"Biggest Loser" With A Big Jackpot
Patrick received $250,000 for winning "The Biggest Loser" and wants Dave's guidance when it comes to spending the money.
QUESTION: Patrick in Jackson received a $250,000 check for winning “The Biggest Loser.” He wants some guidance on how to spend this money. Dave recommends setting some aside for taxes and then walks him right up the Baby Steps.
ANSWER: I would set my tax money aside. Pay off your student loans, and then set aside an emergency fund of three to six months of expenses. I would set aside about $75,000 for taxes. That’s going to leave you with about $125,000. Above your emergency fund, being debt-free, and covering taxes, which would be the first three things I would do, I’d put the rest of it down on the house.
Let’s pretend that you had $125,000 left over after you do those other three things. You put that all down on the house, so $250,000 minus $125,000, and you’ve got a $125,000 mortgage. You’re probably going to make $150,000 a year, so you can easily afford $125,000. Since he’s in the financial world, your brother-in-law could tell you to put down $20,000 and finance $230,000 on the house instead of $125,000 and invest the difference. Let me go ahead and answer that in case it comes up. If you had a home in your situation today with $125,000 owed on it and worth $250,000, would you refinance it to pull $100,000 out to invest it? No. When I ask the question that way, it causes you to measure risk. I want you to get this home almost paid off, and while you’re having your moment in the light—and I don’t know how long the light’s going to burn—I really want you to try to live on your teacher’s salary and let’s throw everything at the house. Let’s get the house paid off in about a year and a half. You don’t quite have enough to do that by the time you pay your taxes.
Taxes are first. Debt is second. The emergency fund is third. The rest goes on the down payment. We live on a very tight budget, and we throw all of this extra found money at the house, and go ahead and pay it off as fast as you can. If you can maintain this level of income for a couple of years, you ought to have the house paid off and everything before you’re 30 years old. You’re going to be in a great position.