Finance

Dear Dave,

davernewMy mom is 71 and debt-free. She’s investing $600 a month in a universal life insurance policy worth $250,000 because she wants to leave something behind when she dies. What could she invest this money in, other than the life insurance policy, in order to leave an estate?

Steve

Dear Steve,

This is a good question. You don’t use life insurance to leave an estate. It’s a bad idea. You leave an estate by saving and investing. The only people who will tell you to use a life insurance policy to leave an estate are life insurance salesmen.

Unless she’s ill, I wouldn’t keep the policy. Instead, I’d do some long-term investing. It won’t take long to get to $250,000 with $7,200 a year. It’s the kind of thing that sounds like it’ll take forever, but you’ve got to remember you’ve got growth and interest in the equation. I wouldn’t put money into a life insurance policy at age 71, unless there’s someone being left behind who really needs the money — and it doesn’t sound like there is in this case.

It would probably take about 13 years for the money to turn into $250,000. Assuming she’s healthy, I’d rather do that and bet on her living. That way, she can leave an estate and avoid the expense and rip-off part of the universal life policy.

—Dave  

No treating student loans like a mortgage

Dear Dave,

I have a very large amount of student loan debt. Where would that go in your Baby Steps plan?

Jade

Dear Jade,

Baby Step 2 is where you pay off all debt except for your house. The fact that it’s a large amount of student loan debt doesn’t change anything.

Hopefully, with your very large amount of student loan debt, you also have a very large income. Believe it or not, there are some really sad situations out there where people have gone $200,000 into debt for a four-year degree in a field where they make $50,000 a year. That kind of thinking and behavior is ridiculous, but it’s out there.

Whatever you do, Jade, don’t treat this student loan debt as if it were a mortgage. In other words, don’t let it hang around for years and years and years. You’ve got to get focused and intense about paying off this mess and getting on with your life.

Remember, your income is your largest wealth-building tool. You can’t save and plan for the future when all your money is flying out the door to pay back debt!

—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.

Dear Dave,

davernewI have job offers from two tech companies. One is in San Antonio and pays $55,000 a year, while the other is in Silicon Valley making $100,000 a year. My friends are advising me to move to California, but I feel like I’d have more money in my budget if I moved to San Antonio. What do you think?

Aaron

Dear Aaron,

The good news about Silicon Valley is you’d be around a ton of really smart people in your industry. I mean, it’s the epicenter of the tech world, right? You’ll learn a ton and have lots of opportunities, so there’s definitely an upside.

The problem is that the Silicon Valley area is one of the most expensive places to live in the entire country. The real estate prices and cost of living are ridiculous! Still, if it weren’t for the cost of living argument, it would be a no-brainer for me. Then, it wouldn’t really be so much about the income and prices as it would be about the career opportunity.

Still, you have to consider the economic factors involved here. With that in mind, it’s not an exaggeration to say you might actually put more money in your pocket at $55,000 in San Antonio than you would $100,000 in Silicon Valley. That’s entirely possible!

I think things are going to come out pretty even — economically speaking — once you adjust for the cost of living. I’m a huge fan of Texas. It’s a great business market and tax situation down there. But really, in my mind the question comes down to your personal comfort level and quality of life. And that’s something you’ll have to answer for yourself!

—Dave

Playing with house money

Dear Dave,

My wife and I just became debt-free, and we’re saving for our first house. We have about $75,000 in savings, and we’d like to buy a home with cash in the next few years. Where do you think we should place our money so it’s working for us while we save?

Andrew

Dear Andrew,

I don’t advise playing the market on the short term. If I were in your shoes, and looking at possibly a two- to four-year window, I’d just pile the cash in a money market account or possibly a balanced fund.

I’m a big fan of growth stock mutual funds when it comes to long-term investing. The problem with that in this scenario would be the volatility of the market. By the time you’ve saved up more money and spent time deciding on a house, the market may be down. All you’re looking for in this scenario is a wise, safe place to park it and pile it up while you prepare.

Congratulations, Andrew. Debt-free is the way to be when you’re looking to buy a nice, new home!

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.

Dear Dave,

davernewMy mom and dad took out a whole life insurance policy for me when I was born. The cash value is $2,500, and my husband and I want to cash it out and put the money toward paying off debt. We already have larger term life insurance policies in place, but I’m worried that doing this will offend my parents. What should I do?

Laura

Dear Laura,

I think the real question is how many toxic things will you do because you’re afraid you might offend them. Whole life policies are financially toxic. They’re a bad product, and keeping it for no better reason than it might hurt their feelings a little bit isn’t much of a reason — especially when the alternative is paying down debt and getting your financial life in order.

I know this is mom and dad we’re talking about, so you’ll have to be nice about everything. But at the same time, your parents have to realize it’s your life and you make the decisions. Try sitting down with them and gently explaining that while you appreciate and love them for their generosity, you’re going to cash it out and use it to get out of debt. Let them know you’re not wasting their gift, and that you’re using it to make a positive impact on your lives.

You’re not doing anything disrespectful, Laura. Just be very clear about the reason and loving with your explanation. Then, if they chose to become a little emotional or resentful, that’s on them. If they get really upset and want the money back, you can do that too. But getting your financial house in order is much more important than hanging on to a bad financial product you don’t need in the first place.

Dave

Housing includes taxes and insurance

Dear Dave,

You recommend that no more than 25 percent of your monthly income go toward a house payment. Does this figure include taxes and insurance too?

Ryan

Dear Ryan,

Yes, it does. Your housing payment should not exceed 25 percent of your monthly take-home pay on a 15-year, fixed-rate mortgage.

When it comes to buying a house, the goal is not to live in the Taj Mahal or have something so expensive you end up being “house poor.” When buying a home, especially for first-time homebuyers, you should look for something nice — in a decent area — that you can get paid off as quickly as possible.

It’s really not a big deal if you cheat a couple of percentage points one way or the other. But 25 percent is a good rule of thumb to ensure you’ll still have money left over to live on, save and invest!

—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.

Dear Dave,

davernewI’m 24-years old, and just got married two months ago. We make $80,000 a year, and have our emergency fund in place with no debt. Plus, we’ve saved up for a 15 percent down payment on a house. I know you suggest 20 percent, but is 15 percent okay?

Tony

Dear Tony,

I don’t have a big problem with 15 percent instead of 20 percent. Chances are you’ll end up having to pay private mortgage insurance, but it sounds like you guys are in good enough shape financially to handle things.

I generally recommend, however, that couples wait until they’ve been married at least a year before buying a home. Buying a house is huge decision. That’s why I think it’s smart to wait and get to know each other even better, and on a day-to-day basis, before moving in this direction.

Take your time and don’t rush things, Tony. There will still be good deals on the market in a year or so. Plus, you’ll be able to save more money!

Dave

Where are you in your financial plan?

Dear Dave,

What things do you advise buying used versus buying brand new?

Amy

Dear Amy,

I’m afraid there’s not one good, across the board answer, because it all depends on where you are in your financial plan.

When it comes to cars, you should always buy good, used vehicles, unless you have a million dollars or more in the bank. New automobiles drop in value like a rock, so buy smart and let someone else take the hit in depreciation. You don’t become wealthy by investing in things that go the wrong way.

If you’re talking about clothing, and you’re broke or trying to get out of debt, there’s absolutely nothing wrong with shopping consignment stores — especially for kids. They wear things three times, and then they’ve outgrown them. “Experienced” clothing is a great buy for adults, too.

Of course there are other things, but here’s the deal. As your money situation improves, you’ll be able to buy more new things. The price of “new” will become a smaller and smaller percentage of your financial world.

But when you’re broke, deep in debt or don’t have a big income, the money you spend on anything is a big percentage. At times like this, a decent $50 washer or dryer in the classifieds can be the best deal on the planet!

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.

Dear Dave,

davernewMy mom passed away recently, and she left behind three timeshares. I inherited them, plus I’m the executor of the estate. They’re all paid for, except for the yearly maintenance fees, which total about $1,500. I don’t think I want them, but I’m not sure what to do. Do you have any advice?

Joe

Dear Joe,

I’m really sorry to hear about your mom. I know you’ve got a lot of emotions going on right now, and taking on the task of overseeing the estate is a serious responsibility.

There are two issues here. One, as the executor you have to decide what’s best for the estate. Number two, do any of the other heirs want these things? I wouldn’t want them, I can tell you that. I realize they’re basically free things—all you have to do is pay the maintenance fees—but by the time you do that, you probably could’ve gone somewhere else. For that kind of money, you can stay in some pretty nice spots and not have the ongoing liability.

Right now, the estate has the responsibility for the maintenance fees. I would call the timeshares and tell them the estate isn’t going to keep them, and that you’re going to deed them back to the companies. The way I look at it, you can have a lot of fun for $1,500 a year. You can go where you want, when you want. You’re not roped into a specific place and date. Part of the appeal of getting away is being able to go where you like at a time that’s right for you.

I understand there may be some sentimental value attached to these, Joe. But timeshares are a horrid, inconvenient product. My sentiment would be, “I’m out of here!”

—Dave

Take the Roth

Dear Dave,

My current employer offers a regular 401(k) and a Roth 401(k). I’ve got several years before I retire, so which one should I choose?

Jennifer

Dear Jennifer,

Take the Roth!

If you put your money into a Roth 401(k), and by retirement age there’s $1 million in there, that money is yours tax-free. By comparison, if it’s in a regular 401(k), you’ll pay taxes on that $1 million, which will come out to about $300,000—maybe $400,000 at the rate things are going now. You’ll lose 30 to 40 percent of your money.

My personal 401(k) is a Roth. And in this situation, yours should be too!

—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.

Dear Dave,

davernewWould 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

Roll the money

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

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

* 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.

Dear Dave,

davernewMy husband died several years ago. He always worked very hard, and we did very well financially. I am now 48 and have $3.8 million in assets. I’ve found a wonderful man who is very stable and loving with a good job, and we’re considering getting married. Do you think I need a prenuptial agreement?

Heather

Dear Heather,

For years I told people never to do prenuptial agreements. I always said if you love your money more than you love your spouse, then you’re too immature and selfish to be married.

However, I’ve changed my tune on this subject a little bit recently. When one or two wealthy people get married, the problems that can arise usually have nothing to do with those two people. The problem is that it can invite a lot of crazy into your lives from the outside. Whether it’s a parent, cousin or child, sometimes people start feeling a sense of entitlement when wealth is suddenly thrust into the picture.

You both sound like mature, functional people with good values. In most cases, that’s a pretty good indication that crazy isn’t in the immediate vicinity. Still, there’s a lot on the line. So while I would advise a prenup, you might keep an open mind to revisions somewhere down the road. Make it pretty solid and protective for the first five or 10 years. But then, after you guys have built a life together, you’ll hopefully reach a point where you’ll feel safe looking at it as all ours.

So, the only reason I’d ever suggest a prenup is when two parties are bringing really unequal amounts to the table. Yours is an extreme situation, Heather, so I’d give it some serious thought. Let him know you want to do this to protect the relationship, so that there’s never any hint that the money is a problem or will create problems. If he’s as kind and thoughtful as you say, I think he’ll understand.

Dave

AAA or self-insure?

Dear Dave,

What do you think about auto club memberships like AAA?

Jeremy

Dear Jeremy,

I’ve got nothing against AAA. But honestly, I tend to self-insure through savings for these kinds of things. I’ve probably used, or had need of, a tow truck twice in the last 20 years. When it comes to this kind of product, I always look at it from the perspective of, “Where does it leave me if I don’t sign up for their service?”

Again, I don’t think AAA is a big rip-off or anything like that. It’s just a type of insurance, if you will, for which I have no need. I guess it could be a handy thing to have if you were in a situation where you were using their services a lot. But if their average customer were like that, they’d probably end up losing money on you.

—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 No. 1 on the New York Times best-seller list. 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,

davernewI 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?

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.

Dear Dave,

davernewMy wife and I have a friend we met through the Big Brothers Big Sisters program. She has a 1-year-old child, and she recently asked us for some money. We don’t really approve of how she’s choosing to spend her money—she’s spending a lot of it on alcohol and cigarettes—but she does need financial help. What should we do?

Mike

Dear Mike,

I have a very simple rule for situations like this. If someone is bold enough to ask me for my money, I can be bold enough to attach requirements to the money for their own good.

One of two things will happen when you handle things in this manner. They’ll welcome the help and graciously accept your conditions, or they’ll get mad and act like you have no right interfering in their business. I don’t have a problem helping people who have a good heart and really need a break. But if someone cops an attitude with me in this situation, I wouldn’t break out my wallet anytime soon.

Regardless, if you choose to do this, I’d make the money a gift and not a loan. Concentrate on trying to get her on a path where she thinks a little straighter, and, as a result, she will make better choices. Teach her how to make and live off a budget or help her enroll in a personal finance course. But right now, just handing her money is like giving a drunk a drink.

This whole situation is a lot bigger than giving someone $35 for diapers. The answer to that is easy. It’s yes. But in this case I’d probably give it to her in the form of a grocery store gift card. Many of those don’t allow alcohol and cigarette purchases. Or, I’d just go buy diapers and baby food and take them to her. Actually helping people is a lot more work than just throwing money at them. To really help someone, you have to get down in their mess and walk beside them.

Financially speaking, her problem is just as much mismanagement of money as it is a lack of money. Anyone who chooses smokes and alcohol over diapers for their kid needs to be smacked. But since you can’t really do that, you can put conditions on your help that are designed to help her improve her decision-making abilities and, by doing that, improving her life.

—Dave

Investing in savings bonds

Dear Dave,

What do you think I should do with savings bonds I’ve been given over the years?

Ashley

Dear Ashley,

I’d cash them out now and invest them in something better. Savings bonds earn almost no money. Plus, they’re the kind of things people just leave lying around and forget about.

Back in the day it was a big thing to get and give savings bonds. We’d get them for birthday presents and such. Then, we’d wait until they matured and cash them out.

That’s exactly what I’d do in your case, Ashley. Cash them out today and put the money into good growth stock mutual funds. You’ll be glad you did!

—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.

Dear Dave,

davernewI’m 23, transitioning jobs, and I make $32,000 a year. I have $11,000 in a 401(k), and about $15,000 in debt. Should I cash out the 401(k) to pay down my debt?

Cody

Dear Cody,

I don’t think so. When you take money out of a 401(k) they charge you a 10 percent penalty, plus your tax rate. Your tax rate is about 20 percent, so that means you’re going to take a 30 percent hit. While I love dumping debt, your idea would be kind of like saying, “I want to borrow $11,000 at 30 percent interest to pay off my debt.” That doesn’t make a lot of sense, does it?

I never tell folks to cash out a 401(k) or IRA to pay off debt, unless it’s the only way to avoid foreclosure or bankruptcy. You’re not facing either one of those situations, Cody. So my answer is no.

Dave

You can do it with no fees

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!

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 andEntreLeadership. 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.

Dear Dave,

davernewI 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

What should I do now?                                                            

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 andEntreLeadership. 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,

davernewI’m 20 years old, and I’m trying to get out of debt. However, I’m concerned about what might happen when I’m older and don’t have a credit score. My girlfriend says I won’t be able to get a job or rent an apartment without a good one. Is this true?

Ian

Dear Ian,

No, it’s not true. I’m sure your girlfriend is a sweet person, but she has no clue what she’s talking about in this situation.

In either case you can simply explain that reason you don’t have a credit score is because you have no debt. Since you don’t have any debt, you have something known as money. That makes you very stable, and it makes you a fantastic candidate as an employee or tenant.

Listen to me, Ian. I’m a landlord, and if I had my choice between a tenant with no debt and no credit score and someone with a high credit score but lots of debt, I’d take the one who has no debt in a heartbeat. Why? Because that’s the one who is most likely to pay.

Besides, you already have a good credit history if you’ve paid your bills on time. Show them proof of that, if necessary. But taking on a pile of debt to have a high credit score or increase your current score is just plain stupid!

—Dave

(No CDs for kids)

Word count: 266

Dear Dave,

Would it be a good idea to open CD accounts for my two small children?

Abe

Dear Abe,

No. A CD is a Certificate of Deposit. Basically, they’re not much more than savings accounts which carry early withdrawal penalties. They earn about the same as a regular savings account, too, which at the moment is next to nothing. There’s no reason to open them for your kids.

Now, is it a good idea to save money on behalf of your children? Of course, it is. But if the idea is simply to teach and help them save money, I’d recommend simple savings accounts. If you’re talking about wanting to save money for them—like for a college fund—I’d suggest an Educational Savings Account (ESA) with good, growth stock mutual funds inside.

Even if you want to put aside college savings, I’d urge you to go ahead and open regular savings accounts for each of them. We did that for our kids, and I can tell you from experience, you’ll find tons of teachable moments about saving, giving and life in general!

—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 andEntreLeadership. His newest book, written with his daughter Rachel Cruze, is titled Smart Money Smart Kids. It releases April 22. 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,

davernewI’ve heard you say many times you shouldn’t buy a brand-new car unless you have a net worth of $1 million. What’s so special about a million dollars?
Angela

Dear Angela,
In all honesty, there’s nothing particularly special about a million dollars. A brand-new car will lose about 60 percent of its value in the first four years. So, if you’re going to turn a $30,000 investment into $12,000, you’ve got to have a bunch of money. You’ve got to be in pretty great financial shape in order to absorb the blow.

If your entire net worth is $100,000, and you put $30,000 of it into a vehicle that will lose 60 percent of its value, you’re just being financially and mathematically stupid. Your income is your largest and most powerful wealth-building tool. If you’re buying things that go the wrong way in terms of value, you’re not gaining wealth; you’re losing wealth.

There’s really nothing special about $1 million. I could have said $2 million or $900,000, but $1 million is easy to remember. Plus, it’s nothing to sneeze at in terms of an individual’s net worth. When you lose a lot, and it’s a small percentage of a lot, you don’t have to worry so much. But when you lose a lot and you didn’t have much to begin with, that’s a recipe for financial disaster!
—Dave

Do fewer dumb things

Dear Dave,
My parents co-signed on government loans so I could go to college. Would my forbearance or non-payment affect their credit if I don’t pay?
Tiffany

Dear Tiffany,
Yes, it would. I’m not trying to lay a guilt trip on you, kiddo, but you’ll be trashing your mom and dad’s credit if you don’t pay the bills on time. If they co-signed for you, they’ll start getting phone calls, too, if you don’t do the right thing and pay back these loans.

The truth is, your mom and dad shouldn’t have co-signed for you in the first place. There’s only one reason lenders want a co-signer, and that’s because they’re afraid the person taking out the loan won’t be able to pay back what’s owed.

My goal here isn’t to beat you up, Tiffany. It’s to give you information that you—and your parents—need in order to make different, smarter decisions in the future. We all do dumb things sometimes. In the past, I did some really dumb things with very large numbers attached. The goal is to grow, learn, and try to use what we learn in order to do fewer dumb things in the future.
—Dave

Where to save?

Dear Dave,
I’m 26, and I just started a new job making $50,000. I’ve also been offered a 401(k) with no match. Should I put money into the 401(k) or open a high-yield CD?
Crystal

Dear Crystal,
I’ve got another idea. I’d open a Roth IRA with good growth stock mutual funds inside and fund it up to $5,500 a year. Make sure these mutual funds have been open at least five years—preferably 10 years or more—and have performed well. Mathematically, this investment, growing tax-free, will be superior to a non-matching 401(k).

Then, if you want to invest more than $5,500, you could put some additional money into the 401(k) offered by your company. Again, make sure you’re invested in good growth stock mutual funds with long, successful track records.

Congratulations, Crystal. And good luck!
—Dave

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