Dear Dave,
My wife and I are following your plan, and we just paid off all our debt except for the house. Since we work for the same company, do you think we should have an emergency fund that is larger than you normally recommend?
Don
Dear Don,
That’s great news! You’ve finished Baby Step 2, and now you’re ready for Baby Step 3, which is fully-funding your emergency fund.
I don’t see a reason to set aside more than six months of expenses. My recommended range for an emergency fund is three to six months of expenses. If your employment situation is one where there’s more risk of something going wrong, you should lean toward saving six months’ worth. If your employment outlook is really stable, you can go with setting aside three or four months of expenses in an emergency fund.
I look at your situation as being more high-risk. You each have jobs, so that’s the good news. But if the company went down, or experienced layoffs, you could find yourselves unemployed at the same time. My advice would be to save up six months of expenses for your emergency fund. With that kind of cash just sitting there, you should be able to make an easier and less stressful transition in almost any kind of unemployment scenario or other emergency.
—Dave
(Secured vs. unsecured debt?)
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Dear Dave,
What exactly is unsecured debt, and how is it different from secured debt?
Rich
Dear Rich,
“Unsecured” debt generally means someone loaned you money, but they don’t have a lien on anything. Credit cards and student loans are examples of unsecured debt, because there’s nothing they can directly repossess if the borrower doesn’t pay. However, they can sue you if you don’t pay, and get a lien against something after they sue you. In some cases, this is done against your income by garnishing your wages.
Some examples of “secured” debt would be things like a home mortgage or car loan. A home mortgage loan is secured by the home. If you don’t pay, they can foreclose and take the house. The same is true with a car loan. If you don’t make the payments, they can take the car.
Typically, unsecured debts will be the last debts you pay if you’re in financial trouble. You’d make the car payment before paying on your student loan, and you’d make your house payment before paying on a credit card.
Hope this helps, Rich!
—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 14 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.
Dear Dave,
I own a rental property that brings in enough to pay the taxes and insurance with a little left over. Recently, I found out that my tenant, who just signed a new two-year lease, is subleasing the property for the short term as a vacation site. This kind of thing happened once before and is prohibited in the agreement. Do you think I should approach him about the situation or let it go until it becomes problematic?
Catherine
Dear Catherine,
It’s already a problem, because he’s in violation of the lease agreement. Call him today and tell him to stop the sublease immediately. Let him know that he’ll be evicted if anything like this ever happens again.
This may sound harsh, but an agreement is an agreement. You may not have experienced any big problems up until now, but what happens when he pulls this again and the next people who come in are a bunch of partiers? You could end up with broken windows, holes in the walls and a bad reputation. On top of all that, what if they leave and he doesn’t have the money to fix things? It’s all on you. Why? Because you lost control of your property!
As a landlord, I always try to be gentle and nice but really clear about things. But this guy needs to understand that you mean what you say in the lease agreement. Once more, and he’s gone!
—Dave
(Healing comes first)
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Dear Dave,
I have a relative who recently entered a rehab center to treat her drug addiction. I’ve been trying to help with things on the outside, and recently I discovered she has about $20,000 in debt. This is in addition to the rent owed on her apartment. I don’t have a lot of money, but do you think I should start trying to pay some of these bills for her?
Jeremy
Dear Jeremy,
I’m really sorry to hear about your relative. Addiction is painful thing for the addict and for their family and friends. While what you’re suggesting is noble, my advice would be to leave the debt alone. I would, however, notify her landlord of what’s happened. If he won’t hold her place, then get her stuff out and turn over the keys so he or she can find another tenant.
As far as the debt obligations are concerned, just let her creditors cry and whine. They’re going to do that anyway, and you’re in no position to help financially at this point. Once she’s out and healthy again, one of the first things she’ll have to do is recreate her life and income. When that’s been done, then she needs to go back and make arrangements with her creditors.
But right now, she needs to concentrate on herself. And as her family, you need to pour as much love and support as you can into the healing process. You’ve got a great heart, Jeremy, but the money stuff can wait until she’s out, healthy and established again. Then, if you want and have been able to save a bit, you might gift her a little money to help her get started again.
God bless you guys.
—Dave
Dear Dave,
Where should you save for large expenditures when you’re doing the Baby Steps?
Heath
Dear Heath,
Depending on what the expenditure is, I would suggest saving for these sorts of things after Baby Step 3. Once you’ve paid off all of your debts, except for your home, and built an emergency fund of three to six months of expenses, you reach a point where you can breathe a little bit. After all that hard work and sacrifice, you’re finally in a position to replace that ratty, old furniture or get a better car. The question then is this: How much do you want to temporarily cut back on investing in order to make this expenditure happen?
Personally, I’d like to see you allocate a fixed percentage of your income toward play money and still be able to put 15 percent of what you make into retirement. If you want to slow down a bit on Baby Step 5, which is paying off the house, in order to take a once-in-a-lifetime vacation, I’m cool with that. But I don’t like the idea of slowing down on funding your retirement.
The basic idea here is to always handle your money with planning, purpose and maturity. You’ve got a little room to play back and forth once you get past Baby Step 3. But until then, I want you to be hardcore about scrimping, saving and getting your financial house in order!
—Dave
(The rebate explanation)
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Dear Dave,
How do cash-back rebates work on electronics and other items?
Dan
Dear Dan,
I like this question. Most consumers don’t think about how the process works. They only care that it’s benefitting them from a financial standpoint.
Let’s say you buy an item for $1,000, and you get a cash rebate for $100. Basically, you just paid $900 for that item, right? So, what the companies are trying to do is incentivize certain retailers to buy a particular product or amount of that product, yet sort of protect the sticker price in the minds of the consumers. To me, it’s really a little ridiculous. Why not simply take off the money, and price it at $900?
That keeps retailers from jerking around with the margins. It purifies the process a little bit, but it adds to the hassle.
Good question, Dan!
—Dave
