Give the kid a hand!

Dear Dave,
Several months ago, my five-year-old son told me he wanted a Nintendo DS. He does little things around the house for me, and at his grandparents’ place, so I told him he’d need to save his money and buy it. Well, he did! He’s got enough for the console, but not to pay the sales tax. Should I help him out?
Nina

Dear Nina,
Are you serious? Yes, you should pitch in and pay the sales tax! It’s not like he’s 15 or 20. This kid is just five years old, and he’s a financial rock star. I think we can cut him a little slack on this one.

The older they get, the more hardcore you need to get as a parent when it comes to financial responsibility. But this child is already learning a great principle that will last him the rest of his life. If you’re willing to sacrifice a little bit, you can accomplish anything.

Don’t let this be a one-shot deal. He needs a new goal right now, so go out and find something he’s as excited about as that Nintendo DS. Then, let him start working on that one.

I’m telling you, if we could send some people to Washington who understand what your son already understands, this country would be in great shape!
—Dave

BIG down payment

Dear Dave,
Is it always a good idea to put the maximum amount of money you can afford into a down payment when buying your first home?
David

Dear David,
Absolutely! Even though most people can’t pay cash up front for a home, you always want to make as big a down payment as possible on any home you buy. Making a down payment of at least 20 percent helps you avoid private mortgage insurance, plus the whole idea is to pay that sucker off and become debt-free as fast as possible. Also, avoid 30-year mortgage plans. Stick with a 15-year, fixed rate loan.

Now, when it comes to putting money toward your down payment, make sure you don’t touch your emergency fund of three to six months of expenses or your retirement savings. Those things are off limits. But scrape together any other extra cash you can, pile it up, and apply it to your down payment. You’ll be glad you did!
—Dave

Relating to parents

Dear Dave,
My mom and dad are terrible with money. They’re getting older, so I’d like to see them start saving something for retirement. How can I teach them your principles?
Suzanne

Dear Suzanne,
I hate to say it, but you probably can’t. My grandmother used to say, “Those convinced against their will are of the same opinion still.” When you start trying to talk to your parents about money, you run into what’s called powdered butt syndrome. Once someone has powdered your behind, they usually don’t want your opinion on money or anything else.

Still, as parents get older, especially if you have a particular skill or expertise, they might ask your opinion from time to time. It may be hard for them to take you seriously, though, even if you’re a world-renown expert. To them, you’re always going to be their little girl.

It’s great if they will listen to you, but you’ll probably have better luck getting them in front of someone knowledgeable in the field. I’m talking about someone who isn’t you, even if they’re not quite as smart as you!
—Dave

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

Prepping for an emergency

Dear Dave,
My husband needs a liver transplant within the next two years, because he has Hepatitis C. We make about $70,000 a year, but we have $25,000 in debt. He’s still able to work right now, and we have health insurance, but how can we prepare for the operation and medical bills?
Nikki

Dear Nikki,
God bless you guys. It’s going to be tough, because you’re going to face a lengthy loss of income, and sky-high medical bills even if everything goes well. I’m really sorry you have to go through this. Life can be hard enough without major health issues knocking you for a loop.

The good news is that there’s something you can do about all this, and it all starts with saving. First, set aside an emergency fund of three to six months of expenses as quickly as you can. In your case, I’d recommend leaning toward the six month side. Second, you guys need to have no life for the next year or two, and get very serious about paying off as much debt as possible after you get your emergency fund in place. I’m talking about following a very strict budget, and living on rice and beans. Bottom line? The less debt you have, the better off you’ll be.

Wouldn’t you love to be debt-free and have six months of expenses in the bank before they perform this operation? You can do it, if it becomes important enough to make it priority one!
—Dave

Who's liable?

Dear Dave,
I attend a small church with about 100 members. There is a $97,000 mortgage at 8.75 percent on the building, and the note was signed only by the pastor. In the event of default, are the members of the congregation liable?
Charlene

Dear Charlene,
Unless you signed the note, you are not liable. If the pastor signed the note personally, or on behalf of the congregation, it would actually depend on the wording in the note as to who is liable in case of default.

But this whole situation is kind of silly, and I’ll tell you why. If everyone in the congregation gave an extra $83 a month in their tithe – that’s only about $20 more every Sunday – you could have this mortgage knocked out in a year! There’s absolutely no reason for your church to be in debt 12 months from now.

This is a prime example of what happens when a church adopts the same mentality as the rest of the world. The Bible itself warns us that the borrower is slave to the lender!
—Dave

I want to open a franchise, but ...

Dear Dave,
I’ve always been intrigued by the restaurant business and wanted to open one of my own. Recently, the opportunity presented itself to open a McDonald’s franchise. I really want to do this, but it would take years for me to save up the money. Is it okay to borrow money to start a business?
Jim

Dear Jim,
It will take longer to save up the money and open the business debt-free, but that’s exactly what you should do. Most small businesses fail within the first five years. One of the main reasons for these failures is the struggle to repay debt.

If you’re into restaurants, try starting small with a catering business out of your home. This will give you a taste of managing your own food service business, and let you know if you really like that kind of work.

It will also give you the opportunity to make and save some money. That way, when your restaurant dream becomes a reality you can honestly say that you own the business instead of it owning you!
—Dave

* For more financial help please visit daveramsey.com.

A parent's last days

Dear Dave,
I need advice on how to handle things where my mom is concerned. She was diagnosed with ALS (Lou Gehrig's disease) a year ago, and now she wants our family to do things together that we can’t afford. Last summer, we took a trip to Norway, and mom paid half, but it still made things hard on us financially. What can I do?
Emily

Dear Emily,
I’m really sorry to hear about your mom. I know that’s tough on everyone in more than just a financial sense. What you’re facing is very sad, and I understand that you want to spend as much time with her as possible. At the same time, though, you can’t bankrupt your family, either.

I think you need to sit down with her and gently explain that while you love her and want to spend as much time with her as possible, you can’t put your family in financial danger to help her with a bucket list. You have to balance your love for your mom and this awful situation with what’s best for your own household.

Make reasonable decisions on what you can and can’t do with her. Can you stretch yourself to do a few special things? Sure, but stretching is one thing; breaking is another. If she’s leaving you insurance money, you could stretch a little bit, then put that back into your funds later. But don’t go into debt to make these things happen. That will just start a cycle of borrowing that you can’t afford and leave you with a pile of payments later on top of your grief.

Your family has enough to worry about right now. Don’t put a bunch of debt on the list, too. That’s going too far.

God bless you, Emily.
—Dave

The meaning of diversification

Dear Dave,
What exactly do you mean when you talk about diversifying your investments?
Sharon

Dear Sharon,
When it comes to investing, diversification simply means spreading your money around. This helps reduce risk, because you’re not putting all of your money into one company. This way, you won’t lose everything if that one company goes broke. It’s also why I tell people not to put all of their money into their own company’s stock.

I have lots of mutual funds with one or two mutual fund companies. Within those two companies they’re called fund families. Think of it like a brand of soup. Campbell’s^® is a brand, but they have all kinds of different soup. I also have money in different banks and in different money market accounts, and I have money in different types of real estate. So, I’ve got several different kinds of investments, but not a million different things running around out there.

If I listed them all out they wouldn’t even take up an entire page. I like to keep things fairly clean and simple, and I encourage you to do the same!
—Dave

A down payment is not an investment

Dear Dave,
I’m saving up money to buy a house in the next couple of years. How should I invest this money before I actually buy something?
Candace

Dear Candace,
The problem is that you’re not really investing; you’re just saving. Investing means you aren’t going to touch the money for five years or more. If you may use the cash to buy something within five years, you’re really just kind of “parking” the money for a little while.

If it were me, I’d put it in a money market account. It’s basically just going to sit there and not earn much, but you won’t lose anything, either. If you’re lucky, you might see one percent interest in the short term, but that’s about all you can expect considering the low-interest rate environment we’re in these days.
FULL POST

Enough for retirement?

Dear Dave,
I’ve heard you tell people that having $90,000 to $100,000 saved up for retirement isn’t enough. That’s what I’ve got set aside right now, and I’m pretty sure it’s all I’ll ever need. Why do you think everyone should have a million or two saved up?
Tom

Dear Tom,
The amount you’re talking about isn’t enough to retire on with any kind of dignity. If you make 10 percent off your money over time it means you’re living on just $10,000 a year. That’s below the poverty level.

Don’t misunderstand my message. I’m not about being greedy, and money is not the key to happiness. Money is good for three things – personal security, helping others, and it’s good for fun. You need to do some of all three. FULL POST

What is unsecured debt?

Dear Dave,
What is unsecured debt?
Anonymous

Dear Anonymous,
This is a great question! You’d be surprised how many people don’t know the difference between “secured” debt and “unsecured” debt.

Unsecured debt means that someone loaned you money, but they don’t have a lien on anything. Credit cards and student loans are good examples of unsecured debt, because there’s nothing they can directly repossess if the borrower doesn’t pay. Now, if you don’t pay, they can sue you and get a lien against something after they sue you. Lots of times this is done against your income by garnishing your wages.

Examples of secured debt would be a car loan or even a home mortgage. A home mortgage is secured by the home, meaning they take a lien against the home. If you don’t pay, they can foreclose and take the house. It works the same way with a car loan. If you don’t make your payments, they can come get the car.

Remember this, too. Unsecured debt typically will be the last debt you pay if you’re in financial trouble. In other words, you’d make your car payment before paying on your student loan, and you’d make your house payment before paying on a credit card.

In a worst case scenario, like bankruptcy, unsecured debt is wiped off. The creditor gets nothing. But a car loan or house payment either gets made, or you give up your car or home. It’s easy to see how a lender making a secured loan is in a much better position than one making an unsecured loan, isn’t it?
—Dave

Do car titles go to teenagers?

Dear Dave,
Our 15-year-old has saved his money, and he’ll buy a car next year. When he buys it, should the title be put in our names or his?
Laura

Dear Laura,
When my kids hit that age, I put the titles in my name. The insurance will be much less expensive if you do this. Plus, you don’t want a 16-year-old under the illusion that they’re in control of their lives.

As their parents, you should love them more than that, because they’re just not ready to be in full control. You want them to be in control of some parts of their lives, so that when they leave they have a clue about life and don’t boomerang on you.

But at that age, you should be guiding them, and you don’t need an ownership document to a car confusing them about who’s in charge. I turned the ownership over to my kids when they turned 18. In each case, I knew I could trust them, and they were ready for that level of control.

So, once they’re ready—and you know they’re ready—if it’s going to be their car, all the accompanying responsibility should be theirs, too!
—Dave

* For more financial help please visit daveramsey.com.

Is downsizing the answer?

Dear Dave,
My wife and I are about to have our first child. She’d like to stay home with the baby after it’s born, so we’ll be losing about half our income. We’ve looked at our budget, and we can stay in the house but things would be very tight. I’ll make $42,000 this year, with a potential bonus of $23,000 at the end of the year. Our house payment is $1,550 a month. Do you think we should downsize to a smaller home and live more comfortably?
Mike

Dear Mike,
I hate it when people have to leave their homes. It can be a hurtful thing to the heart and spirit.

If you had $65,000 as a steady income the house payment wouldn’t be a big deal. But you can’t count on a potential bonus, and from your guaranteed income, more than half your take-home pay will be wrapped up in a house payment. You’d probably have to take a part-time job, or save any bonus you get to subsidize your income just to have a realistic chance of making ends meet.

I’m all for mom staying home with the kids – especially a little baby – whenever possible. But when it comes right down to it, Mike, you and your wife have to decide if it’s worth the part-time work and budget hassles to stay where you are.

Moving is no fun, especially when it’s something you’re forced to do. But you don’t want to be a slave to your house payment either!
—Dave

Refinance questions

Dear Dave,
We’re thinking about refinancing our home, and will be talking to a loan officer next week. What kinds of things do I need to know so we can protect ourselves in the deal?
John

Dear John,
It’s not really a big deal. You’ll get a Truth in Lending Sheet and an Estimated Settlement Sheet. You might want a little more detail, so ask them to give you a sample settlement sheet based on the size of your loan.

Watch out for points and origination fees. These are nothing but pre-paid interest. You might get a little lower interest rate if you pay them, but the break-even point is between seven and 12 years to get your money back. Since the average mortgage is refinanced every 5.6 years, paying points and origination fees is not a good deal.

And don’t worry if the loan officer tells you this isn’t normal. They can make just as much money from the sale. They’ll just have to work a little harder to do it!
—Dave

Broker diversity

Dear Dave,
Is it a good idea not only to diversify among various mutual funds, but also among different companies that sell mutual funds?
Brian

Dear Brian,
There’s no need to do that. Find one good broker you’re comfortable with, and who has the heart of a teacher. You want to know what’s going on with your money, and finding someone who can explain it well and help you understand the details is a must!

Just make sure your broker is not directly connected to the mutual fund. You don’t want someone with a vested interest. What you’re looking for here is someone who can objectively connect you to a good mutual fund with a solid five- to 10-year track record.
—Dave 

* For more financial help please visit daveramsey.com.

He needs love right now

Dear Dave,
My husband and I are adopting my nephew. His mom is involved with drugs and alcohol, and his father isn’t in the picture. We’ve got $1,000 in the bank, and we’re in the process of paying off all our debt, except the house. Should we slow down or stop the Baby Steps temporarily, and spend more on family things since my nephew is a teenager?
Jocelyn

Dear Jocelyn,
Hugs are free. Making cookies costs next to nothing, and spending quality time with a young man or woman doesn’t cost a thing. I call that a teenager-friendly environment.

I know your heart is in the right place, but I don’t want you to fall into the American trap of thinking he’ll be happy if he has a Wii or you take expensive vacations every year. It sounds to me like he’s coming straight out of a big mess. He wants and needs someone to put their arms around him, tell him he’s a good guy, and teach him how to grow into a strong man.

Doing some affordable family things once in a while is okay, if you can make it work with your budget. But I wouldn’t spend a bunch of money to try and prove that you love him. You’ve already proven that by bringing him into your home and making him part of your family. Continue cleaning up your finances. Then, when you’ve actually got some money to spend, you all can do some really cool stuff together.

You guys are awesome!
—Dave

College or the house?

Dear Dave,
My wife and I make about $100,000 a year combined, and we’re debt-free. Recently, we got an insurance settlement of $95,000. We have an $89,000 mortgage and a 19-month old baby. Should we use the settlement money to pay off the house, and use the rest to start a college fund for our son?
Michael

Dear Michael,
Absolutely! Then, if you guys save the equivalent of a house payment until your son is ready for college, he could travel the world while he’s studying. If I’m in your shoes, I’d pay the house off tomorrow. In fact, I do it today if there’s still time to get to the bank.

Being completely debt-free, and with your income, you guys have the money to do just about anything. You can start the kiddo’s college fund, save for retirement, and you’ll have the money to build wealth, too.

Don’t let this great opportunity to change your family tree pass you by, Michael. You two have the chance to live great lives and retire early—and wealthy!
—Dave

Pre-nup ... yes or no?

Dear Dave,
How do you feel about pre-nuptial agreements?
Anonymous

Dear Anonymous,
When I first started financial counseling, I told people to never get a pre-nup under any circumstances. Basically, I felt the whole process was like planning your divorce in advance. I still feel that way to a degree, because if money is more important to you than the person you supposedly love, then you don’t really love them and you have no business getting married.

I’ve changed my stance a little bit, though, and now I feel a pre-nup may be in order under one condition: If there are substantial assets in one person’s name. By “substantial,” I mean $2 million or more. I’ve counseled several wealthy people, some of whom were heading into a second marriage. It’s not that wealthy folks are weird or necessarily greedy, but sometimes they attract weird and greedy people.

In these kinds of cases, I’m okay with a pre-nup. But I still think you should love somebody enough to be willing to take a bullet for them if you’re thinking about marrying them.
—Dave

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

Mom has her bags packed for a guilt trip!

Dear Dave,
My mom makes $20,000 a year, and without telling me she took out a Parent PLUS Loan for $16,000 to help me with college. She’s saying she can’t pay the loan, and it’s been in deferment. Now, she wants me to pay it. I’ll be making good money a few years after I graduate, but I don’t have the money to pay the loan now. What should I do?
Jill

Dear Jill,
A Parent PLUS Loan would not have your name on it, so you have no legal obligation to pay this bill. The real question is this: How much do you want to help your mom after she screwed up big time?

She’s obviously done a horrible job communicating with you and managing her own situation. Under the circumstances, I’m sure that leaves you torn between your loyalty to her and being angry that she messed up. In these cases, I think the best thing is probably to sit down and have a good heart-to-heart talk with her about what she’s done and how to fix things in her own financial world. I know you love your mom, but she’s done a really dumb thing here and gotten herself into a mess. Now, she’s trying to lay a guilt trip on you. That’s not cool.

To be honest, I wouldn’t feel a lot of guilt if I were in your position. If you get yourself in a good financial situation after college and want to pick up part of the tab, just to say thanks, then that would be fine. But don’t get dragged into some kind of dysfunctional family drama and end up paying something out of guilt that’s not your responsibility!
—Dave

Who is Murphy?

Dear Dave,
I’ve just started listening to you and trying to clean up my finances. Who exactly is this “Murphy” you always talk about?
Jennifer

Dear Jennifer,
The Murphy I talk about isn’t an actual person, or even a real family. There’s an old adage called Murphy’s Law, and it goes something like this: “If anything can go wrong, it will go wrong.” In other words, if you’re alive and walking around, bad stuff will happen to you sooner or later. It’s not even about being pessimistic or negative, it’s just a fact. Sooner or later it’s going to rain, and that’s why you need an umbrella.

I tell people all the time that having an emergency fund of three to six months worth of expenses saved up is great Murphy Repellant. Think about it. A lot of your big problems seem to leave when you have $10,000 to $15,000 sitting around. An emergency fund can turn a disaster into nothing more than a minor inconvenience.

So, it’s just a saying. But there’s still a whole lot of truth in that little saying, Jennifer. If you’re properly prepared, you can keep Murphy away from your door!
—Dave

* For more financial help please visit daveramsey.com.

Skipping a payment after refinance?

Dear Dave,
I just refinanced my home from a 30-year fixed rate to a 15-year fixed rate mortgage. The first payment won’t be due until July, but should I go ahead and make a June payment or put that money toward my debt snowball?
Avery

Dear Avery,
If it were me, I’d put that money toward paying off debt. At this point, you don’t have a June payment coming due, so anything you paid in would only go toward prepaying the principal. Mortgage interest is charged in arrears, which means backward. Your July payment would pay your June interest. That’s why your first payment isn’t due until July 1.

I think deep down the heart of your question is whether or not to pay extra on your mortgage instead of putting money toward your debt snowball. The answer to that question is always no. Get rid of all your debt except the house first, which is Baby Step 2. Then, move on through the rest of the Baby Steps.

Baby Step 3 means fully funding your emergency fund with three to six months of expenses. After that, Baby Step 4 is investing 15 percent of your income into Roth IRAs and other pre-tax retirement plans. Baby Step 5, if you have kids, is college funding, and then you pay off your home early on Baby Step 6.

Once all this is done, you have the final Baby Step, and that’s number seven—build wealth and give. That’s when the fun really begins!
—Dave

Peer-to-peer lending?

Dear Dave,
What do you think about peer-to-peer lending? I’m thinking about getting in on investing in individual loans as an investment strategy.
Brian

Dear Brian,
Sorry, but as an investment strategy I think this kind of thing is pretty stupid. Most of these kinds of loans are not collateralized, which means they’re not checked out. I mean, would you loan someone money without really getting into their business and knowing something about them first?

Right now, there’s a social justice aspect to this kind of stuff. But I prefer charitable giving to lending. I mean, if you’re going to help someone, then just help them. I know, it’s almost a fad, in-vogue kind of thing right now, and everybody’s yakking about it. From a human standpoint, it’s never a bad thing to help people who are hurting. But as an investment, it makes very little sense, and you have to examine whether or not you’re really helping someone by doing this.

Don’t get me wrong, the motivation behind that kind of thing might be noble. I can appreciate that aspect of the process. But since I believe debt is a curse—not a positive thing—it would be hypocritical of me to recommend peer to peer lending.
—Dave

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

Ignore the math!

Dear Dave,
Should I continue to contribute to my 401(k) at work up to the match if I’m still trying to get out of debt?
Anonymous

Dear Anonymous,
Nope! I know, you probably think I’ve lost my mind on this one. Yeah, I know how important it is to take the match in a situation like that. In fact, it still kind of irks me to have to say these kinds of things. I’m a math nerd, so I really don’t like the whole idea of it very much.

But I’ve learned a few things over the years. One of those things is that personal finance is 80 percent behavior and only about 20 percent head knowledge. And in the short term, the power of passionately focusing and sacrificing deeply to attack your debt will supersede the mathematics involved where your company match is concerned. In other words, if you stop saving temporarily for a year or two, and in that time wipe out your debts, the power you’ll gain in being free from those debts will be more beneficial to you than a couple of years of your company match.

I would never tell you to stop investing or doing the company match for 10 years or anything silly like that. But if you stop for just a little while and clean up your mess, then go back to investing for retirement, you’ll reap so many more rewards down the road. Not only will you have permanently changed your behavior, but you’ll also be able to invest even more for retirement and other things!
—Dave

You can't make him grow up

Dear Dave,
I’ve tried for years, but I can’t convince my husband to plan for tomorrow and stop living just for today. Is there anything I can do?
Candace

Dear Candace,
I hate to say it, but I don’t think you can convince him. The essence of your question is this: “How do I get him to grow up?” If he’s not willing to delay getting or doing things he wants, that’s a sign of immaturity. You guys are probably going to struggle with money as long as he has an attitude of “Thank God, it’s Friday! Oh, God! It’s Monday…”

Being careful with your money and planning for the future doesn’t mean you can’t have any fun. It just means you may have to delay certain things for a little while. My wife and I have lots of fun and cool things now. Why? Because we saved like crazy and sacrificed. We lived like no one else, so now we’re able to live like no one else. In other words, we paid a price to win.

Your husband’s problem is that he’s not willing to pay a price for a short period of time. That kind of immature thinking is a one-way ticket to a lifetime of mediocrity. And if you’re unwilling to pay the price to win, then you’re going to end up paying the price that comes with never having paid the price.
—Dave

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