Dear Dave,
I can’t decide what to do about my car. I owe $8,000 on it, and I have the cash to pay it off with plenty left over. One of my co-workers said I shouldn’t pay it off, because I have a very low interest rate on the loan. What do you think?
Derricka
Dear Derricka,
What do I think? I think your co-worker is broke. Taking financial advice from broke people is like taking dieting advice from fat people. In other words, it’s dumb.
Pay off your car, and never borrow money to buy a car again for the rest of your life. If you want to win with money, you have to get out of the land of car payments. The idea that you’re stuck with car payments — that you’re always going to have one — is the mantra of those who’ve given up hope. You are in charge of your life. You are in charge of your financial situation. Don’t be like all those folks out there who whine about stuff like stagnant wages and are unwilling to get up off their stagnant butts to make their lives better.
Derricka, pay off your car today. And please, don’t take any more financial advice from broke people!
—Dave
(Emergency fund in cash?)
Word count: 264
Dear Dave,
My wife and I are completely debt-free. We would like to have part of our emergency fund in cash inside a heavy duty safe at home. How should we document this cash in the event of fire or theft? Also, would our homeowners insurance policy cover cash?
Will
Dear Will,
Typically, homeowners insurance policies have a limit as to how much cash they will cover. I’d advise re-reading your policy, and double checking with your insurance agent just to be sure. When it comes to documenting valuables, I’d suggest making a video or taking photographs. Just to be extra cautious, you could store these in a safe deposit box at your local credit union or bank.
Having some cash on hand is never a bad thing. When it comes to the portion of your emergency fund you keep at home, I’d recommend just being reasonable. If you’ve got $10,000 set aside for emergencies, I’m okay with you keeping $5,000 at home in a quality safe. I wouldn’t put all, or even most of it, in a safe, though.
Again, just make sure your homeowners policy covers anything you might put in there. A strong, fireproof safe is a must!
—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,
We’ve got our starter emergency fund in place, and we’ve paid off the last of our debt. Currently, we rent an apartment but my wife really wants us to buy a house now. She also wants us to use a 30-year, 100 percent financing plan, and says this wouldn’t cost any more than we’re paying in rent. I disagree with her idea, and she’s upset with me. How can I make her see this is a bad plan?
Alan
Dear Alan,
I think she probably knows deep down this isn’t a good plan. She’s found something she really likes, and she’s mad because you’re not going along with the idea. It’s called “house fever.”
When you buy a home with nothing down and little to no money in the bank, you’re inviting Murphy and his cousins — Broke, Desperate and Stupid — to move in with you. In other words, you’ll find yourselves in a mess because you didn’t have the maturity and wisdom to wait until you had your fully funded emergency fund of three to six months of expenses in place, plus a 20 percent down payment saved up for a house.
The idea that you save money because your house payment is the same, or even a little less than your rent, is a myth. It costs more to own a home, period. As a homeowner, you’re exposed to all kinds of things you never have to worry about as a renter.
We all have times when we get excited by something we want and do things we shouldn’t. I’ve done it, and I’ll bet you have, too. But in situations like this, you’ve got to sit down and talk things out. I’m not sure how to get your wife to realize this or act more mature, but I do know that people who charge into things of this magnitude without thinking are the very ones who end up in my office for financial counseling or filing bankruptcy!
—Dave
(Let a little life happen first)
Word count: 258
Dear Dave,
I’m 19, and I have a job making $30,000 a year. I’ve also got about $40,000 in stocks and $10,000 in savings. I want to buy a house in the near future. Should I pay cash and buy it outright, or is a 15-year mortgage okay?
Sam
Dear Sam,
I love the idea of paying cash for a house, but I’m even more impressed that you’ve got so much you could put toward a house and a job making $30,000 a year at age 19. Man, you’re really kicking it!
But the thing that keeps sticking in my mind is that you’re still just 19-years-old. Now, there’s nothing wrong with being 19, but there’s also nothing wrong with waiting a few years and getting a little more life experience under your belt before you take on a mortgage.
At times like this, I think about what I’d tell my own son at your age. And honestly, I think I’d advise him to wait and let life happen for a while. You’ve done some amazing things, but I think the best thing would be to keep piling up cash. Then, take a look and see how you feel and what your life is like in four or five years.
You’ve got lots of time and a huge head start already. When the time is right, either pay cash or do a 15-year, fixed-rate mortgage. And if you take out a mortgage, make sure the monthly payments are no more than 25 percent of your take-home pay.
—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. 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,
My daughter is a freshman in college, but I didn’t save for her education. My parents said it was my job to pay for my college, and that’s what I’ve told her. She’s going to have about $12,000 in student loan debt after her first year, but how do I talk to her about not ending up with $50,000 in debt when she’s through?
Paul
Dear Paul,
If you want her to pay for college, then, as her dad, you have to coach her on how she’s supposed to come up with the money and manage it properly. She’s already behind the eight ball because it sounds like you didn’t teach her the correlation between work and money earlier. So, you’re going to have to get real busy, real fast unless you want her to be drowning in debt when she graduates.
I think you owe her a leg up at this point. Twelve thousand dollars doesn’t just magically appear in an 18-year-old’s hands. I’m perfectly okay with kids working through college and parents cracking the whip when it comes to acting responsibly. But if you expect them to pay for it, you first have to show them how to do that. Otherwise, they’re going to hit the default button and wind up $50,000 in debt when they graduate. That’s a really bad plan!
If you have some money, I think you should help her along while teaching her how to make money, save and budget. Then, maybe she’ll be prepared to pay for her last couple of years with some good, hard work!
—Dave
Mortgage – NAD Word count: 312
(Don’t stop paying just yet)
Dear Dave,
I’m a junior in college, and I live in a rental house. There’s no formal lease, and my landlord never asked for a deposit of any kind. Recently, I started receiving notices from Chase Mortgage saying that my landlord is $7,500 behind in his mortgage. I’m worried about what will happen if they foreclose on him. Should I move out, stop paying rent or what? He’s told me not to worry, because he’s just behind on the payments and not in default.
Chris
Dear Chris,
Well, the last part is not quite true. When you’re behind on payments you are, by definition, in default. Still, I think you should stay right where you are for now, and keep paying your rent on time like normal. Keep the lines of communication open with your landlord, too. I’d also contact Chase, and tell them about your situation in this house. Ask them to keep you informed about what’s happening with the property, so that you’ll have time to formulate a plan and find a new place to live if the house goes into foreclosure.
Chances are they’ll give you at least 30 days to move out if a foreclosure occurs. You probably won’t have to pay anything to the bank afterward, so you may get to sit there rent-free even longer while they sort out everything. Considering the fact that you don’t have money wrapped up in a deposit or a lease hanging over your head, there’s really not a lot of risk for you here. Your landlord is still providing the home, and the truth is that foreclosures — if it comes to that — generally take a while to complete in Florida.
You might keep an eye out for other properties in the weeks ahead, but other than that, as a renter, you’re in pretty good shape under the circumstances.
—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. 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,
My husband will be leaving his full-time job in a year so that he can go back to school full-time and finish his degree. We’ve both agreed this is what we want to do, but it means that we’ll go from a yearly income of $90,000 to $45,000. We’ll have tuition assistance from my job and his veteran’s stipend to help pay for things, plus we’re debt-free except for our house. But in this scenario, once we complete Baby Step 3 should we move directly to Baby Step 4 or continue saving?
Erin
Dear Erin,
I think this is a good plan, as long as the two of you are on the same page and you’re willing to save like crazy for the next year and beyond. Even with help from your employer and his stipend you’ll still have some expenses, so you’ll have to be ready.
Once you complete Baby Step 3, which is having three to six months of expenses set aside as an emergency fund, Baby Step 4 is usually starting to invest 15 percent of your income toward retirement. In this case, while he’s finishing his degree, you’re not investing for retirement directly but you are investing in your husband and your future together. That’s a great investment, by the way. As long as he’s studying something that has marketplace application, you’re setting the stage for him to make back the money put into his degree and much more.
If that’s the plan, and he’s not off pursuing a Ph.D. in something like German polka history, you two are making a great investment. So work hard now, cut all the corners you can and pile up money so you two can get through his time in school!
—Dave
(Selling a car with a lien)
Word count: 227
Dear Dave,
How do you sell a vehicle with a lien amount that’s higher than the actual value of the car?
Miranda
Dear Miranda,
First, you have to find a way to cover the difference between the amount of the lien and what you can get for the car. Let’s look at an example.
If the car is worth $15,000, and you owe $18,000, that would leave you $3,000 in the hole. How do you get out of that car? The bank holds the title, and until you give them the payoff amount of $18,000, you’re not getting the title. The easiest and simplest way would be if you had $3,000 on hand to make up the difference. But if someone comes along and buys the car from you for $15,000, you’ve got to be able to cover the remaining $3,000, right?
Barring the best-case scenario where you actually have the money, you could go to a local bank or credit union and borrow the remaining $3,000. I hate debt, but being $3,000 in the hole is a lot better than $18,000 in the hole. Then, you could turn around and pay back the $3,000 quickly.
After that, you’d give the total amount owed to the bank. They would give you the title, and you sign it over to the new owner. That’s how it works!
—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. 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,
What do you think about making bi-weekly mortgage payments?
Jeremiah
Dear Jeremiah,
I think it’s an awesome idea. By doing that, you can pay off a 30-year mortgage in about 22.8 years, on average, depending on the interest rate.
However, I would never pay someone a fee to set up bi-weekly mortgage payments. All you do on a bi-weekly schedule is make half a payment every two weeks. Since there are 26 two-week periods per year, that equals 13 whole payments. It’s nothing magical, and it’s not difficult.
Go for it, Jeremiah. Get rid of that house payment as fast as you can. Just don’t pay extra fees to make it happen!
—Dave
(Move to the head of the line!)
Word count: 208
Dear Dave,
I owe the IRS $6,000, and currently I’m making monthly payments. Should I roll this debt into my debt snowball, and then really attack it when it gets to the top of the list?
Jared
Dear Jared,
My advice would be to put the IRS at the very top of your debt snowball. Usually, when it comes to paying off debt, I advise people to arrange their debt snowball from smallest to largest, then start with the smallest one and work their way up. This doesn’t always seem to make mathematical sense, but the truth is personal finance is 80 percent behavior and only 20 percent head knowledge. Paying off some small debts quickly energizes you and gives you motivation. It makes you feel like you can really do it. Besides, if you were such a math genius you wouldn’t have debt in the first place.
But the IRS is a different animal altogether. Their interest rates and penalties are ridiculously high. Plus, they have virtually unlimited power to collect. So put them at the top of the list, and get them paid off as fast as you can!
—Dave
* Dave Ramsey is America’s trusted voice on money and business. He has authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. His newest book, written with his daughter Rachel Cruze, is titled Smart Money Smart Kids. It was released April 22nd. 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.
