Don't fall for same-as-cash offers

Dear Dave,
My wife and I bought some furniture a while back on what we thought was a 24-months-same-as-cash plan. The original purchase price was $1,600. The other day, I got a call from a collector saying that it was actually a 12-month plan, and the balance is now $2,800. We looked at the contract, and it was our mistake on the length of the plan. Still, that makes the interest rate about 30 percent. Is there anything we can do about this?
Robert

Dear Robert,
This is one of the reasons I tell people to stay away from “same as cash” agreements. You may not have agreed to a specific percentage rate, and I’ll bet it’s something less when you factor in the time before and after the 12-month period ended. Still, I’m pretty sure that when you signed the contract you did agree to have this thing convert to a financed contract if you didn’t pay it off in 12 months. These kinds of deals are really scummy. Not only have they charged you interest since the 12-month period ended, they’ve also back-charged you interest for the entire length of the contract!

These same-as-cash contracts are a bear trap. They’re designed to mess you over big time. You can try to dispute it, but I’ve got a feeling you’ll lose and have to pay about $1,200 in stupid tax on this one.

Lots of people think they can pull one over on a company with the “same as cash” deal, but stuff almost always comes up—even if you don’t misread the contract. I’ve said it a million times, Robert. If you play with snakes, you will be bitten!
—Dave

A place for everything

Dear Dave,
I’ve heard you talk about something you call the Legacy Drawer. What exactly is this, and what goes into it?
Lisa

Dear Lisa,
One of the best ways I know to tell your family how much you love them is by having your financial act together and organized in a central location. The Legacy Drawer is a collection of your essential financial documents in a safe place where they can find them when you die, or if you’re sick or disabled.

All of the pieces of your financial life should be in this drawer. I’m talking about your will, living will, estate plan, investment statements, insurance policies, and property deeds. You should also include stuff like power of attorney statements, access information to lock boxes, and other instructions to family and loved ones.

Make sure it’s really well-organized, too. It should be laid out simply enough that anyone who can read could open it up and find exactly what’s needed in just a few minutes. The stress of having a loved one die or become seriously ill is bad enough. You don’t want to make it any harder on them by leaving your finances in a mess!
—Dave

* For more financial help please visit daveramsey.com.

What's your emergency fund range?

Dear Dave,
In your plan, you talk about Baby Step 3 as saving enough to have three to six months of expenses in your emergency fund. My husband and I were wondering how you can determine whether you need to be on the low end or high end of that range?
Amanda

Dear Amanda,
Lots of times in a marriage you’ll have a situation where one person wants to save more, while the other is excited to move on toward investing. Technically, neither is wrong. So, the emergency fund really deals with someone’s own personal level of peace. Remember Murphy’s Law, and how it says that says if something can go wrong it will go wrong? Your emergency fund is Murphy Repellant. Some people just want to make sure he doesn’t knock on the door, while others make sure he stays in the next county!

There are always practical considerations you can use to determine the amount of your emergency fund. If you both have very stable jobs, you’ll probably be okay saving up three or four months of expenses. But if just one of you works outside the home, or if one is self-employed or on commission, leaning toward the six month side is probably a good idea.

Of course, you can always compromise. Start out with three months, but add a little every once in a while until you reach a point where you’re both comfortable.
—Dave

Finding foreclosure homes

Dear Dave,
We’ll be completely out of debt in September and looking to buy a home in the next year or two. We’re thinking of buying a repo home. Do you have any suggestions on where to find these?
Levi

Dear Levi,
One way is to buy the home from the owners before the sale happens. It’s better for them because they realize some money and it stops the foreclosure. It’s better for you, too, because you won’t find yourself in a bidding war later on the courthouse steps!

You can also find listing in your local newspaper under the legal notices section, and if you live in a metropolitan area it’s not hard to find a legal newspaper that lists incorporations, real estate transactions and foreclosures.
—Dave

Let someone else make the decisions?

Dear Dave,
I’ve never heard you discuss at what point it’s advisable to let someone else make and manage your investments. Also, is there a point at which it’s good to go with a fee-only financial planner?
Anonymous

Dear Anonymous,
I think it’s always a good idea to do it yourself. And to be honest, I never recommend fee-only planners.

Don’t just turn everything over to someone else – no matter how many letters they have after their name – and let them manage it all or make all the decisions for you. You’re the one who made the money, so you should take care of your own stuff. In lots of cases people looking for this kind of help have a greater net worth than the bozos dishing out advice and wanting to “handle” it all.

None of this stuff, investing, personal finance, or saving, is rocket science. You need to be in control of your money. Now, can you have counselors in your life? You bet! Everyone needs the benefit of people around them who have wisdom and experience.

But it’s never a good idea to just blindly trust someone. If you do, you might end up like an old, washed up boxer – no money and no teeth!
—Dave

* For more financial help please visit daveramsey.com.

Lay the foundation first!

Dear Dave,
We’ve read about your plan, and we’re in pretty good shape financially, but we don’t know what to do next. We have $400,000 in a 401(k) for retirement, but we don’t have an emergency fund or any other savings. The only debt we have is our house. What should we do about Baby Steps 4 and 6?
Mary

Dear Mary,
You guys have done a great job of saving for retirement and staying out of debt. 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, not vacations, toys or a new car. The problem right now is if you have a real emergency, you’ll have to cash out your 401(k). If you do that, the government’s going to penalize you 10 percent, plus your tax rate. That’s about a 40-percent kick in the teeth just because you didn’t do things in the right order!

Again, you’re in pretty good shape overall, but in building your financial house you’ve put the roof on before you’ve laid the foundation. If I’m you, I’m going to temporarily stop my 401(k) contributions until I get my emergency fund fully loaded. By temporarily, I mean six months at most. That way, you’ll be covered when life happens without having to sacrifice your retirement savings!
—Dave

Just what she needs

Dear Dave,
My daughter is a student and has $13,000 in student loan debt. Recently, her grandparents dissolved an LLC, and they want to give her a gift of $12,500. Should she use this money to pay off the loans, or invest it in a Roth IRA and keep working to pay off the student loans herself?
Meg

Dear Meg,
Let’s look at it this way. Pretend she didn’t have any student loan debt. Would it be wise for her to borrow money on a student loan in order to invest in a Roth IRA? Of course not. If you don’t pay off the loans, and invest it instead, it’s just like you borrowed money to invest. That’s not a good plan.

Your daughter needs to get her student loan mess cleaned up, and this is the perfect opportunity to do just that. And I think it’s pretty cool that God gave her what she needs to fix things. Besides, she can’t do a Roth IRA, except to the point that she has an earned income, anyway.

The last thing this girl needs is a pile of debt waiting on her when she gets out of school. She’s not in a position to be an investor right now. The minute she pays off her student loans, she should get to work on saving a pile of money for an emergency fund so she can complete her studies without racking up more debt!
—Dave

* For more financial help, please visit daveramsey.com.

How much am I really liable for?

Dear Dave,
I have old credit card debt that goes back a few years. The account has been sold and re-sold to several collection companies. The limit on the card was $300, but with late charges and fees I now owe $1,500. Am I liable for the extra $1,200?
Monica

Dear Monica,
You agreed to their terms, which included the right to charge fees and penalties. Legally, they can do this. The honorable thing would be to send the company you contracted with a check for the full amount.

However, that company no longer owns the debt, and they won’t get the money. They sold the debt. The present holder is just hoping to get something out of it. They buy debt in volume, dirt cheap, and whatever they can collect from any creditor is profit.

The current collection company would probably be thrilled to settle for a lot less than face value. Make them an offer, but start really low. You can probably meet them somewhere in the middle and settle this for around $500.

Do not give them any money until you have in your hand – on paper, in writing – a statement showing the amount for which they will settle, and do not give them electronic access to your bank account, either.

Once you have this in hand, send them a cashier’s check or money order, and keep a copy of that payment and the letter for the rest of your natural life!
—Dave

Going too far?

Dear Dave,
Your plan has been a real blessing to us. Last week, my mother-in-law told my husband they haven’t paid their property taxes yet. Three thousand dollars is due. I love my in-laws, but they’re big spenders. They’ve got plenty of money and love to take lots of trips. We make good money, too, and could help them out, but we’re afraid this may be just the tip of the iceberg. What’s your advice on handling this?
Kelly

Dear Kelly,
This is a really touchy situation. First of all, you shouldn’t do anything. Your husband needs to handle this, because he’s their son. Even if you make kind, polite suggestions, they’ll assume you’re the one withholding from them. You don’t want to be labeled as the evil daughter-in-law!

I understand your position and agree that you don’t want to enable their bad habits. Giving a drunk a drink is never a good idea. But this is family we’re talking about. You should try to find a way to help them if you can. If that help includes money, make certain you know exactly where it goes. When you give someone $3,000 (the amount needed for the taxes) you earn the right to have a say in what’s happening.

Maybe your husband could go have coffee with them and just talk about things. He could explain how you guys are getting out of debt, and living on a budget to get control of your money. He could tell them how it’s been a fabulous thing for your marriage and your finances, and that he’d love to show them how you’re doing it.

I’ve got a feeling that mom and dad didn’t raise their son to have dessert first and then eat his vegetables, but that’s exactly what they are doing. They need to pay their property taxes before they go running off on a bunch of fancy trips.

From what you said, they’ve got the money to take care of what needs to be done and have some fun. But if they don’t correct their course, they’re liable to have their financial dignity stripped away.
—Dave

* For more financial advice please visit daveramsey.com.

Saving is always smart

Dear Dave,
My wife and I have gone from having almost nothing to making about $90,000 in the last few years. The problem is that I can’t get her interested in saving money. What’s worse, her father is the preacher at our church and he has convinced her that he knows the Lord is coming back in our lifetime. Thinking this, she says there’s no reason to save because it will all be gone anyway. What can I do?
Brian

Dear Brian,
I’m all for people living their lives according to God’s word. But the Bible says that no man knows when the Lord will return. So, I get pretty leery when a guy – especially a preacher – tells me he knows when it’s going to happen.

The Bible also tells us very clearly that it is wise to save, and the Bible does not contradict itself. So basically, if you don’t save you’re being foolish. Still, it probably wouldn’t be a great idea for you to run and tell your wife that financially she’s behaving like a fool.

This is a touchy situation in other areas, too. Right now her dad’s theology is ruling your marriage, and that’s not good. Husbands and wives should grow in their faith together. I think you guys should sit down with a good marriage counselor and, for the good of your family, come to an agreement on a new place of worship.

I mean, even if her dad is right about this – and if he turns out to be right, I’m pretty sure it’s not because he has inside information – there’s some stuff going on here where he’s interwoven his own ideas and spiritual authority in with your household authority.

And that kind of thing could cause more problems down the road!
—Dave

Company needs to step up!

Dear Dave,
My company makes me use my personal credit card for overseas travel. They take care of my expenses, but sometimes they don’t send the money until after the payment is due. Does this affect my credit score?
Marshall

Dear Marshall,
Unless you pay on time instead of waiting for their money, you bet it affects your credit score. It’s your card! You signed for it, and it’s in your name. Every late payment affects your credit bureau score.

I don’t know who you work for, but this is a very dangerous and bad practice – both by you and your company. Your company is using your credit and abusing you in the process. Talk to them about furnishing you with a corporate card. Better yet, a corporate debit card! If your employer is going to send you overseas, or anywhere on the road, it shouldn’t cost you money or cause you problems.
—Dave

Stick with term

Dear Dave,
My husband and I both work, and we just bought a great house for $150,000. He makes $50,000 a year, and I make about $30,000. We’ve been getting lots of different mortgage life insurance offers in the mail. They say they will pay off the house if one of us dies. Do you think we should take advantage of this?
Blasha

Dear Blasha,
No! These kinds of offers are terrible unless you’re uninsurable, because most mortgage life insurance policies are a lot more expensive than term life insurance.

You and your husband both need about eight to 10 times your annual incomes wrapped up in good, level term policies. Forget that overpriced stuff. These will take care of you both, and the house, for a lot less if something unthinkable happens.
—Dave

* For more financial advice please visit daveramsey.com.

Guilt and cynicism

Dear Dave,
I’ve noticed that lots of people get defensive when it comes to talking about money and living on a plan. Why is this?
Tonya

Dear Tonya,
I think it’s because there seem to be two negative emotions connected to people who have failed with money: guilt and cynicism. They feel guilty because they’re terrible when it comes to handling money, and they don’t want to talk about it.

Cynicism may be more prevalent in people who feel like they’ve been messed over by some “money expert” out there. Maybe they got caught up in a deal that went bad, or they lost a lot of money following their advisor’s advice. The results can be they end up believing that anyone connected to the financial arena is a bad, incompetent or manipulative person.

If you’ve made mistakes with money, that just makes you human. Everyone alive has messed up financially, and that includes me. I made mistakes with lots of zeroes on the end, but I managed to turn things around. Now, I’m running my own company based on those mistakes, how to fix them and how to keep people from making the same mistakes I did years ago.

Sometimes people just don’t want to be around others who are trying something new or different and winning in the process. Then, there are people in life—I call them losers—who just don’t want anyone else to win, because it reminds them that they’re not winning. Being stuck around those kinds of people is no fun for anyone!
—Dave

Where do toys fit in the Baby Steps?

Dear Dave,
When is it okay to have a little fun and get a boat or a motorcycle when you’re doing the Baby Steps?
Jennifer

Dear Jennifer,
I always recommend that folks complete the first three Baby Steps before running out to buy a bunch of toys. Baby Step 1 is to save up $1,000 in the bank for a starter emergency fund. Baby Step 2 is to pay off all your debts, except the house, using the debt snowball method. Then, on Baby Step 3, we go back and fully fund the emergency fund to contain three to six months of expenses.

After you’ve gotten this far, it’s okay to have a little fun and save up for a toy. But don’t forget about Baby Step 4, which is putting 15 percent of your income into pre-tax retirement plans, like mutual funds and Roth IRAs. Don’t neglect saving for college, either, if you have kids. That’s Baby Step 5.

Baby Steps 6 and 7 are paying off the house early and building wealth and giving. Everyone likes having fun, and there’s nothing wrong with a few toys if you an afford them. Just make sure you don’t sacrifice your financial health for the shiny things!
—Dave

* For more financial help, please visit daveramsey.com.

Review the research

Dear Dave,
I’ve heard you say that people spend more with plastic than with cash. Exactly what does that mean?
Edmund

Dear Edmund,
There have been several studies done in recent years that show people spend less money when buying with cash as opposed to swiping a credit card. One study in particular conducted by MIT and published in Carnegie Mellon magazine, indicated through the use of Magnetic Resonance Imaging (MRI) that the pain centers of the brain are activated when you spend cash. Of course, it depends on the item in question and individual spending patterns as to exactly how much less is spent, but the average is between 12 and 18 percent.

Want some more information? When McDonald’s first began accepting credit cards they conducted a focus group study in their restaurants on credit card users versus cash users. At that time, the difference was about 42 percent, meaning that a person using cash bought 42 percent less in a fast food setting than someone paying for their meal with a credit card. On other, more expensive items, the percentage generally drops. But these studies and others have proven that people spend more when using credit cards instead of cold, hard cash.

See what I mean when I say you can’t beat the credit shark at his own game? Even if you’re one of the few who pays their credit card bills on time every month, you’re still throwing your money away!
—Dave

Trust broken after co-signing

Dear Dave,
My dad cosigned on a car loan for me a few years ago before I began working your plan to get control of my money. I missed some payments back then, and it has affected our relationship. I’ve since paid off the car, but how do I make things right with my dad?
Stephanie

Dear Stephanie,
I know you’re hurting, but a lot of this is up to him. The truth is he’s partially to blame for being dumb enough to cosign in the first place. And if this was just a mistake you made when you were a kid, then he should be mature enough to realize that and recognize the progress you’re making now with your finances.

If you haven’t yet apologized for messing up, I think it’s something you should do very soon. Let him know how much you hate that it harmed your relationship, and tell him you’re following a program that will help you make sure nothing like that ever happens again.

Then, if he can’t accept that and move on, it’s all on him. I know that’s not what you wanted to hear, but sometimes time is the only thing that heals those kinds of wounds.
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Where does the donation go?

Dear Dave,
Our financial situation is pretty good now, and my husband and I feel it is time to start giving something back. There are several organizations we’re interested in helping, but how can we know if they’re legitimate and will use our money wisely?
Laura

Dear Laura,
I really appreciate your giving spirit, but the truth is you can never be 100 percent certain about this kind of thing. About the best you can do is put in some serious time researching and digging beneath the surface of various organizations to find some that are a comfortable fit for you.

My wife and I give the majority of our donations to Christian ministries. It’s not unusual for us to take a tour of the place to see what kind of feel we get while we’re there. If they’re secretive or not forthcoming with what we consider to be basic information about how they operate, or if we see signs of opulence or super-luxury, you can bet we’ll be asking lots of questions.

Talk to the leaders and administrators about what they plan to do with the money from your donation. You have a right to know this. I mean, if they’re going to give the money to hurricane victims, you want the victims to get the money, right?

People who work for a charitable organization need to make a decent living just like everyone else. But if they’re ultra-rich, it could be a sign that they’re not being responsible with their donations. Take a look at their administrative costs - what percentage of donations goes directly to the cause - and anything else you feel would help you make the right decision.

Giving is like anything else. It takes time and work to do it responsibly and with excellence!
—Dave

Where does debt go when filing bankruptcy?

Dear Dave,
What happens to the money that is owed when someone files bankruptcy? Do creditors just have to write it off, or do other people pay the price through taxes or higher interest rates?
Grace

Dear Grace,
In most cases the creditor just loses the money. That’s one of the risks businesses face. Of course, any bankruptcy is also a seriously bad mark against the filer’s credit record.

Chapter 13 filings may be considered a little less severe than Chapter 7 because you’re showing an interest in retiring the debts. They often allow – if you have a regular income and limited debt – to keep some of the property you might otherwise lose. Also, some debt balances may be partially discharged, with the filer agreeing to make monthly payments to the trustee for distribution among remaining creditors.

A Chapter 7 bankruptcy is lots tougher on the one who files. It involves liquidating all assets that aren’t exempt. Some of the filer’s property may be sold by a court-appointed official – a trustee – or just turned over to creditors.

It’s really a lose-lose situation, Grace. The business loses money, and the filer suffers the emotional pain of participating in a shameful process.
—Dave

* For more financial help please visit daveramsey.com.

Business and friendship

Dear Dave,
I’m about to buy my first home. My plan is to buy a duplex and rent out the other side to help pay down the mortgage quickly. A friend of mine wants to be my renter, but I’m worried that this could jeopardize our friendship. What do you think?
Jerry

Dear Jerry,
This can work, but the odds aren’t in your favor. When you do business with friends you always face the risk of running into a situation that can damage the relationship.

Does this mean you can never do business with friends? Of course not. I do a lot of business with friends. But I make sure that the specific requirements of our relationship are laid out very clearly, in writing.

It would be a good idea to make sure he understands that he absolutely must come talk to you ahead of time if there’s even a chance that he might not make the rent one month. Most problems can be worked out, but you’re not running a charity. This needs to be emphasized in a kind-but-firm manner.

Sometimes friends have unrealistic expectations on both sides. The friend who is renting may think he’ll get some slack on the payments, or the friend who’s the landlord may assume the renter will be a model tenant. These dangerous myths need to be addressed and ironed out before anything is signed.

You can make it work, Jerry. Just be straightforward, and make sure the rules are understood by everyone involved. Then, when you have to enforce the rules, do it gently but firmly.
—Dave

Co-signing leads to Stupid Tax!

Dear Dave,
My wife co-signed on a loan for an ex-boyfriend five years ago when they were together, before we even met. Now a collection agency is after her. Our attorney has recommended we take Chapter 7 bankruptcy, but the debt is only $5,000. Is there a better way?
Jeff

Dear Jeff,
You bet there’s a better way! It’s just plain stupid to even consider trashing your financial life over $5,000, because bankruptcy stays on your record for years.

This is an old loan with very low expectations for collection. The collector probably bought it for next to nothing, and everything he gets will be profit. It’s not uncommon for debts this old to be settled for fifty cents on the dollar, and sometimes even less. Haggle with them, and I’ll bet you can talk them down to $2,500.

Get an agreement in writing before you send them a dime, and do not give them access to your bank account. They’ll threaten to sue, or ruin your credit and that kind of stuff, but my guess is you can work this out. It may take a couple of weeks and some patience, but that’s nothing if it will save you $2,000 to $3,000.

You guys will have to pay some Stupid Tax on this one, but I hope it will teach you both a very valuable lesson. Never co-sign a loan!
—Dave

* For more financial help please visit daveramsey.com.

Intensity hurting the marriage?

Dear Dave,
When does reaching the point of being debt-free become more important than marriage? We’re following your plan and doing the debt snowball, but my husband’s been working a second job, and it’s really cutting into our together-time at night and straining our relationship. I’m afraid we’re going to end up debt-free, but divorced. When does one outweigh the other?
Tracy

Dear Tracy,
Getting out of debt is never more important than your marriage. But families go through all kinds of stuff, and one of those things is cleaning up messes they’ve made. It’s not always fun, but there’s a price to pay if you want to win with your money or anything else.

It sounds to me like your husband has gone gazelle intense about getting out of debt, and in the process may have left you behind a little bit. I don’t recommend that! He probably needs to take some time to come back and emotionally re-connect with you. And I’m sure some good, old-fashioned back rubs and words of encouragement from you are in order. Your man could use them if he’s been working two jobs!

But there’s plenty of time for snuggling and stuff later. Right now, you’re trying to do something—something really important—for the good of your family. I know it can be difficult, but it won’t last forever. And I can promise you this: Once you’re done, you’ll be very glad you toughed it out!
—Dave

Ready to buy?

Dear Dave,
I graduated from college in May, and I already have a job in my field. It was a part-time position that went full time, so I already have $15,000 in an IRA and about $23,000 in savings. I’m also debt-free, because scholarships paid for my education. Am I ready to buy a house?
Zack

Dear Zack,
This is an awesome position you’re in right now! Financially, you’re okay to buy a house. I do have one slight hesitation, though. There are going to be lots and lots of things happening in your world during the next few years, and there’s a possibility you’ll end up moving—maybe for a girl, or even another job—during this time period. It’s going to be a time of transition, and having a piece of real estate tied around your neck could be a huge pain. But if you’re sure that’s where you want to be for a while, then it’s not such a big deal.

Keep in mind that there’s a word for real estate that sells quickly, and that word is cheap! Lots of times, the only way to get out from under something like that fast is to practically give it away. It’s a great time now to buy a home, though. It’s like they’re on sale. Interest rates are really low, too.

Don’t use the entire $23,000 as a down payment on a place, and keep an emergency fund of three to six months of expenses set aside. Make sure you get a 15-year, fixed-rate mortgage, too. If you play this right, Zack, you’re going to be sitting pretty!
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