Dear Dave,
My husband and I finally have our full emergency fund in place. Like you recommend, we’ve kept it in a money market account with check writing privileges for easy accessibility. Recently, we heard about short-term bond funds with a higher interest rate than our current money market account. Our money would be available for withdrawal if needed, and we would only lose the interest. Is it okay to move half of our emergency fund into one of these bond funds to take advantage of the higher interest rate?
Ferisa
Dear Ferisa,
Absolutely not! Under no circumstances should you do something like that. An emergency fund is not an investment. You’ll never build wealth and get rich off your emergency fund. That’s not what it’s there for.
I understand this might be the first time in your lives you’ve had a nice chunk of cash in the bank. I also get that it’s hard to let it just sit there and make no money. But an emergency fund is insurance, not an investment. It’s a rainy day fund, and its whole purpose is to sit there safe and wait until life throws unexpected expenses in your face.
Think about it this way. Insurance costs you money to protect things that make you money — like your home. It’s also there to cover things you otherwise would not be able to afford. When you have an emergency fund in place, you don’t have to dip into your 401(k), your IRA, or go into debt. Why? Because your emergency fund provides insurance against those kinds of things.
Let your emergency fund sit right where it is, Ferisa. Besides, it’s a really bad idea to buy bonds in an environment where interest rates are increasing. Bonds have an inverse relationship to interest rates. So, as interest rates climb you’ll lose out if you’re playing around with bonds!
—Dave
Our daughter just turned 10 years old. Is now the right time to start giving her an allowance, and start teaching her about money?
Danielle
Dear Danielle,
I’m glad you’re going to teach your daughter about money. But in my mind, there’s never a time for an allowance. I believe that kind of thinking, and using words like “allowance,” are some of the best ways to instill an attitude of entitlement in a child. I don’t think you want your daughter growing up with the idea she deserves money simply because she’s alive.
My advice is to develop a method by which she can earn commissions. Write down a daily or weekly list of jobs around the house that are age-appropriate she will be responsible for doing. Then, at the end of the week, she gets paid for jobs she completed — and she doesn’t get paid for the ones she didn’t do. The idea is to teach her that work creates money, and teach a healthy work ethic at the same time.
Of course, there are some things a child should be expected to do without financial reward. Everyone needs to pitch in, and do certain things to help when they’re part of a family. And once you’ve taught her about the importance and rewards of work, make sure to also teach her about the three uses for money — saving, spending, and giving!
—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 585 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey
Dear Dave,
I’m self-employed, and I travel about 30,000 miles a year in my van. I’m three payments away from having the vehicle paid off, but it has 170,000 miles on it. Do you think it would be a good idea for me to buy a new van and have the tax advantages that would go along with it?
Doug
Dear Doug,
There are two things you can do on taxes when it comes to your automobiles. You can straight line depreciate them, which is what you do with expensive vehicles, or you can write off the mileage. That’s a good idea if you drive a lot. The thing is, you get the mileage whether you have debt or not.
Let’s say you bought a $25,000 van. If you depreciate that over five years, that’s $5,000 a year. If you made $65,000, and take $5,000 from that, you’d pay taxes on $60,000. If you didn’t have that, you’d end up paying $1,250 in taxes. In other words, you’d be spending $25,000 over five years to save $1,250 a year on taxes. That’s a trade I don’t think you want to make.
Remember, too, that you basically destroy whatever you drive. You have to think of your vehicle as overhead. So, you’re going to destroy a $25,000 van or a $5,000 van all in the same period of time. As a businessman, which would you rather destroy? The answer is whatever is the least expensive and gets the job done!
—Dave
Dear Dave,
I have two credit cards. One charges me an annual fee of $79 and the other a fee of $39. Should I cancel these and not worry about my credit score? I’d like to buy a house in the next two or three years.
Ken
Dear Ken,
In my mind, there’s no such thing as a good credit card. My advice is to go ahead and cancel them.
When you stop borrowing money and don’t have any open accounts, your credit score will slowly disappear. The big thing is that you don’t want to be caught in no-man’s land in terms of a credit score. You want either a fabulous one, which means you’re in debt all of the time, or you want no score because you don’t have any open accounts.
By the way, did you know that you can still qualify for a mortgage, even with no credit score? There are still mortgage companies out there that will do manual underwriting. It takes a little extra effort, but in my mind that’s a small price to pay.
Cancel the cards, Ken. I’ve never met a millionaire who prospered thanks to credit cards and their gimmicks!
—Dave
* Dave Ramsey is America’s trusted voice on money and business. He has authored five New York Times best-selling books. The Dave Ramsey Show is heard by more than 8.5 million listeners each week on more than 550 radio stations. Dave’s latest project, EveryDollar, provides a free online budget tool. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com
Dear Dave,
I noticed that your Baby Steps list puts saving for retirement before saving for your kid’s college fund. Sending your kids to college would come first on the timeline, so what is your reasoning behind this?
Jen
Dear Jen,
I advise this approach because everyone is going to retire someday, unless, of course, they happen to die before reaching retirement age. Retiring and eating are necessities. College is a luxury. Lots of people succeed in life without going to college, and thousands have worked their way through college. I worked 40 to 60 hours a week in college, and I still graduated in four years.
Having a college fund set aside by your parents is really nice, if they can afford that kind of thing. But you can go to school by getting good grades, applying for scholarships, working your tail off and choosing a school you can afford. I believe in education, but there are lots of ways to get a college degree other than having your parents foot the bill. Besides, the last time I checked there weren’t any good ways to retire that didn’t include saving and preparing for retirement beforehand. I mean, you can always try to live off Social Insecurity, but I don’t consider that a plan.
In short, college funding is not a necessity. That’s why it follows saving for retirement in the Baby Steps. Should you try to save up for your kid’s college education? Sure, if you can. But there are lots of parents out there who won’t be able to pay a dime toward someone’s college education. And that doesn’t make them bad parents!
—Dave
Dear Dave,
I think I made a big mistake when I bought my car. I’m having a hard time affording the $500 a month payments, because I only make minimum wage at my job and work 35 hours a week. My boyfriend, who was supposed to help me pay for it, has moved out and left me. I owe $20,000 on the car, but I know it’s still worth about $19,000. What can I do?
Rachel
Dear Rachel,
Sell the car! You went car crazy and bought a vehicle that was way out of your league.
Right now, your entire financial world is wrapped up in paying for this thing. And depending on a boyfriend to help make the payments was a big mistake, too. When he left, so did the financial support.
At this point all you need is enough to cover the hole you dug. Go to your local bank or credit union and try to get a very small loan from them—about $3,000. I hate debt, but you really don’t have a lot of options here. Then, if the car will sell for $19,000, get it sold and use $1,000 to cover the difference.
After that, take the remaining money and buy yourself a little beater. I’m talking about basic, ugly transportation. The next step is to pick up a part-time job on the side, and work like crazy for a few months to get that loan paid back as quickly as possible. Don’t ever do this kind of thing again, Rachel!
—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, released April 22nd and written with his daughter Rachel Cruze, is titled 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.
Dear Dave,
Do you recommend a credit freeze in order to protect against identity theft?
Eric
Dear Eric,
I absolutely recommend doing that, especially if you’re not borrowing money anymore. However, putting a freeze on your credit report only provides partial protection against identity theft.
Identity theft is where someone, for example, signs up for a credit card in your name. If Joe Crook signs an application with your name and address, and the credit card company issues the card without checking —they blind-issue cards about seven out of 10 times — then the card will be issued to the thief. Having your credit frozen does nothing to stop that from happening. Still, if they check your credit and it’s frozen, chances are they won’t issue the card.
I’d also recommend having a good identity theft protection program in place. I have it on myself and all my team members at the office. If you don’t have this, and someone gets a card in your name, the credit card company will demand that you pay the bill. You can insist it’s not you, but that won’t do much good. Then, you’ll have to go through the hassle of filling out affidavits and police reports.
You may get out of paying for it in the end, but you’ll still have to spend dozens, if not hundreds, of hours dealing with the credit card company trying to get the whole mess straightened out!
—Dave
Dear Dave,
I make $30,000 a year. I’ve just started Baby Step 2 of your plan, and I’m paying off my debts from smallest to largest. I have $55,000 in debt, including $15,000 on a car loan. I recently picked up a part-time job to help pay down the debt, but sometimes I’m working 70 hours a week. Do you have any recommendation for staying motivated during this process?
Brandon
Dear Brandon,
I understand, man. We can all get tired and run short on motivation from time to time. There’s an old saying that fatigue makes cowards of us all. I know sometimes, when I’m traveling a lot, I can lose some boldness, strength or compassion when I get tired. So fatigue is a real issue if you’re working long hours and facing additional pressure.
The balance on your car is awfully high. My general rule is that you don’t want to own vehicles equaling half or more of your annual income. If I’m in your shoes, I’d sell that car and move down to a little beater for a while. I’m not talking about a rattletrap piece of junk, just something lots less expensive. You can find a decent used car to fit the bill, and that would get rid of a big chunk of debt in a hurry.
At this point, I think you just need to feel like you’re making some measureable progress. Sometimes, that means throwing a stick of dynamite into the middle of your life. Also, try keeping your debt snowball list where you’ll see it on a regular basis. I knew one lady who kept in on the fridge, so she could look at all the little red lines drawn through things she had paid off. It was a visual reminder of the progress she had made, and it provided motivation to keep working hard and become debt-free!
—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.
