Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including “The Total Money Makeover.” Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.
Out of debt and on track, time to increase life insurance?
My husband and I are on Baby Step 3b, and we’re saving for a house. We’re out of debt and both of us make good money, plus we each have 20-year level term life insurance policies with coverage equaling 10 times our individual incomes. We also have an emergency fund equal to six months of expenses. I recently received a promotion at work, with a subsequent raise of $10,000. Should I update my life insurance policy to reflect this new income? —Maria
I think you’re OK right now. I’d evaluate it, and maybe update the amount every three or four years. But as you get out of debt and build wealth, and as the kids get older, the real question to ask yourselves is how much less life insurance do you need?
As your income increases and you get in better and better financial shape, it’s not going to be necessary to have 10 to 12 times your income wrapped up in life insurance policies. That’s just a starting point.
Would your husband and any kids be well taken care of based on your current life insurance amount? Would you and any kids be OK based on his life insurance? If the answer to both questions is yes, you’re good! —Dave
My wife and I put her two adult kids on our cellphone plan a few years ago. We thought there would be no problem since they were both paying their own bills. After my wife and I split up a couple of years later, we made sure everything was current, canceled service with that company and we all went to different providers. A debt collector called me last week saying I owed $4,000 on 19 different devices. When I called our old provider, they said I owed $4,000 on nine devices. I asked for a current, itemized statement of the devices that were still out and the bill. So far, I haven’t heard anything back. What do you think I should do? —Bob
Just keep on tearing into them. This thing won’t go away until you get everything completely rooted out. If you ignore it, chances are it’ll bite you on things like your credit bureau report. You might even find yourself the subject of some vague lawsuit years from now.
Considering the numbers you gave me, and what you know happened with the account and the devices, it sounds like someone on their end made a clerical error. More than likely, this is a case of incompetence on the part of a cellphone company.
You may have an uphill battle ahead of you, but I’d keep on shoveling until the barn gets clean. Stay on top of it, and don’t let them push you into giving them money if they can’t prove they’re right. You may have to hire an attorney at some point to sue them and clear your name, but hopefully, it won’t come to that. —Dave
Cash out my Roth IRA?
I have around $15,000 in a Roth IRA. I just recently started studying your advice, and I was wondering if it would be a good idea to cash it out and put the money toward debt. —Sarah
I teach people to stop investing temporarily while they attack their debt. So, I wouldn’t add anything to it at this point, but the worst thing you could do is cash it out. If you do, taxes and penalties will steal a huge chunk of that cash. The only time I take money out of a retirement account to pay off debt is to avoid bankruptcy or foreclosure.
Start working the Baby Steps from the beginning. Baby Step 1 is saving up $1,000 for a starter emergency fund. Baby Step 2 is paying off all debts from smallest to largest, except for your home, using the debt snowball method. This will free up a ton of money! Then you’re ready for Baby Step 3, which is increasing your beginner emergency fund to a fully loaded emergency fund of three to six months of expenses.
Now you’re ready for Baby Step 4, which is 15% of your income going into retirement! —Dave
Tighten up your budget, save up an emergency fund
I’m beginning to think we got in over our heads with our house. My wife and I make about $125,000 a year combined, but we’ve never been able to put anything aside for an emergency fund. Our mortgage payment is 35% of our take-home pay each month. We have two young children, so we eat out a lot, but we have no debt other than our house. Do you think we should refinance our home? —Jeff
You two are making good money, and you’re debt-free except for your home. You can’t tighten up your budget enough to save up an emergency fund? Stay out of restaurants, dude! There’s no law stating you have to eat out a lot just because there are kids in the house. I mean, you’ve got no emergency fund. That’s a pretty basic thing.
You guys need to get on a written, detailed plan, and start hitting your goals. I’m talking about a strict, monthly budget. Now, I’ll admit your mortgage payment isn’t exactly what I would’ve signed you up for. Your house payments, or rent, should be no more than 25% of your monthly take-home pay. But your house payment isn’t what’s holding you two back. What’s holding you two back is the fact that you haven’t been willing to tighten up the finances in other areas of your life to offset biting off more than you could chew in terms of a home.
No, I wouldn’t refinance. You’re fairly close where the mortgage payments are concerned, so I think you can make it through this by looking at ways to increase your income and selling stuff you don’t need to build an emergency fund. You two have been smarter than some, but you’re really going to have to buckle down and rearrange your priorities to make this happen! —Dave
Learning to say no to debt
We’re debt-free except for our home, and we’ll have our fully funded emergency fund of three to six months of expenses—we’ve agreed on six months’ worth—saved up by the end of the month. We’re also setting aside a little each month to buy a newer car with cash later. We’re about $5,000 from our car fund goal, but my husband is getting impatient. He wants us to go ahead and finance the remainder since it’s a relatively small amount. He has tried to justify this by mentioning that you don’t seem to have a problem with people borrowing money to buy a house. Could you explain the difference? —Lana
OK, first things first. I don’t like debt of any kind. I don’t really like borrowing for a house, but I’m not unreasonable. I tolerate mortgage loans, as long as people use a 15-year, fixed-rate mortgage, with payments that are no more than a fourth of their monthly take-home pay. A house is often the largest purchase in a person’s life and one most people can’t achieve based solely on saving. I still recommend, however, setting aside as much as possible for a down payment before taking out a mortgage.
Here’s the thing. Cars go down in value, while traditional homes generally increase in value substantially over the years. Plus, you can get a great, pre-owned car for $10,000 to $15,000. This is an amount, which in my mind, is doable over the course of several months through determined saving and living on a budget. Depending on where you live, a good home can cost 10 to 20 times that much.
The best way to build wealth and have a secure financial life is to stay away from debt. This means getting out of mortgage debt as quickly as possible, too. You’re never going to win with money if you can’t learn to delay pleasure.
Everyone has that little kid inside them, and that little kid wants everything he or she wants right now. Your husband is asking a normal question, but he’s dangerously close to letting that immature little kid out. It happens to all of us once in a while, but we have to grow to a point as adults where we tell that little kid no! —Dave
Playing the lottery robs you of your future
I’ve been struggling financially for the past few months, so I’ve been playing the lottery once a week. To me, the chance to win millions is worth a few dollars a month, even if things are tight. —Paula
You’ve told me you’re having money troubles, and at the same time, you’re throwing money out the window every week? Honestly, the small amount you’re talking about doesn’t make a difference. Even if it’s just two or three bucks a week, that action represents a lot of financially irresponsible behavior in your life.
I’m going to be very blunt with you. The lottery is a tax on the poor and people who can’t do math. Your chances of winning are bleak at best. Did you know the odds of winning the Powerball jackpot are about 1 in 292,000,000? There are plenty of other very unusual things that are much more likely to happen to you than winning the lottery. Your chances of making a hole-in-one on the golf course are about 1 in 12,500. Even your odds of having quadruplets are around 1 in 11 million.
When times are tough and you’re strapped for cash, the last thing you need to do is spend what little you have on gimmicks. My advice is to focus on working hard, living on a tight budget that cuts out all unnecessary expenses and saving every penny you can. Unlike the lottery, this is a plan that works every time. When you start living on a budget and get out of debt, it provides a little bit of breathing room in your life. You might even feel like you got a raise!
Don’t let your finances—and your dreams—be hijacked by the lottery. —Dave
A debt consolidation company is not a magic pill
My wife and I made a resolution this year to pay off $20,000 in credit card debt we’ve accumulated. I want us to follow your plan and live on a really tight budget. She wants us to use a debt consolidation company, like some of her friends have done. I’m really against her idea, but how can I change her mind? —Blake
I’m glad you two have made the decision to get out of debt and gain control of your finances. When it comes to this sort of thing, it’s wise to remember there’s no magic pill. No debt consolidation company is going to get you out of debt and help you stay out of debt. The answer is learning how to control yourself and your behavior with money.
Using a debt consolidation company seems appealing because there’s usually a lower monthly payment or lower interest rate attached. The problem in most cases, however, is the lower payment or interest rate exists only because the term is extended. You might pay a little less each month, but you end up staying in debt longer.
There are other problems involved in using debt consolidation companies, too. For one thing, it can trash your credit for a long time when it comes to buying a car or a house. For these reasons, I sometimes refer to it as a CON-solidation because the whole thing is basically a con. They make you think you’re really doing something about your debt problem, but the debt—and all the bad habits that caused it—are still there.
My guess is your wife’s friends think using a debt consolidation company is an easy, harmless way to get out of a financial mess. But sometimes, you’ve got to be an adult, admit the mistakes you’ve made and do what it takes to straighten things out. This kind of thing isn’t a math issue. It’s a behavior issue. Making the decision to get out of debt and never go back there again, by living on a really tight budget and making sacrifices, is the best way to fix this mess and learn a lesson in the process.
Live like no one else, so that later, you can live—and give—like no one else. Stay away from debt consolidation companies, Blake. Doing this the right way is worth it! —Dave
Keep your dignity, work your way out of debt
My wife and I will both turn 30 next month. We have two young children, and we make a little over $85,000 combined. The problem is we have about $70,000 in debt. Some of it is credit card debt, but nearly $50,000 is in two car loans. Her mom and dad have offered to let us move in with them, so we can save up money and start getting a better handle on our finances, but we’re not sure how we feel about this. What’s your advice? —Justin
You’ve got a ridiculous amount of money wrapped up in those cars. I’d sell the stupid things, get into a couple of little beaters and start living on a budget and paying down debt.
In your situation, the only scenario where I’d even consider taking the in-laws up on their offer is one where the stay is for a very short, agreed-upon period of time. They’d have to be absolutely wonderful people, too, and everyone involved would need to know their boundaries.
But you guys can get out of debt pretty fast if you’ll just lose the cars. You even could save a little money on the side while you were paying down debt, and buy a better car as soon as the debt was gone.
You might love your cars so much that you’re unwilling to make the sacrifice. Not me. I’d rather keep my dignity intact and work my way out of the mess I created! —Dave