Traps to avoid after graduation

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

I'm currently a senior in college. I'm completely debt-free right now, and I am wondering what I should do to stay this way after graduation.

Cary

Dear Cary,

You're already primed for a great start. Doesn't it feel great to know you won't have a bunch of payments hanging over your head when you walk out into the world? I'm really proud of you!

There are three major traps I tell all new graduates to avoid. One, don't buy or lease a new car. Save up and pay cash for your cars for the rest of your life. If you saved the amount of an average car payment — about $485 a month — and put it into a good mutual fund from age 25 to 65, you could easily retire a millionaire. Now that's something to look forward to!

The second trap to avoid is rushing in to buy a house. The first few years after college will be some of the most volatile in your life in terms of career and relationships. Save up a big pile of cash and be patient. Too many young people today go crazy and buy houses they can't afford just because their friends bought one, or everyone is telling them it's what they should do.

Last, don't ever get caught up in the credit card trap. Your income is your greatest wealth-building tool, so why would you want to take a chance on wrecking your future by sending everything you make to some bank? Live on less than you make, and live by a written, monthly budget.

I think you've got a really bright future ahead, Cary. Just remember to have a plan, pile up some cash and stay away from debt!

Dave

Stay away from interest-only mortgages

Dear Dave,

Can you explain interest-only mortgages? Are they a good idea?

Dale

Dear Dale,

An interest-only mortgage is just what it sounds like. You're paying only the interest on the loan, and none of what you actually owe. It's a good way to stay in debt for the rest of your life, so they're not a good idea.

Lots of people look at this product and say, "Wow, I'll get a lower monthly payment, and then I can throw tons of cash at the principal." Guess what, in most cases it doesn't work out that way. Why not take out a good 15-year fixed rate mortgage and put a bunch of money toward the principal? Everyone thinks they have a great idea for tricking the system. But the only system that really works is to pay off debt as quickly as you can.

Interest-only mortgages are like adjustable rate mortgages and high fixed rate mortgages — they're good things to stay away from completely!

Dave

You Need Something that Matters

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My wife and I are in our twenties. We have no debt and $50,000 in the bank. Our income is $90,000 a year, and we're cautious to live on less than we make. Still, we can't seem to get motivated to make a budget. How can we get inspired to do this?

Isaac

Dear Isaac,

Two of the biggest motivators we have are pain and pleasure. Financially, you guys don't have any pain. You're killing it! So, we're going to have to figure out something associated with pleasure.

I think you need to look for something bigger than money to push you. You guys need to ask yourselves, "What are we saving for?" On a bigger scale, ask yourselves, "What can we do with this money?"

It sounds to me like you both realize money can't be the goal. And that's a good thing. You guys are obviously smart, gifted people. I'm sure you have ideas and goals, dreams and desires. Talk about them and write them down. By doing this, you'll be taking the first steps toward making these things reality. When you have something specific that you want money to do, it gives you a reason to make it behave.

God calls us to manage well the resources He gives us, so that we're able to do good things for His kingdom and His people. Broke people can't give, so my advice would be to use your talents and resources for the good of others.

Dave

RV upgrade

Dear Dave,

My husband and I work and live in an RV. The vehicle is paid for, and I'd like to upgrade to a larger one, but that would mean taking out a $30,000 loan. We have $30,000 in savings, including our emergency fund, and we make $55,000 a year. What are your thoughts?

Renee

Dear Renee,

I think what you're doing with your lives is kind of cool. But I can't advise financing something that will go down in value as quickly as an RV. I wouldn't even do it on the basis that it's going to be your primary residence.

Let's look at things from a different angle. First of all, I think your emergency fund is a little high. I recommend three to six months of expenses, and on a household income of $55,000, holding $20,000 in reserve would be a lot. If you kept $15,000 in the bank, that would leave you with $15,000. If you're talking about a $30,000 upgrade, you'd only need to save up another $15,000.

See where I'm going with this? With a little patience and planning, you can have your upgrade in the not-too-distant future and still have the peace of mind that goes with knowing you have a reasonable emergency fund sitting in the bank!

Dave

Don't give a flighty explanation

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

I've been in my current job for five years. I've also had a second job for three of those years, but now I'd like to make a change. Do you have any advice on how to convince a potential employer that I'm a good hire, even though I had a couple of jobs in the past that I quit after a month or two?

Bill

Dear Bill,

Quitting a job after a month or so isn't normally some kind of sin that automatically disqualifies you from being hired. It might be with some corporate goober who's looking at things through some silly, one-size-fits-all hiring paradigm, but that alone wouldn't be the kiss of death around my office.

Now, would we look at something like that and want to know what happened and what your explanation was? Absolutely! But if it made sense, there wouldn't be a problem. However, if it made you sound flighty or disgruntled with things in general, we'd probably pass.

My guess is that the fields you're interested in are like most — there's a lot of importance put on who you know. And I don't mean this in a negative way. Work and try to develop good relationships with people in your field and those associated with it. If that's in place, they can honestly give out positive references.

Knowing someone within the field or at the company, or being connected to someone with a positive reputation, can help you avoid the résumé slush pile. It can help cut through the mess and achieve clarity!

Dave

Big debt on an old car

Dear Dave,

My wife cosigned a loan on a 2007 car for her sister. Now, it's being repossessed, and $23,000 is still owed on it at 20 percent. What can we do in this situation?

Pablo

Dear Pablo,

Tell the bank or dealer where the car is, and tell them to come pick it up. There's no way to get out of the rest, my friend. You and your wife are going to be liable for whatever the car doesn't bring in afterward. Let's say it sells for $4,000. That would be subtracted from what is owed, and it will still be up to you guys to pay the rest. You could always try to negotiate to settle it for pennies on the dollar. Based on what you've told me, that's a best-case scenario.

The other thing I would do is demand a full audit on the account from day-one to present, because a 20 percent interest rate doesn't explain why a car didn't pay off – especially a $23,000 car. If this was a $5,000 car from a tote-the-note car lot, and they were ripping her off charging only interest – and that's all anyone was paying, and she gave up and punted – that's fine. You're just looking for a little understanding of the situation. But $23,000 cars don't generally have 20 percent interest. That's a pretty freaky deal, and I'd want to know where the money went.

From a bank's perspective, I don't see how anyone would think something like this would work out. The car was going down in value the entire time, so it just doesn't make sense to me. Of course, if you have the cash lying around and it wouldn't damage your finances, you could just take care of things and call it Stupid Tax.

Cosigning on a loan, especially with family, is never a good idea.

—Dave

“God sometimes puts the sweetest things in life, like being in His presence, at a higher reach to make sure that those who find Him really want Him.” Josh Waltman

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

I recently applied for life insurance for the first time with a child rider. The insurance company denied my request for the rider portion because my son has hemophilia. Do you have any suggestions or advice?

Sarah

Dear Sarah,

Unfortunately, you're going to have a difficult time with this situation. It's generally pretty hard, for obvious reasons, for hemophiliacs to get life insurance. I hope you understand that's a statistical statement, not a spiritual statement.

You can always cover him as a child by building an emergency fund over and above the three to six months of expenses I normally recommend. A child rider is just a small policy to cover final expenses and things like that, so you could self-insure by saving up in the event — God forbid — of a worst case scenario. An average funeral today costs around $7,000 to $10,000. You could always spend less, but if you guys have reasonable safeguards this isn't a situation you should be facing. I mean, there are probably some things he just shouldn't do from a common sense standpoint, right? But lots of folks have long, wonderful lives with that particular condition.

It might be that as research on the disease progresses and as he gets older, there's a possibility that he could qualify. Think about this. If you even whispered a word like "cancer" anywhere near your name 25 years ago in the insurance business, you were done — no life insurance of any kind. Nowadays, they look at all the factors involved. You can actually have had cancer and get life insurance.

In short, I think there's hope for the future. In the meantime, I would cover it with a slightly larger emergency fund. Just add a few thousand to what you would normally set aside for emergencies, because you might face some medical issues, as well.

Dave

Bankruptcy aftershocks

Dear Dave,

What are the long-term effects of declaring bankruptcy?

Brittany

Dear Brittany,

One of the biggest aftershocks of filing bankruptcy is that it stays on your credit report for years afterward. A Chapter 7 filing, which wipes out everything and gives you a clean slate, stays on your report for 10 years. Chapter 13, which is a repayments plan, and Chapter 11, another type of large bankruptcy or business bankruptcy, both stay on your credit bureau report for seven years.

Another big problem is that it can follow you around when it comes to applications or when you apply for different types of licenses. Many of these ask if you've ever filed bankruptcy. It doesn't ask if it's still on your credit report; it will ask if you've ever filed bankruptcy. If you have, you'll have instances for the rest of your life when you have to admit it and explain it all over again. So, it's an emotional scar that follows you around for a long, long time.

Too many bankruptcy filers never really recover from their financial distress because they never learn new and better ways to manage their money. That's why I recommend people do everything they can to avoid bankruptcy. It's not an easy do-over; it's a last-resort kind of thing. And in the vast majority of situations it's just not necessary.

—Dave

Out of step with the Baby Steps

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My husband and I have been following your plan. We just paid cash for our new home after selling the old one, so we're out of the Baby Steps. But we've still got about $50,000 in student loan debt hanging over our heads. We make over $100,000 a year combined, so how would you suggest handling this?

Stephanie

Dear Stephanie,

Whoa, hang on a minute! I think you're a little confused about the steps in my plan. You're not out of the Baby Steps quite yet. You just got Baby Step 6, which is pay off your mortgage, done ahead of time.

Go back to Baby Step 2, which involves paying off all your debt except for your house, and take care of the student loans. You guys make good money, so it shouldn't take long at all. After that, if you haven't already, move to Baby Step 3 and set aside a fully loaded emergency fund of three to six months of expenses. Baby Step 4 is investing 15 percent of your income for retirement, and Baby Step 5 means putting aside money for the kids' college education — if you have kids. The seventh Baby Step is building wealth and giving.

I hope that helps straighten things out. The good news is you won't have to fight through a house payment while you're paying off the student loan debt. So for now, just get into attack mode and make it disappear. Then, move on to the other steps. Other than getting the sequence a little mixed up, you guys are doing great!

—Dave

Do no more damage

Dear Dave,

I'm returning to school to finish my degree this year, and I'm going to ask my girlfriend to marry me. We both have decent jobs, but I also have some previous student loans that I could put into deferment. Do you think I should pay off the debt before getting engaged?

Colton

Dear Colton,

Congrats on finding that special someone! Now, if I were in your shoes, here's the way I line up my priorities.

First, don't do any more damage where debt is concerned. I want you to pay cash for your food, lights, water, gas for your car and housing. Obviously, you have to live, but I want you to all this without adding any new debt. The next priority would be to pay for college, and pay cash for your tuition and stuff from this point forward. Remember, no new debt!

After that, let's save up and pay cash for a nice, inexpensive ring. The student loan debt comes last through deferment. I'd really attack it with a vengeance after I was married, out of school and had an even better job and bigger income.

You're going to be a busy guy for a while, but I'll bet this lady's worth it. Gaining control of your finances now will be a great gift for you both when you start your new life together.

—Dave

Church Pushback

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My wife and I go to a small church where we tithe. The church is continually asking for contributions to other charities and causes, and we don't have the money to give to them all while we're sticking to our budget and getting out of debt. The worst part is that we get pretty aggressive pushback when we say no. What can we do?

Michael

Dear Michael,

I don't react well to that kind of pushback. I would probably be nice a couple of times, but after that my response might sound something like, "Mind your own business."

Seriously, I'd probably be a little gentler than that. But basically when it reaches that point, they're saying, "I want your money." And that's really over the top. If it goes even further, and it becomes a question of you "digging deep" or not having enough faith, I might get un-gentle in a hurry.

Your first job is to provide for your family and take care of those kinds of responsibilities — which is a very scriptural stance. Once you've done that, then you'll hopefully have the financial ability to move beyond tithes and into offerings, which are completely different concepts. Tithes are first fruits off the top, while offerings are from surplus — meaning that you and your family are doing well financially.

Another thing to consider is this: Does this church turn every impulse they have into pressure to donate or buy something, because they didn't plan for this kind of stuff in the church budget? I'd start having a problem with the leadership if this turned out to be the case, because it's a sign they're not planning and leading well.

Hopefully, you can explain to these folks the reason why you can't contribute to additional things at the moment and they'll understand. If not, and it were me in your shoes, I think I'd have to find another church.

Dave

Stick with mutual funds

Dear Dave,

I've been following your plan, and I have my emergency fund in place and am investing in mutual funds. Recently, a financial planner recommended bonds to me. What is your opinion on this?

Becky

Dear Becky,

I don't recommend bonds at all right now. I'm not a fan of them, and I don't own any. The bond market is almost as volatile as the stock market, and it doesn't pay nearly as much on average.

On top of all that, bond prices work at an inverse of interest rates. In other words, as interest rates rise, bond prices go down. Long-term interest rates are still really low. If you were to buy a bunch of bonds right now, and interest rates went up even one percent, you could lose a lot!

I recommend mutual funds and good growth stock mutual funds. There are always some bonds mixed in with a growth and income fund, and I'm not opposed to that to some degree, but it's not my favorite. So, if I were ever going to buy bonds — and I'm not going to — it definitely wouldn't be right now. It doesn't take much of a move in interest rates for bond prices to go down dramatically.

—Dave

God is whispering to you

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

I was recently notified that I am one of the beneficiaries of a class action lawsuit against a previous employer. The amount I can receive is just $200, but I don't feel like this past employer wronged me in any way. Everyone around me is urging me to take the money, but I feel kind of weird about accepting anything under the circumstances. What do you think I should do?

Randy

Dear Randy,

I don't know all the details of the episode you're talking about, or what happened with this particular company. But I don't agree with the idea that we're supposed to beat up anyone we can, or milk everything we can get out of every company or human being we come across. Some people are just incredibly opportunistic. They live like it's anarchy, and they have no sense of fairness or decorum. But you do.

The people who are telling you to take the cash don't think the way you do. They're the kind who would take any money, no matter the reason. But you sound like the kind of person who wouldn't do that, so you shouldn't be taking advice from those people.

I think your heart has already told you what to do, Randy. God is whispering in your ear. If I were in your shoes, I wouldn't take it. If it were $100,000, I wouldn't take it. You were not wronged, and that money is for someone who was wronged.

You have a sense of dignity and pride about yourself and your behavior, and I respect that. My advice is to listen to your heart.

Dave

Mortgage or save?

Dear Dave,

I just became debt-free, and I live in an apartment. I'm also 28 and single, and I make about $75,000 a year. Do you think I should get a mortgage and go back into debt, or save up and pay cash for a house? I'd like to keep the price of a new home around $200,000, and I think I can save about $15,000 a year.

Kevin

Dear Kevin,

Congratulations on becoming debt-free! It feels awesome, doesn't it?

When it comes to saving, how about rounding that figure up to $20,000 a year? Going that route, you're only 10 years away from a nice, new paid-for home, and you're still debt-free. That's one way to do it.

I don't borrow money, Kevin. And I don't tell people to do things I won't do. The one exception to that is I don't yell at people for taking out a 15-year, fixed-rate mortgage, where the payments are no more than 25 percent of your monthly take home pay. You could save like crazy for a couple of years and put down a really strong down payment on a home in the price range you're talking about. Then, you could pay off that house in 15 years max — or even sooner.

I don't have a big problem with it either way. But wouldn't it be great to be only 38 years old and still be completely debt-free?

—Dave

Difference in debts

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My wife and I are on Baby Step 3 of your plan. We’re also saving up to buy a car with cash. We’re about $3,000 away from our goal, but now my wife wants to go ahead and finance the rest. She has started wondering what the difference is in borrowing to buy a car and borrowing to buy a house.

Lex

Dear Lex,

This is a good question. It sounds like you guys have made good progress, but now one of you is running out of steam. That’s okay. Getting out of debt and staying out of debt can be a tough road.

For one thing, cars go down in value. The second thing is I don’t like debt of any kind. I don’t really like borrowing for a house even, but I tolerate it as long as you use a 15-year, fixed rate mortgage with payments that are no more than a fourth of your take-home pay. I mean, it’s a much larger purchase. You can get a great car for $15,000 to $20,000 dollars. Depending on where you live, a good home can cost you 10 times that or more.

Still, the best way to build wealth and have a high-quality financial life is to not be in debt. You’re never going to win with money in the long term if you can’t learn to delay pleasure. That’s the bottom line. Personal finance is about controlling the person you see when you look in the mirror.

Every one of us has that little four-year-old kid inside, a little kid whose name is Immaturity, and he or she wants what they want right now. What your wife is asking is a normal request, but it’s also a sign that we all have to address that little kid that’s inside us once in a while — and tell that kid no!

—Dave

Car debt!

Dear Dave,

My wife and I have just started getting on track with our money. We have $2,000 in savings, and the only debt we have is our house and two cars. I work in the oil and gas industry and make about $180,000 a year, but things are pretty volatile right now. We’re upside down on both vehicles, and we owe $39,000 on one and about $48,000 on the other. Under the circumstances, should we go ahead and build a fully funded emergency fund or work on paying off the cars?

Kendall

Dear Kendall,

Are you kidding me? Sell the cars, dude!

You need to go to Kelly Blue Book’s website right now, and find out what your cars are really worth. Then, put them on the market as a private sale. You’ll get thousands more selling them that way than you will at a dealership. You’ll have to talk to a local credit union or bank for a small loan to cover the difference, plus a little bit more so you guys can get a couple of little beaters to drive for a while.

But man, you’ve got close to $100,000 in car debt hanging over your heads. That’s a disaster! I want you to take a moment and think about how things would be without these stinking car payments. Your lives would change completely!

Hopefully, you’ll be able to keep your job. But this car debt is the scariest thing I’ve heard in a long time, even with your great income. Get rid of those things now!

—Dave

Sharing Successes

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My husband and I are 28 years old. We're completely debt-free, and we each have great jobs. We don't talk a lot about this kind of stuff, because we've found it causes other people to treat us differently. We realize how incredibly blessed we have been, so we always try to give God the credit, save, tithe and give regularly, and not brag about these things. How would you recommend handling a situation like ours?

Amanda

Dear Amanda,

When you start to win with money, build wealth and achieve some of your goals, you discover pretty quickly that there's a very small group of people you can celebrate with. It sounds like you've discovered this already.

A lot of times there are friends, and even family members, you can't celebrate with because it comes off as bragging — even if you're just happy you've reached a milestone. So, you learn to keep lots of stuff private and not even share the good things. Still, if you have a nice car or a beautiful home, these things can indicate that you're successful. Even if they're a small percentage of your financial world, it will sometimes generate feelings of jealousy or envy in other people.

Jealousy is, "I want what you have." Envy is, "I don't think I can have what you do, so I don't want you to have it either." These are two really evil spirits, and they're loose in our country today like never before. Part of the price of making smart decisions, and being wise with your money, is that some people don't understand when you win and don't think it's fair.

But the truth is that you guys have every right to enjoy the fruits of your labor. You've earned it. You're generous, giving people, and you take care of your family so the rest of us don't have to pay extra taxes to take care of them for you. That's the truth about winning with money. You guys are under no obligation to explain your income, net worth or the fact that you're winning. And you're not obligated to be ashamed of it either!

Dave

Pay it, but with caution

Dear Dave,

I got a department store credit card, using my real age at the time, when I was 17. I ran up a debt of $150, and the balance has grown to over $350. This was 10 or 12 years ago, but a debt collection agency started calling again the other day wanting the money. Hasn't the statute of limitations run out by now? What should I do?

Elizabeth

Dear Elizabeth,

There is a statute of limitations, but there are a couple of other things to consider, too. First, the debt is not collectible because a minor alone cannot enter into a legally binding contract in any state. The second thing is they can screw up your credit report for a very long time, and it sounds like they're in the process of doing that right now.

Here's my advice. Call them and explain that they are past the statute of limitations, and that you are considering suing them. After that, remind them that you were a minor when someone approved you for the card, which means the store you signed up with can be sued as well.

However, since you did take stuff from the store, offer them the original $150 to settle the deal. Get it in writing that the account is settled in full by this amount, and don't give them electronic access to your money. When you get the settlement offer in writing, keep a copy of the letter and a copy of the cashier's check you'll use as payment.

Pay it because you owe it, Elizabeth. It's a moral issue. And hopefully as a result you can get these kinds of people out of your life for good!

—Dave

What's the Goal?

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

We have two girls in competitive gymnastics, and it's costing $12,000 to $15,000 a year at a professional gym to do all this. My wife and I both work, and we make about $115,000 a year, but virtually all of her income goes toward paying the gymnastics bill. We're also trying to get out of debt and get better control of our money at the same time. Should we focus more on our finances right now?

Jim

Dear Jim,

If I were in your shoes, I'd be asking myself why the kids are in gymnastics. Unless you guys are trying to send them to the Olympics — and they're actually good enough to reach that level — teaching them things like discipline and to master their bodies through physical training can be done at a local amateur level. And at a much lower cost.

My son played ice hockey in local leagues for years when he was growing up. We did it as a family thing, and he had lots of fun and we all made great new friends. He even played some in high school, too, but he wasn't NHL material or anything like that. It didn't change his life that he didn't play on a traveling team or with professional trainers, so we had to ask ourselves, "What will it matter when he's 30 years old?"

You make good money, so that's not really the big issue. If you guys made $50,000 or less, I'd be yelling at you. But with your income, the gymnastics thing probably isn't going to slow you down too much when it comes to getting your financial house in order. In other words, it's a parental thing. Ask yourself why you're investing so heavily in this, and what the goal is when they're adults. I think that will help you make the smart decision.

Dave

Bi-coastal is for the birds!

Dear Dave,

My husband and I have been living bicoastal since last October. He found a great job with great pay in Charlottesville, Virginia, after graduation, and we both agreed he couldn't pass it up. I'm still in Portland, Oregon, with a good marketing job making $50,000 a year. We're trying to get out of debt. If I join him now, I won't have a job and we won't pay off our debt as quickly. But being apart is so difficult. Should I go ahead and make the move now?

Danielle

Dear Danielle,

If he's making great money, and you guys can make it on one salary while you look for another job, then I'd say go for it. There are things in life that are more important than money, getting out of debt in a certain amount of time, or a particular job.

Have you talked to your company about the possibility of doing your job remotely? If that's not possible, maybe you could do some consulting on a remote basis. Even if you weren't a traditional employee, they might float some projects your way.

Talk to them about these ideas, and start shopping for a position in Charlottesville. It's a university community, if I remember correctly, so there are probably lots of opportunities in your field.

Go be with your husband, Danielle. You guys have been apart way too long already!

—Dave

Breaking the News

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

My parents are going through a divorce, and money issues are a big part of the problem. My dad bought several rental properties and poured money into them. Then, he lost them to foreclosure and isn't making a lot in his new, commission based job. How can I, as a 25-year-old kid, tell him that his career choices aren't working?

Ryan

Dear Ryan,

I'm sorry to hear about your mom and dad. Divorce is never an easy thing, no matter how old you are.

You've probably heard lots of old sayings about how winners never quit. Well, in many cases those are false statements. Winners and successful people quit all the time; they quit doing things that aren't working. This doesn't have to mean that you quit on a dream, but it could mean you change the methodology you're using — especially if it's not getting you anywhere.

Part of being a successful entrepreneur is having the ability to recognize when something isn't working and change it. You sound like a smart, caring young man, but there's little chance that a twenty-something with very little life experience will be able to convince his father of these things. I mean, he's probably in his fifties, right? Plus, he's going through a divorce, and it sounds like he's broke and emotionally worn out.

You've got a great heart, and I'm glad you care enough about your dad to try and help him. But in this scenario, I think he needs to talk to someone like a pastor, or even an older relative or good friend closer to his own age — a guy with a little more life experience. Maybe you could talk to someone like this and explain what your dad is going through. Ask them to talk to him, and see if he'll open up to some new ideas.

In the meantime, just be there for him and show all the support you can. You're a good son, Ryan.

Dave

Just a theory

Dear Dave,

Let's say you have $1 million in the bank. Why would you take out $300,000 to buy a house, instead of just making a 20 percent down payment and keeping the rest of the money in mutual funds to make more money? If need be, I could still pay off the house.

Alex

Dear Alex,

Interesting question. Okay, I'm game.

The spread that you'd make between even a high-interest rate mortgage — let's say six percent — and mutual funds at 11 percent or so, is about five percent. And that's assuming nothing goes wrong, and you can get your mutual fund out if needed.

What you're talking about is theory, and what I'm talking about is actual life. In your theory you've left out two major issues: paying taxes on the mutual fund, which would make your yield less, and risk. You've compared a zero-risk investment with a risk investment, and you shouldn't do that. You must factor in risk so you can accurately compare one investment to another.

Every time you pay off a mortgage, the bank no longer charges you interest. That's zero risk compared to a mutual fund, which does have risk. Remember, if your house was paid for you wouldn't borrow $300,000 against it to invest in mutual funds!

—Dave

Pay for Grades?

Written by Dave Ramsey on . Posted in Finance

davernewDear Dave,

What's your opinion on rewarding kids with money for getting good grades in school?

Joe

Dear Joe,

Honestly, I don't have a strong opinion about it one way or the other. We didn't pay our kids for good grades, but I can't really think of a strong argument not to pay them for success in school. You could say you shouldn't pay them because it's something they're expected to do anyway, and that's somewhat valid. But you could also make the same point where chores around the house are concerned, too.

We paid our kids to do some chores, but really the point is not about the economic value. It's the fact that you want your kids to associate work with money. I still meet people my age and older who haven't made that connection. Work creates money, and that's an important thing to teach your kids. Once they've created some money by working, then you want to use those moments to teach them to save, spend and give wisely.

You can do this around the subject of grades if you want. There's probably a valid case to be made that getting an "A" takes a lot more work than getting a "C." You're certainly not obligated to pay them for work or grades, but if you don't do some of this – and teach them the proper ways to handle the money they earn — you'll miss out on a lot a fantastic teachable moments.

—Dave

Making grown-up choices

Dear Dave,

My husband and I are on Baby Step 2 of your plan. We've got our starter emergency fund of $1,000 in the bank, and we're busy paying off credit cards and unpaid taxes from previous years. He thinks it's okay to take trips and save up for other fun things while we're doing this, but I disagree. I want to cut out all extra spending and pay off our debt as fast as possible. What's your opinion?

Laura

Dear Laura,

It's okay to do those things in the general philosophy of life. Unfortunately, that's not what I teach when it comes to getting out of debt and gaining control of your finances. The reason people are successful following my plan is because I teach common sense combined with an unbridled, scorched-earth kind of intensity.

Let's take a closer look at this. You have unpaid taxes, not to mention credit card debt hanging over your heads, and he's talking about going on a trip and saving up for toys? I'm sorry, but that's completely irresponsible. Remember when we were kids, and Mommy and Daddy wouldn't let us go outside and play until we had cleaned up our mess? That's the kind of thing I teach.

There's a process here. There's an idea and a concept behind what I teach, and when you plug into it, you're going to start moving in a positive direction. In short, behaviors have to change, Laura. The more dramatically they change, the better results you get and the faster you fix things. But if you don't plug into it — if he doesn't plug into it — you guys are going to keep getting the same results you've been getting, which basically stink!

—Dave

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