QUESTION: Amy in Rockford, IL, has a 14-year-old son. He has a full-time job this summer and is about to receive his first paycheck. They have taught him about spending, saving and giving, and his first goal is to buy an iPad Mini. Amy asks Dave and Rachel if the money should be allocated from his savings or his spending, since his dad is going to put $2,000 toward a fixer-upper car.
ANSWER: (Rachel) The way mom and dad raised us — and correct me if I’m wrong, dad — the savings category for a 14-year-old is more of a long-term spending category. At that age, they’re not going to be saving for retirement or something in the distant future. Now, if college or a car is in the picture, then maybe he needs to make that a higher priority than an iPad Mini. But as far as I’m concerned, a 14-year-old’s savings category is a long-term spending category.
(Dave) Sure, which means an iPad Mini is okay. The big question we would’ve had around our place would be the car. We required our kids to buy their cars, and we agreed to match whatever they saved. At our house it would have sounded like this: “You can use your savings for an iPad Mini, that’s fine. But you have to understand this $400 thing is actually costing you $800 if we’re matching you.” We’re going to talk that part through, and it would be one and done. If it were out of savings at our place, given that the car is in the picture, we’re probably going to do that one. But from then on, your savings is going toward your car and the other stuff is coming out of spending. You’ve got to be realistic about saving up toward a car.
The other thing is this … In the kids’ minds we were perfect at all this. Of course we weren’t perfect — there were a lot of things we messed up in this deal — but we convinced them we were, I guess. More than anything else, we were always asking ourselves this: What’s the lesson? What’s the takeaway here? The takeaway is not an iPad Mini. The takeaway is not picking up a car. The takeaway is teaching the kid to save for a goal. But the danger of the mathematics is part of the lesson, too. If he goes and buys an iPad Mini, then something else and something else, he’s going to have about $3 in savings. He’ll be riding a bike, because his car’s not going to be running.
QUESTION: Tucker in Topeka, Kan., has been renting a 5,000-square-foot space for his small business for just over a year. His landlord asked if he’d like to buy the location, which includes two adjacent tenants, for between $150,000 and $200,000. He’s paying $1,300 a month for rent, and that would almost cover the monthly mortgage payment on the building. What does Dave think?
ANSWER: Yeah, but that’s the great misnomer about these situations. You can get out of a tenant situation and move on. You can’t just get out of a mortgage situation and move on without selling the property.
Here’s the thing: If your business had been around a little longer, and you had the cash to buy it, I might suggest doing this. But here’s the problem with buying real estate associated with the operation of your business. I’ve got this problem right now. I’ve got a 64,000-square-foot building that our business operates in. I’ve also leased another 40,000 feet out back from another company that owns it, and I bought another building next door, because we’ve outgrown the first building. Now I’m having to fight all the time to make sure I don’t conform my business to my building, and instead make the building conform to the business.
It’s really tempting, in other words, to not grow and have to move out of this place we love. But we’re going to have to move out of it. We’re not going to be here in three or four years; we’re going to be somewhere else. And I’m going to have a really nice, empty office building at that point — that’s paid for, that I’ll rent. Otherwise, this business is going to be stuck.
But the problem can be that if the business is growing, is shrinking or hasn’t been open long enough to stabilize, a piece of real estate can start being the tail that wags the dog, instead of the dog wagging the tail. I love real estate, but I’d remain a tenant in your situation. A, you don’t have the money; and B, you haven’t been doing this long enough to know what your real estate and physical plant needs are going to be.
QUESTION: Gretchen in Germany is calling because her husband is about to separate from the military and will receive a year’s salary in separation pay. It is taxable. He is considering going into the National Guard. If he does, they will need to repay that separation pay. Dave advises Gretchen to check into whether or not the separation pay can be declined.
ANSWER: I would just assume not receive the pay. The problem is if they pay you a year’s pay, you get to pay taxes on it. But then you have to turn around and have to pay the whole thing back. They just cost you 40% to get the opportunity to sign up for the Guard. That’s not very good. I think I’d decline the separation pay if you think you’re going to go in. I would look into seeing if you can do that. If you can’t, it’s costing you 40% or 30% of a year’s pay.
This is like a reverse signing bonus.
This is a $20,000 hit. You’re going to lose $20,000 for the opportunity to get to sign up for the Guard. The $10,000 Guard signing bonus offsets you $10,000, so it’ll only cost you $10,000 to get to take the new job.
I’m really looking into this. I can’t believe that the military—I can believe it, but it’s not logical—the right hand doesn’t know what the left hand is doing. You would think that they would want guys coming out of the military in the Guard and that there’d be a way to avoid this issue.
If you take the money, it’s taxable. If you have to pay the money back, it doesn’t save you on taxes. You’re going to lose the taxation on $75,000, which is probably $20,000. That’s just a rip. That’s awful, especially when you’ve been serving your country for 10 years and you’re going to turn around and serve your country again. That’s just craziness.
I would get in there with the military office and say, “Hey, we’d rather not have the separation pay,” if you’re going to take the Guard job. And I’d take the Guard job in time to refuse the separation pay if that is an option. I don’t know if it’s an option. It should be, but otherwise, you’re going to lose $10,000 net on this transaction.
It’s worse than an ugly loan because you’ve got a full taxation on it. That’s the problem. It’s not even a good loan. It’s not even an ugly loan. It’s just nastiness.
So if he’s going to take the job, I would try to avoid the separation pay, and I’d try to find out in time to avoid it if that is an option. If not, you know taking the job is going to cost you $20,000 in taxes. The Guard’s going to give you $10,000, so your net loss is $10,000. It just takes the fun out of this.
QUESTION: Lindsey in Dallas and her husband have a mortgage on their home, and the payment is more than 25% of their take-home pay. They’re trying to decide if they should be placing the full 15% of their income toward retirement or pay down the mortgage. They have a $350,000 mortgage and make $7,000 a month.
ANSWER: Your take-home pay includes bonuses, so you’re fine on that. I would be putting 15% of your income into retirement. Above that, I’d be throwing money at college and then money to pay off the house as soon as possible. The good news is that you’re really starting to get some wiggle room now, because you’ve gotten all this other stuff cleaned up.
The 25% of your take-home pay includes all of your income. That’s our general rule of thumb. If your house is 27% of your take-home pay, that doesn’t mean you have to sell your house. I’m just trying to keep people who are buying a house from buying too much. I don’t want you to be house poor or be so tied up with a mortgage that you can’t breathe.
You have to stop and think about what your steps are to buy a home that stays within that general range, so you aren’t house poor and the house thus owns you. Then when you buy, you have a payment that is no more than a fourth of your take-home pay on a 15-year, fixed-rate mortgage.