QUESTION: Bethany in Detroit isn’t sure if she should contribute to her 401(k) or a Roth IRA instead. It is a discretionary 401(k), and Bethany isn’t sure she’ll receive a match at the end of the year. What would Dave do?
ANSWER: If they match, then I would jump into it. If you feel like they won’t match, then don’t do it.
If you look up in January of next year and they’ve closed the biggest deal they’ve ever closed in their lives, then you might say that this year you’ll probably get the discretionary match. That’s when you get into it.
I would rather see you in a Roth IRA than a non-matching 401(k). Tax-free growth is better than tax-delayed growth or tax-deferred growth. That’s really what the traditional IRA and the traditional 401(k) with no match are.
QUESTION: Joel in Colorado Springs says his wife really wants to be a mom and would like to start planning for that. Joel wants to wait a little longer and build up their emergency fund before taking that step. Who’s right?
ANSWER: Within reason on number of children, the old saying is true. If you wait until you think you can afford them, you’ll never have them. Whenever you guys think you want babies, get babies. You’re fine. You’re out of debt. You’re already working on your emergency fund. Before the baby got here, you’d have the emergency fund complete. If she announced this morning that she was pregnant, you’d have nine months to finish it.
You’re a responsible guy. You’re going to be a good dad. You’re going to be a good provider. You don’t have to wait another day.
That opinion is probably worth what you paid for it, but that’s my belief on it. I don’t teach people that you have to be out of debt or have every little detail worked perfectly on their money before they have babies. Babies are not that expensive. They don’t break your back like everybody talks about. They generally eat from your table, assuming you teach them to. You can let them break your back if you want to spoil them and be crazy parents, but the first years, you’ve got diapers and baby stuff. But seriously, it’s not the end of the world. You can work your way through it, and very few times are people having kids their problem. Now if you go to an extreme and have 16 kids, then yeah—that many baby birds to feed can become a financial problem without a doubt. But the normal sized family in America—usually, children are not your financial issue.
QUESTION: Tina in Arizona says she and her husband are battling the state over owed child support. Tina isn’t sure where that debt falls in Baby Step 2. The kids involved are grown with their own children. The balance is about $15,000. Dave tells Tina how she needs to handle this.
ANSWER: You have a judgment lien against you and you’ve lost the lawsuit. You have a $15,000 debt. Just put that in your debt snowball. Pay minimums on everything but your smallest debt and list your debts smallest to largest, then pay them off in that order.
When you get down to the child support, wherever it falls in the debt snowball, you just treat it like it is credit card debt and knock it out. It’s not going away until you pay it.
If he wants to go part time, you have to do a budget and see if he can do that and you guys can still get out of debt and retire with dignity. But at some point, this has to be cleared up. So I would treat this just like it was credit card debt. Pretend that an old credit card that you didn’t pay sued you and you have a $15,000 that you are paying $50 a month on. Just put it in the debt snowball right there; treat it exactly that way.
QUESTION: Jonathan in Memphis is finishing his last semester of college and just landed his first job making $33,000 a year. He’s revising his budget, and he has $15,000 in student loans. Jonathan wants to know if he should put some fun money into this budget.
ANSWER: The faster you pay on the debt, the faster it’s gone. It’s up to you of how long you want to be in debt. I am a guy who likes to rip the bandage off. I’d rather get it over with. If I’m you, I’ll have no life. My new goal after getting this job is paying off the student loan and cleaning up the mess.
Then when I don’t have any payments, then I’ll have some money and that’s when the fun comes. That is the definition of gazelle intensity. It is no holds barred and going wide open. We are going to pour everything we’ve got into this before the debt’s gone. It means my broke friends are going to be making fun of me.
But you have to decide. The more you let your foot off the gas, the slower you’ll get out of debt, but the better lifestyle you’ll have while you’re waiting. If it were me, I’d just want to have no life. Keep living like a college student while you clean up the mess.
With the numbers you gave me and with living at home with no rent, you’ll be able to plow through this. I would look at the music equipment you have and just ask yourself what is not replaceable. That would be something like a guitar that has a lot of memories with it; something that you’ll wish you had back one day when you’re wealthy. I would put that in the same category as not selling your wedding ring.
But if it’s an old guitar and you don’t think much of it and you can get another one without a big deal, then dump everything and clean house. Let’s get out of debt. But hold onto the special things.
Sign up for our free step-by-step guide to getting started with Dave's plan. Real stories, practical advice, proven tools you can use via email.