QUESTION: Rachel on Facebook asks how to determine expenses in order to save for the emergency fund.
ANSWER: No, I think it’s what it takes—your basics—to run your life. You wouldn’t have a Caribbean vacation figured into your expenses for emergency purposes, but you would want to maintain your life.
The whole idea here is to have a rainy day fund. What does it take to operate your household right now in a given month? And if you were out of a job or something bad happened, what would it take to operate your household? It’s more than just the Four Walls. You wouldn’t want to take it all the way down to just base necessities, but it doesn’t have a bunch of luxuries in it either, so somewhere in between those. It’s just kind of a medium ground and then that times three months or up to six months of those expenses.
QUESTION: Chad on Twitter asks if you can have more than one life insurance policy. Is there ever a reason to do this?
ANSWER: Sure. You can have more than one. There are several reasons you might do this. One is that—like in my case—I have a lot of insurance regarding our business, our estate plan, and those kinds of things, and I’ve reached the limits, in some cases, that a company will write on me. They won’t write but so many millions on one person from one company, so I go to another company to do that, so that’s one reason to do it.
Another reason people do it is so that they feel more secure that if the one policy that they have goes bad—if that company goes bad—then they’ve still got the other policies in place. That’s not a real good reason because most of the companies you’re going to buy from now are financially stable and/or have insurance to back them up with the state and that kind of thing, so that’s usually not the issue.
The only problem with it is it just creates more complication for your life in that you’ve got two checks to write for the same amount of insurance rather than one check, and you do pick up … each life insurance policy has a policy fee—an annual policy fee—plus so much per thousand. Generally speaking, all things being equal, it’ll be cheaper to have one policy that totals your $600,000 or $1 million or whatever coverage you’ve got versus three that do that because those annual policy fees will get you.
Most people don’t have more than one because it does cost you a little bit more in most cases, and it’s a little bit more complicated to keep up with. But there’s no prohibition with it—nothing keeping you from doing that.
QUESTION: Erin in Baltimore says her husband is leaving his full-time job in a year so that he can attend school full time. They will go from an income of $90,000 a year to $40,000 a year. Once they complete Baby Step 3, should they move to Baby Step 4 or continue saving?
ANSWER: You need to save like crazy to be able to pay for school. You say that you have tuition assistance from your work and he has a veteran’s stipend. That’s great! If you guys will save like crazy to cover the deficit, that will work. You’ll have some out-of-pocket expenses that those things won’t cover. You have to get ready.
Let me tell you what you’re doing. You are in Baby Step 4 but you’re not investing in retirement directly. You are investing in your husband. That’s a great investment, by the way, provided he’s studying something that has marketplace application. I don’t want him getting a PhD in German polka history. Let’s have a job where we can get that money back.
As long as he’s doing that, this is a great investment and a great plan. So build your emergency fund and just keep piling up money to make sure he gets through school.
QUESTION: Mike in Indianapolis and his wife have a 20-year-old friend they met through the Big Brothers Big Sisters program. She has a one-year-old child, and she recently asked for money from Mike and his wife. They don’t approve of how she’s choosing to spend money, but she does need help. What do they do?
ANSWER: My rule is very simple. If someone is bold enough to ask me for my money, I’m bold enough to attach requirements with the money that are for their own good. Then one of two things will happen.
They will either welcome the help, or they’ll get mad that you are interfering with their business. In this situation, my help would sound like this. I don’t want to loan her money; I do want to give her some money. This is a girl who didn’t have a strong upbringing and has already made a whole series of bad choices the way you’re describing it to me.
We’ve got to get her on a path where she has better thinking and therefore better choices. This is a whole lot more than just deciding to give someone $35 for diapers. The answer to that is easy; it’s yes. But I’m going to do it in the form of a grocery store gift card, and most of those do not allow alcohol and cigarette purchases. Or I’ll go buy the diapers and take them to her.
What you’re pointing out more than anything is that you have realized that you’re giving a drunk a drink, which means she’ll always have money problems until she corrects her bad thinking that is leading to bad choices.
I would help her lay out her budget. Pay for her to go through Financial Peace University and then walk with her. As you help her with her budget and see what she is spending money on, and as long as she sticks to what you are telling her to do for her own good, then you’ll try to help her out occasionally with a gift. That’s assuming you can financially do that.
But $50 or $100 is a big deal in this kid’s life. But giving it to her without any kind of requirement that she think better or live better is enabling; it’s not helping.
If she lives two hours away, set her up with the class and ask her who her coordinator is. Then the coordinator can coach her and stay in contact with you to help verify the good decisions and hold her accountable.
Helping people is a lot more work than just throwing money at them, which actually doesn’t help them. You have to get down in their mess with them and walk with them out of the mess. Set it up where your money is influencing her life to be better, not just throwing money at her. Her problem is that if she’s putting pictures of vodka and cigarettes on Facebook, the problem is not lack of money for diapers. Her problem is mismanagement.
If you choose vodka and cigarettes over your kid’s diapers, it means you need to be smacked. If you don’t want to do that, you can just cut her loose. Tell her you won’t throw money at this situation if she is not going to do this stuff. If she has some debt, you can say that every time she pays off some debt, then you’ll contribute some.
You can also match toward saving or set up and contribute to an account for her kid to go to college where you are the custodian. You can do all kinds of stuff that doesn’t take a lot of money, but it’s a lot of money in her world and allows you to have influence with her to force her to change her thought patterns and her habits and behaviors. But that’s a lot of work. That’s loving someone well, and it’s a lot of work to love somebody well.
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