Giving Beyond Your Means

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My wife and I are debt-free except for our home, and we’re on Baby Steps 4 and 5. Recently, we were asked to make a large donation to a charity we already support. We don’t have the full cash amount they asked for on hand, and after hearing that, they said we could make monthly installment payments until the donation amount was paid in full. We’re hesitant to do this because it seems a bit like debt to us. What do you think?

Ben

Dear Ben,

Well, it’s not debt. There would be no repercussions, other than guilt, if you couldn’t make the full donation. So, it’s not debt. To be honest though, I don’t engage in that kind of stuff when it comes to giving.

My wife and I do all our giving — except for our tithe to our local church — through our family foundation. Sometimes we’ll do this giving in a couple of installments, but it’s not because we don’t have the money. It’s generally a situation where we’re walking with the charity or ministry throughout the year, and we’re observing and assessing the need.

I’d be hesitant to give a gift when I don’t have the money. Most of the time, approaches like this fall under the heading of manipulation. You’re being pushed beyond your means. Most giving of this type, biblically speaking, would be from surplus. And right now, you don’t have the surplus.

I’m kind of uncomfortable with this, Ben. I don’t engage in making gift promises beyond what I have. It’s not debt, but it kind of starts to feel like it, and it’s not so much living beyond your means as it is giving beyond your means. That’s just another reason it doesn’t strike the right chord with me.
Dave

Know where to go

Dear Dave,

I am 18 years old and homeschooled. I want to continue my education this fall, and my dad works at a college near our home. I would get free tuition, but there’s another college farther from home that I like just as much — but it’s more expensive. On the plus side, it is a Christian school, and my faith is important to me. What do you think I should do?

Braden

Dear Braden,

Free tuition is a major plus in my book. At the same time, I can understand your desire to get out from under mom and dad’s wings a little bit. Just don’t make the mistake of thinking that a school, church or anything else is completely Christian. You’ll meet some of the wildest characters ever at a Christian school, just like you would at a public university. However, you would have the advantage of a built-in spiritual support network.

All things considered, and since you mentioned your faith specifically, I’d probably choose the Christian school. But I wouldn’t go into debt to make it happen. There’s absolutely no reason why you can’t work and go to school at the same time. Pay it as you go. I did it, and I finished with good grades in four years. It’s a little bit harder way to go, but it’s a lot better than ending up with a ton of student loan debt when you’re through!

Dave

Family and business

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My husband and I own a small business. One of our relatives asked for a job recently, and we both have reservations about hiring him because there are several dysfunctional relationships and personalities within our extended family. Are we being mean? We're not sure how to respond.

Becky

Dear Becky,

Having a small business doesn't give relatives a free pass to employment. As entrepreneurs, you have the right and responsibility to do what's best for your company. And you don't have to hire anyone — even a relative — who's not a good fit.

There are situations where hiring a family member can actually be a plus. If a relative is qualified and the kind of person who understands they'll have to bust it every single day and perform at a level equal to or above your other team members, that can be a special and productive thing. A relative who is a problem child, however, can be a nightmare in both your professional and personal lives.

Ask yourself a few questions: Would you hire this person if they weren't part of the family? Would you hire this person because they would make a good team member? If the answers are no, then you don't hire them — period.

Be kind about the situation, because there may be some bruised feelings. But the bottom line is you have to do what's best for your business, your immediate family, and your team.

—Dave

Don't be house poor!

Dear Dave,

I read where you recommend having your house payment or rent at an amount that's 25 percent or less of your monthly take-home pay. Does this figure include property taxes and insurance too?

Mark

Dear Mark,

Yes, it does. I'm trying to keep you from being "house poor." Did you know you can qualify for a house payment, with taxes and insurance, that's close to half of your take-home pay? That's ridiculous! When you don't have room in your budget to do anything else that matters because your house payment is so large, that's what we call house poor.

When your income minus your basic living expenses equals almost nothing, it means your basic living expenses are way too high. Being in this kind of situation keeps you from saving for really important stuff like investing, retirement, and college for your kids. I'm trying to position you where you can get the house and everything paid off so you can become wealthy. Remember, your most powerful wealth building tool is your income.

When we talk about driving a crappy car, not going out to eat, or not going on vacation — those are temporary things. It's all about living like no one else, so that later you can live and give like no one else!

—Dave

Roth over Pension

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My wife and I are both 25 years old, and we're working on Baby Steps 4, 5 and 6. I have a 401(k) through my employer, and she has a pension. Currently, we're falling short of the 15 percent of income you advise putting toward retirement. Should we get IRAs, or start stocking money away in her pension?

John

Dear John,

I wouldn't put money into a pension. For one thing, when you die after putting money into a pension, in most cases it dies with you. Number two, when you put money into a pension, you're going to get about a six percent rate of return in the current environment — maybe even as low as five percent. You're not making much on it while you're alive, so I don't advise putting money in pensions. We let employers put money in pensions, if they want to. That's a nice benefit, but I wouldn't add to it.

I would do a couple of Roth IRAs, and max those out. Then, max out whatever you've got at work that you own. Of course, when you're vested in a pension, you own it. That much is true. But still, I don't advise adding to pensions, buying years up, or any of those kinds of things.

There are a few examples out there where that kind of thing works mathematically to your benefit, but they're very hard to find. Out of all the years I've been in this business, I can count on two hands the number of times I've seen it work out.

So no, I wouldn't do more with a pension where you add to it yourself, especially at such a young age.

Dave

Why the smallest debt first?

Dear Dave,

I'm new to you and your plan. Why do you want people to pay off the debt with the smallest balance first, instead of the one with the highest interest rate?

Courtney

Dear Courtney,

Simply put, because personal finance isn't all about math. Personal finance is only about 20 percent math. The other 80 percent is behavior.

We list debts in the debt snowball in order of the smallest to the largest balance, putting as much as possible toward the smallest while paying the minimum payments on the others. The reason, as I mentioned earlier, is behavior modification. It helps you see yourself making a dent in your debts.

It's easier to change bad habits when you see quick results from your efforts to eliminate negative behaviors. Paying off the smallest debts first, instead of the debts with the highest interest rates, will give you quick wins that will help keep you motivated. It provides proof that you can succeed and become debt-free!

Dave

Do the Manly Thing

Written by Dave Ramsey on . Posted in Finance

davernew2Dear Dave,

My wife and I argue a lot about finances. We're trying to get more control over our money, and she has been listening to you. That's helped a lot. She's also a lot more frugal than I am, and our biggest point of contention right now is how we handle our spending money. Whenever I work overtime at my job, I feel like I should be able to put the overtime pay toward my spending money. What are your thoughts on this?

Josh

Dear Josh,

No way, dude! You don't work overtime for your little boy wants. You work overtime, and rake in that extra cash, for the good of your family. That's the manly thing to do.

Now, that's not to say you both can't have a little spending money. It also doesn't mean that you can't treat yourself once in a while if you're working your tail off. I mean, if I'm working 70 to 80 hours a week I may give myself a little inexpensive treat in the midst of all that. So, my spending money should reflect that. But it shouldn't reflect a sense that I get to play more because I work extra, while the rest of the family suffers.

Sorry, man. I think you knew what I was going to say. Step up, be good to your family first, and then your good times will come. If you haven't learned it already, you'll soon discover that those good times are best ones!

Dave

Teens and checkbooks

Dear Dave,

My daughter is 15, and she's had jobs around the house and been on commission and the envelope system for years. She's very good about saving and not spending on silly things. We recently opened a checking account for her, and I was wondering what bills you think we should assign for her to pay on her own?

Suzanne

Dear Suzanne,

This sounds a lot like we did with our kids. She's obviously bright and motivated, so the first thing you do is explain to her the seriousness and responsibility associated with a checking account. The next step is for her to balance the checkbook with you looking over her shoulder. Do this with her for several months, while you keep one on the account, too. After that, I want her to do it alone and show you her work. Her balance should match yours and the one at the bank.

As soon as she demonstrates competency, and you feel comfortable that she can handle things, I want you to start putting her clothing budget in the account. You know, the weirdest thing happened with our girls at this stage. They suddenly started shopping at less expensive stores. It's amazing when they see that the dollars associated with these purchases can run out. My bet is you'll see some changes in her value choices.

Just take it step-by-step, a little at a time. The more they exhibit competence, wisdom, and confidence, the more you can release them.

Dave

It Doesn't Have to be a Deal Breaker

Written by Dave Ramsey on . Posted in Finance

davernew2Dear Dave,

One of my relatives just graduated from college with $20,000 in student loan debt. Her boyfriend graduated, too, and he has over $100,000 in student loan debt. They want to get married, so she's looking for a job. He wants to go to graduate school, and take out more loans to remain a full-time student. The idea of even more debt hanging over their heads really bothers her. Do you have any advice?

Denise

Dear Denise,

You don't throw away a great, potentially lifelong, relationship just because of debt. Things like laziness, dishonesty, and irresponsible behavior are deal breakers, though. Those are flaws that usually don't go away.

I'm glad she's looking for a job, but her boyfriend needs to be working, too. There's no excuse for either of them being full-time students with more than $120,000 in combined student loan debt hanging over their heads. Lots of people hold down real jobs, save money, and further their educations on a part-time basis.

If she were my niece, I would encourage her to have an open and honest discussion with her boyfriend about their future, and how he plans on paying for graduate school. She also needs to be very real about her feelings in this situation. If, after that, he still wants to just borrow more money and not work outside of school, then she might have a difficult decision ahead.

However, if he realizes how damaging additional debt could be to their relationship, and he's willing to work while continuing his education, I think their future together looks much brighter.

Dave

You skipped one!

Dear Dave,

My husband and I heard about your plan, but we're not sure what to do next. We have between $400,000 and $500,000 in a 401(k) for retirement, but we don't have any other savings. We're both in our forties, and the only debt we have is our house, so what should we do about Baby Steps 4 and 6?

Mary

Dear Mary,

Overall, you two have done a great job with your money. Let's go over the Baby Steps you mentioned. Baby Step 4 is putting 15 percent of your income into Roth IRAs and pre-tax retirement plans. Baby Step 6 is paying off your home early.

The thing that worries me is you've completely skipped Baby Step 3, which is having three to six months of expenses in an emergency fund. This is money set aside strictly for emergencies. The problem right now is if you have a real emergency, you may have to cash out your 401(k). If you do that, you'll be penalized 10 percent, plus your tax rate. That's a real kick in the teeth just because you didn't do things in the right order.

My advice is to temporarily stop your 401(k) contributions until you get a fully funded emergency fund in place. By temporarily, I mean six to eight months at most. That way, you'll be covered when life happens without having make a big dent in your retirement savings!

Dave

Get rid of the Cards

Written by Dave Ramsey on . Posted in Finance

davernew2Dear Dave,

We're trying to get control of our finances, and my husband wants to close all our credit cards. I want to keep one and use the bill-pay option for monthly stuff like utilities, so we can keep earning rewards points. I look at my way as a method of just re-routing the money and paying it off each month. Am I wrong in looking at it like this?

Cheryl

Dear Cheryl,

Yes, you are. Life never goes as planned. You can have all the well-reasoned and best-intentioned ideas you want, but sooner or later something will go wrong.

Why not use a debit card that has a rewards system attached? Lots of debit card programs offer the same kinds of rewards programs that credit card companies do, with one big exception — you don't have to go into debt!

Studies have shown that the vast majority of people never redeem their credit card airline miles. Other studies show that people spend more when using credit cards as opposed to cash. That extra money you spend on things you don't need is money you could have been saving and investing.

So, where's the reward?

Dave

Collections and creditors

Dear Dave,

We were very late on one of our credit card bills, and now it has been turned over to a collection agency. The collection company has offered us three or four different payment options. Does the original creditor accept the agreement, too, if we accept one of the collection agency's options?

Anonymous

Dear Anonymous,

In most situations of this type, the collection agency owns the debt outright or they're directly representing the original creditor. It's pretty much standard operating procedure when someone has defaulted on a loan.

My advice would be to accept the deal they've offered that makes the most sense for you and your current financial situation. It'll ding your credit report, and show a settlement on the defaulted credit card, but that's not the end of the world. There's already a mark against you for it being turned over to collections.

If you want to keep things like this from happening in the future, you need to get control of your finances. Stop playing with credit cards!

—Dave

Beware of overspending

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

I know you're big on bargains and saving money. How do you feel about warehouse clubs, like Costco and Sam's Club?

Jessica

Dear Jessica,

We have both of those in our neighborhood, and I'm a big fan. There are definitely some good buys and great bargains to be had in places like that. To be honest, my wife is probably a bigger fan than I am. I suspect we save more money from her trips than mine to those spots.

I will advise you to watch your spending carefully in warehouse clubs. Most people overbuy in situations like that, especially those of us who are spenders by nature. Believe it or not, I'm a spender by nature. To this day, if I'm not careful, I'm still bad about buying things I don't need – or too much of the things I do need – in warehouse clubs.

Have fun in there, and make sure you find some steals on smart things you can stock up on. Just don't go crazy and wreck your budget by overspending!

Dave

No magic number

Dear Dave,

I'm 26, and I've been running my own business as sole proprietor for a year and a half. My gross revenues are about $94,000, and my personal net worth is around $68,000. Is there an asset level you recommend reaching before moving to LLC status?

Meghan

Dear Meghan,

There's not really a magic number for this kind of thing. In your case, I wouldn't go to the trouble for an LLC right now. You don't need the hassle of extra paperwork and the expense of processing and filing fees. Just make sure you have normal, liability-type insurance in place. That shouldn't cost a lot of money.

The main reason you would consider shifting to an LLC is if you had reached a point in life as a business owner where you were afraid you might have a target on your back. By that, I mean you would want protection in the event of a lawsuit if your company had grown to sizable proportions and you had begun to accumulate substantial personal assets.

At this stage I don't think anyone's going to bother you.

Dave

What Will Won't Work?

Written by Dave Ramsey on . Posted in Finance

davernew2Dear Dave,

When it comes to making a will, would it suffice to sit down and write it all out on a piece of paper, then have it notarized?

Joyce

Dear Joyce,

I would never advise someone to write their own will, unless, of course, they're an attorney in that state. Laws can vary from state to state, and some states may not look upon a document like that as being official under law. Some even require witnesses, and a notary might not be good enough.

If you're trying to save money by doing it this way, I would strongly urge you to look at involving a lawyer as an investment. In most cases, having a reputable lawyer draw up a legally correct, state-specific will doesn't cost a lot of money. At the very least, go online to USLegalForms.com. They have all kinds of state-specific legal forms, including wills.

Your last will and testament is one of the most important legal documents you'll ever be part of. Please don't try to do this yourself, Joyce. I've run into so many families who, in the midst of grieving the loss of a loved one, were handed a handwritten piece of paper that wouldn't hold up in court. That kind of thing just adds more stress to an already heartbreaking situation.

Dave

Not ready for a house

Dear Dave,

I'm thinking about getting a secured credit card to help rebuild my credit score, because I'd like to buy a house. Do you think this is a good start toward getting my credit back on track and taking control of my finances? I make $50,000 a year, and I have $3,500 in debt and $2,100 in savings.

Maria

Dear Maria,

No, getting a secured credit card is not a good idea. Let me tell you a couple of things. Number one, your income is your most powerful wealth building tool. If you don't have any payments, you have the ability to build wealth and be generous. When you have debt, all you do is send money out the door to make payments. So, being in debt is a guaranteed way to stay broke.

Number two, you can get a home mortgage with no credit score through a manual underwriting. Just make sure you have a good, long history of paying other things, like your rent and utilities on time. You would also need to have all your debts paid off completely, and the accounts closed for at least six months.

I want you to become debt-free before you buy a home, Maria. I also want you to save an emergency fund of three to six months of expenses and a down payment before you buy a home. Buying a house when you're broke and in debt is a really bad idea.

Dave

A good marketing idea

Written by Dave Ramsey on . Posted in Finance

davernew2Dear Dave,

I'm a small-business owner with a lawn care franchise. It's common in our industry, after the season is over, to send out pre-pay letters for the upcoming season. If we send out these letters offering a five or 10 percent discount for early payment on next year's services, is that too similar to borrowing money from our customers at five to 10 percent?

Kevin

Dear Kevin,

Not at all. I definitely would send pre-pay letters. It takes some of the seasonality "ouch" out of your financial equation, and it gives them the opportunity to take advantage of a bargain. It's not a bad plan from a marketing standpoint for your business, either. You might even be able to add some new customers with an offer like this.

You obviously have to be really secure and confident in your ability to provide the service. Otherwise, you could end up in a really bad situation. Your equipment, staffing and track record in the business will all come into play. But if all this is strong, and you've been in the business for a number of years and plan on staying in the business for years to come, then this is something I'd definitely do.

Dave

Girlfriend debt account

Dear Dave,

I'm 29, and I have no debt. I've gotten a good start on my savings and retirement, too. My girlfriend and I plan to get married in the next couple of years, and she has about $90,000 in debt. I'm not paying on her debt yet, but I think together we can save up enough to pay it off by the time we're married. Should I temporarily slow down saving for a house and start saving toward paying off her debt?

James

Dear James,

Yes, I would have a "girlfriend debt" account. That way when she becomes your wife, you two can write a check the moment you get back from the honeymoon and be debt-free — or at least knock out a huge portion of the debt. After that, the two of you — as in WE — resume saving for retirement, a house and so on.

That, James, is exactly what I would do. You're right in line with my thinking on this, brother. Best of luck to you both!

Dave

Fighting fear

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

After listening to your show, I want to try to get control of my finances, but I'm afraid to open up the bills. I make about $60,000 a year, but it's a real struggle just to keep my head above water financially. My checking account is always overdrawn, and I don't know where to start in catching up. Can you help?

Gail

Dear Gail,

Trust me, I know it can be scary. But the easiest way to attack this thing is by taking one slow, sure step at a time. Try not to let worry consume you in the process, either.

First, sit down, take a deep breath, and open all the unopened bills. Throw away any duplicates, and keep only the most recent statements and notices. The unknown is always scarier than the known, so facing the bills and cutting that stack in half right off the bat will help reduce a lot of your initial anxiety.

Next, let's start a debt snowball. List all the debts you owe, from smallest to largest, making one column for the payoff balance, one column for the amount you need to get current on that debt, and one column for the single payment amount when you get current. Total each column — the payoff balance, the amount to get current, and the single payment. I promise it won't be as bad as you think.

Finally, make a monthly budget. Prioritize your needs, starting with food, utilities, house payments and transportation. When it comes to your debts, pay as much as you can on the smallest one while making minimum payments on all the others.

You can do this, Gail. If you'll follow my plan, I think you'll see improvement in several areas of your life and you'll feel good about the progress you're making, too!

Dave

Use an insurance broker

Dear Dave,

My mom is 73 years old, and she's dealing with depression and a few other mental issues. Is it too late for her to get long-term care insurance?

Julie

Dear Julie,

It wouldn't be a big problem if she were healthy. But given her age, and the other struggles you mentioned, I'd check with a good insurance broker to see what's out there for her.

In the insurance world they call this "making a market." Will they be able to find a company that will write her in that situation? I can't give you an accurate answer off the top of my head, because this is a difficult thing. It would probably depend on things like the extent of her depression, how long it's been manifested, and what it has done in her life.

That's one of the reasons I'm advising you to see an insurance broker. A broker doesn't represent just one company; they represent several companies. They can shop around in a given situation, and find someone to write something you might not get written otherwise. They can also shop around for the best possible price, and you get the efficiencies of the marketplace working for you.

God bless you both, Julie.

Dave

Husband's business is dying

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My husband and I have four kids, and I make $50,000 a year. He runs a small business that has been floundering for a while now, so we're basically living off my income. Part of that income is going into the business. Plus, we don't have much in savings, and we're behind on our house payments. Do you have any advice?

Paige

Dear Paige,

First of all, you and your husband have to get on the same page financially. Sit down together, and do a household budget and a profit and loss statement on the business. A profit and loss statement will tell you the money that comes in minus the money that goes out.

Here's the thing. If you're putting other money into a business account, that's a clue that you're not making money on the business. Put his rent, supplies and any other business expenses on the profit and loss list, and write out — step by step — what it will take for you to break even in the business each month. If you don't at least break even, then it's time for him to do something else for a living.

I'm an entrepreneur and a business owner. I get the allure and excitement that goes along with running your own business. But family and your financial responsibilities come first. You don't need to put any money into the business account, except for the income he creates. And while you two are sorting this out, use your income to get current on your house payments and attack any other debt!

Dave

Keep it simple

Dear Dave,

I'm looking for a good accounting program for small business. Do you have any suggestions?

Julie

Dear Julie,

The best one I've seen is called FreshBooks. I like it so much that we're actually endorsing it on some of our podcasts and a few other places. It's a cloud-based program for small business, and it's a pretty simple accounting system.

Honestly, you don't want anything super complicated for small-business accounting. You just need something that allows you to write out invoices and keep up with your expenses while categorizing them. It's important you know what's going on in your business — to be able to continually analyze what's happening — and have the ability to look in your rearview mirror and see if anything's coming up behind you!

Dave

Run from that guy

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My husband was recently laid off, and he has $229,000 in a 401(k). He has been told that he should roll it into a hybrid annuity. Is this a good idea?

Durnae

Dear Durnae,

Absolutely not! It sounds to me like he's been talking to an insurance agent instead of an investment advisor. There's no reason to put a 401(k) into an annuity. Annuities are there to protect money, as it grows, from taxes. Well, guess what? The 401(k) is already protecting it from taxes.

I would roll it into a traditional IRA in a series of growth stock mutual funds. You'll have half the fees, the advisor won't make anywhere near the commission he'd make on an annuity, and you'll get much better results in the end.

Yeah, I definitely wouldn't go the annuity route. I don't have a single annuity, and I've got a lot of investments. One of the reasons so many "advisors" push annuities is because they wind up with bigger commissions. Annuities aren't evil or anything, but they're definitely not the proper product for you in this situation.

Get away from the guy who gave you this advice, and find a good financial advisor — not an insurance guy — with the heart of a teacher. You need to talk to someone who's interested in helping you two plan for your future, not theirs!

Dave

Jobs from home?

Dear Dave,

I'm 37 years old, married with two great kids, and I was just diagnosed with multiple sclerosis. I'm trying to plan for the future, and I was wondering if you have any suggestions for work at home or self-employment ideas for people with disabilities.

Chris

Dear Chris,

I'm really sorry to hear you're facing this. You're a smart, brave young woman to be looking ahead and making plans for the coming years.

I suggest you read a book by Dan Miller called 48 Days to Creative Income. Dan is a friend of mine, and he also wrote a popular book titled 48 Days to the Work You Love. The issue you're talking about is very close to his heart, and I think his books will be a great help to you.

There's also a book by Richard Bolles. It's called Job Hunting for the So-Called Handicapped or People Who Have Disabilities, and it's full of ideas to help you work around the issues you'll be facing.

There are lots of people out there — well-known, highly successful folks — who have disabilities and still make good money and have rewarding lives using the principles found in these books. Another great piece of news is it sounds like you have a wonderful support system around you.

God bless you all, Chris. I'm praying for you.

Dave

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