Dear Dave, My husband opened his own commercial painting business in May. He knows he will have about three months in the year where he’s making little to no income. We’ve gotten $1,000 set aside for our Baby Step 1 beginner’s emergency fund, but because of that down period he would like to skip paying off all our debt except for the house, which is Baby Step 2, and move to Baby Step 3 and put an emergency fund aside. I can understand his thinking, but I wanted your thoughts on the idea. Melody Dear Melody, Baby Step 3 is not a fill-in-the-gap measure for income you already know won’t be there. Baby Step 3 is an emergency fund of three to six months of expenses, and the scenario he’s talking about is not an emergency. He knows it’s coming, so it is not an emergency. I think he needs to re-work his business model. This guy needs something to do during those three months, so he doesn’t drop off to no income. Also, if you’re going to set some money aside for a down time, that would not be Baby Step 3. It would be a line in the budget where you’re setting some money aside, because you know a problem’s coming. If something happens around the same time every year it becomes predicable, and it’s not an emergency. So, it’s not really a matter of the order of the Baby Steps. You budget for this down time, or even smarter, figure out a plan for his time during these months, based on his skill set, that will earn some money! —Dave
Dear Dave, I’m debt-free except for my home, and I’m about to start Baby Step 3 of your plan. I will be will back on active duty in the Navy soon, and they provide certain types of relief funds for its members depending on where you’re based and other factors. With this in mind, how should I approach Baby Step 3? Brad Dear Brad, For Baby Step 3, I tell folks to have three to six months of expenses set aside in an emergency fund. You have incredibly stable employment, so you would probably be okay on the three-month side of that equation. And you wouldn’t need quite as much emergency fund money as if you were a straight commission salesman. However, my guess is you’ll still have emergencies that will be your responsibility to cover. Everyone needs an emergency fund, Brad. But in your situation, you’ll probably be okay with one that’s closer to three months of expenses rather than six months of expenses. Thank you for your service to our country! —Dave * Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 13 million listeners each week on 585 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.
Dear Dave, I’m debt-free except for my home, and I’m considering having solar panels installed on the roof of the house. It would cost about $27,000. I have $80,000 in savings, but the company doing the installation will finance it all for just one percent interest. It’s almost like free money. My electric bills average around $310 a month, and I thought this would be a good way to save money in the long run. What do you think? Michael Dear Michael, If you have to finance the project, my answer is no. My guess is the break-even analysis you’re trying to give me is the sales pitch your solar panel company gave you. That’s how they sell solar panels, but it doesn’t justify going into debt. You told me you have around $80,000 in savings right now. Why not just write a check? Let me ask you a question. What if you could borrow $10 million at one percent interest and put it in the stock market? Would you do that? Of course, not. It would be way too risky, right? Basically, we’re talking about the same kind of thing. I made you feel the risk by scaling things up in my scenario. You’re not feeling the risk right now because we’re talking about $27,000 instead of millions. This move wouldn’t bankrupt you, but wealthy people don’t do the kind of thing you’re talking about. Either pull the money out of your savings account and buy the panels, or don’t buy them at all! —Dave
Dear Dave, I make $48,000 a year, and I have $35,000 in credit card debt. I owe $25,000 on my home, and I was thinking about taking out a loan against my house to pay off the credit cards. Is this a good idea? Mike Dear Mike, I would never advise anything like this, unless it’s to avoid bankruptcy. Here’s the problem with that kind of plan. Most people who do that kind of thing don’t change their financial habits. In fact, they end up with a new mortgage and new credit card debt somewhere down the line. You need to start building a track record of paying off debt. Cut up the credit cards, slash your spending, and start living on a tight, written, monthly budget. Prove to yourself that you’re not going to take out a mortgage and turn around and run up a bunch of new credit cards. I want to see you not take on any new debt and reduce that $35,000 credit card bill dramatically over the next six months. If you can knock out half of it in a year, you can take care of the other half in another year or less. Then, you wouldn’t need a second mortgage! —Dave * Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 13 million listeners each week on 585 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.
Dear Dave, My wife and I have been helping our adopted daughter financially for some time. She’s 25, has been married for three years, and we don’t see this cycle stopping anytime soon. The worst part is, they will often throw in that our grandchild will go without something unless we help. We’re certain this isn’t teaching them to stand on their own feet, but we don’t know what else to do. David
Dear David, You’re right about one thing. It’s time they both learned how to handle money like mature, responsible adults. I don’t know how much your tried to teach her about finances when she was growing up, but it sounds like this “needing help” thing is turning into an endless cycle.
You’re giving them money left and right, and it’s not working. You’re giving them fish, and you’ve heard that whole saying. You could also teach them to fish and then not give them any fish, but I like a third choice in this scenario — give them fish only if they take fishing lessons. They get no more money from you unless they get financial counseling together and make a serious move toward straightening up their lives.
If they try to play on your feelings by saying your grandchild is hungry, tell them to send the child over for a meal. If they run out of money until payday, tell them to go to their financial counseling session to find answers. Right now, every time they have a problem they call mom and dad. Guess what? They don’t have any problems as long as you’re doing what you’re doing.
Love them well. Hold their hands and say, “When I was your age, I wish someone had done this for me. I’m not going to give you any more money unless you go to financial counseling sessions regularly and together. If you do this, turn in a budget to us and let us coach you on how to be adults and handle your own money well, we’ll help and set up a matching system. If you don’t do the matching part though, you won’t see anything from us.”
They’ve figured out if they hold your feet to the fire when it comes to this grandbaby, you’re going to open the wallet. They’re playing you right now, and it’s not to their benefit — or yours! —Dave
Dear Dave, I have an opportunity to take a loan against my 401(k) retirement, and pay myself interest. Is this a good idea? Susan
Dear Susan, Actually, you’ll end up costing yourself interest. Never take a loan against your retirement!
When you pay interest against your retirement, you cost yourself interest. If you leave the company — which you will someday — the loan against the 401(k) is due within 60 days. If you don’t pay it off, they consider it an early withdrawal and you’ll get taxed and penalized big-time.
If you have a certifiable emergency, like owing the IRS or facing a foreclosure, you may have to withdraw some. You’ll still get taxed, but please don’t ever borrow against retirement! —Dave
* Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 13 million listeners each week on 585 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.