Dear Dave,
I’m on Baby Step 4 of your plan. I’m debt-free, and I’m currently putting lots of money toward retirement. Now, I want to go back to school and get an MBA. I could pay for school with cash, but that would delay buying a home. My parents have offered to help out financially, so do you think I should accept their offer?
Isaac
Dear Isaac,
I don’t have a problem with this, if they’re doing well enough financially to afford it, and the help comes in the form of a gift. If they’re borrowing the money to make it happen, then the answer is “no.” If they want to loan you the money, the answer is “no.” A loan between family members, or even friends, isn’t help—it’s a trap for both parties.
But hey, if they’re in good enough shape to gift you some money to help with the MBA or a home, that would be an incredibly generous thing to do. I think it’s so cool when people work hard, make smart decisions, and manage their money well to the point they can do things like this for others.
It sounds like you’re in a really good place, Isaac. Pay cash for school, and if you can’t buy a home outright when the time comes, make a down payment of at least 20 percent. That way, you’ll avoid having to pay private mortgage insurance!
—Dave
(Cash out stock for emergency fund?)
Word count: 281
Dear Dave,
I’m 45, married, and we have a household income of around $85,000 a year. We have no debt, except for our home, and we owe about $70,000 on it. I recently stopped contributing to my 401(k) temporarily in an effort to help us build an emergency fund, but things are moving slowly. We also have $25,000 in stock. Should we cash out the stock, and use the money for an emergency fund?
Nate
Dear Nate,
Yes, that’s what I would do. Basically, your emergency fund is in stock right now. That’s not a good place to keep an emergency fund, because you never know when life will throw unexpected expenses your way or the stock market will go down.
I would cash out that stock as soon as possible. Put the money in a simple money market account—one with check writing privileges and no penalties for early withdrawals. You always want your emergency fund to be safe and easily accessible. Then, make sure you keep pushing forward and take care of Baby Step 4, investing for retirement; Baby Step 5, save money for college if you have young children; and Baby Step 6, pay off your home early.
Baby Step 7 means building wealth and giving like crazy. These things are easy once you have the other Baby Steps out of the way. Good question, Nate!
—Dave
*Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 14 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey
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Dear Dave,
How should I handle my 401(k) when moving from one job to another?
Tracy
Dear Tracy,
I would roll it to an IRA. Your new company, if you move it there, will have limited choices for your 401(k). You’d also probably have a lengthy waiting period for verification and the potential add-on fees and taxes.
Plus, with an IRA you can cash it out if something really bad happens. But I rarely ever advise people to cash out their IRAs. The only exceptions are extreme cases, like to avoid bankruptcy or foreclosure. Even then, hardship withdrawals are very difficult to get. And again, this kind of thing should never be done except in an absolute, worst-case scenario.
Just roll your money into a traditional IRA, Tracy. It’s called a direct transfer IRA, and that way there will be no taxes on it. You want the money to go directly from the 401(k) to the IRA. Then, you’ll have the freedom to choose from about 8,000 mutual funds and move the money around, if you like.
In other words, you’re in control. That’s the way it should be when it comes to your money!
—Dave
(It all evens out)
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Dear Dave,
We have three children, ages 15, 10 and nine. With our oldest starting high school and just being a teenager, we’re spending lots more money on her than the others. It’s almost like she’s the favorite child. Should we spend more on the other kids to make things seem a little more fair?
Julie
Dear Julie,
I don’t think so. In five or six years, it’ll be their turn and you guys will be spending that kind of money on them, too. That’s the way it is with teens.
Here’s a question for you. When the 15-year-old is 23, and you’re buying prom dresses and all the other teenage stuff for the younger kids, are you going to turn around and give the older child extra money just to “even things up”? Of course not—that would be silly. She had her moment in the sun, and now it’s their turn.
Just make sure you hug on all of them equally, and let them know you love them!
—Dave
(Wait for it)
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Dear Dave,
Would it be okay to go on a tenth anniversary honeymoon while we’re working on our debt snowball?
Karen
Dear Karen,
I don’t think so. I mean, it’s not against the law or anything like that. I just don’t think it’s a good idea. I wouldn’t do it, and I wouldn’t suggest taking the trip then rolling it into your debt snowball either. I know this probably sounds mean, but I’m just not a big romantic when it comes to people who are deeply in debt.
A rare exception may be a situation where you have a really small debt snowball and a nice, fat income. But most people in your shoes have average incomes and mountains of debt. On top of that, they want to take a big celebration vacation? I would say no.
At some point you have to stop the spending and concentrate on getting your finances in order. Besides, you’ve got a lifetime together to take romantic vacations and celebrate your marriage. Just wait until you can afford something like that. Trust me, you’ll enjoy it even more!
—Dave
* Dave Ramsey is America’s trusted voice on money and business. He has authored five New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover, EntreLeadership and Smart Money Smart Kids. His newest best-seller, Smart Money Smart Kids, was written with his daughter Rachel Cruze, and recently debuted at #1. The Dave Ramsey Show is heard by more than 8 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.
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Dear Dave,
I know you recommend that no more than 25 percent of your take-home pay should go toward rent or a mortgage payment. Should taxes and insurance be figured into this amount?
Kayla
Dear Kayla,
Yes, they should. Mortgage companies will qualify you for twice as much house as you can realistically afford. They’ll try to put you on a 30-year, adjustable-rate mortgage and leave you in debt up to your eyeballs for half of your life. Payments like that can easily equal 36 percent or more of your take-home pay. That’s just nuts!
I see so many people who can’t take a decent vacation or save anything for retirement or their kids’ college fund because their mortgage payment is through the roof. That’s called being “house poor.” And I’ve even seen it push people into debt just to buy groceries.
It’s fine if you want to follow my guidelines. But what I’m really trying to do is get you to think. Engage in some critical thinking when it comes to your finances. There’s so much more to life than that building we call a house. I want you to think about your future and your family’s future and make smart money decisions that will change your family tree for years to come!
—Dave
(More than one life insurance policy?)
Word count: 326
Dear Dave,
Can you have more than one life insurance policy, and is there ever a reason to do this?
Chad
Dear Chad,
Sure, you can. And there are several different reasons you might choose to do this.
One, like in my case, I have lots of insurance regarding our business, our estate plan and those kinds of things. In some cases, I’ve reached the limit on the amount of a policy a company will write on me. Most life insurance companies will only write so much in coverage for one person. So when this has happened, I’d go to another carrier for additional coverage.
Another reason people do this is to feel more secure from a company standpoint. If one insurance company goes out of business, they’ll still have another policy, or policies, in place. Usually, that’s not much of an issue. Most insurance companies are financially stable or have insurance to back them up with the state.
The only real problem with having more than one life insurance policy is that it complicates your life a little bit. You’d have two or three premium checks or withdrawals to worry about each month and possibly even additional policy fees. So generally speaking, it’s cheaper to have just one policy. And I’d recommend having 10 to 12 times your annual income wrapped up in a good, level term policy.
But no, there aren’t any rules against having more than one life insurance policy.
—Dave
* Dave Ramsey is America’s trusted voice on money and business. He has authored five New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover, EntreLeadership and Smart Money Smart Kids. His newest best-seller, Smart Money Smart Kids, was written with his daughter Rachel Cruze, and recently debuted at #1. The Dave Ramsey Show is heard by more than 8 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com
