Saving

QUESTION: Roxanne is trying to get out of debt, but she’s still using one credit card to cover travel expenses related to her job. She asks Dave for suggestions, and he’s happy to give her an idea that will enable her to get rid of that card.

ANSWER: Let’s set up an account, and prime the pump once. By this, I mean in the next few months I want you save up $500, then open a separate checking account with a debit card attached for reimbursable travel expenses only.

If you put $500 into this account one time, you’ll never have to save for it again. You’ll use some of that money for your travel expenses—on your debit card—and when they reimburse you, you’ll put the reimbursement check directly into your travel account. After you get the initial $500 in there, your travel account will run off your reimbursement checks.

Lots of people carry credit cards on the road for expenses, but often they’ll end up buying things that aren’t reimbursable. It happens to everyone who travels. Then, over time, you accidentally run up credit card debt. But when you use a debit card with an account that’s completely separate, and you’re not using it for anything except reimbursable travel expenses, it’ll help you become a lot more disciplined with your purchases on the road.

QUESTION: Should Nate cash out a small amount of stock, and use the money for an emergency fund? In this situation, Dave thinks that’s the right move.

ANSWER: That’s what I would do. Basically, your emergency fund is in stock right now. That’s not a good place to keep an emergency fund, because you never know when life will throw unexpected expenses your way or the stock market will go down.

Put the money in a simple money market account—one with check writing privileges and no penalties for early withdrawals. You always want your emergency fund to be safe and easily accessible. Then, make sure you keep pushing forward and take care of Baby Step 4, investing for retirement; Baby Step 5, save money for college if you have young children; and Baby Step 6, pay off your home early. Baby Step 7 means building wealth and giving like crazy.

QUESTION: Keith is concerned about his mom’s savings and investments. He wonders, also, if she should pay off her mortgage. After hearing the details, Dave doesn’t think there’s much reason for Keith to worry about her situation.

ANSWER: I would recommend she go ahead a pay off the mortgage. If she can do that at age 75, and still have $430,000 left, that’s the way to go.

Being in the stock market at her age sounds like a shock to you. I don’t think it’s a bad thing. It’s just not what the typical financial planner tells you to do. For the most part, they’ll tell you to get super conservative with your money as you get older. But she’s not going to use this money; she’s going to use the income from this money. The money’s going to be left alone. If she’s in good mutual funds, and not single stocks, I’m not worried.

Let’s pay off the mortgage, and then she can start taking her income off the remainder. She won’t need as much in terms of income, because she won’t be sending money to the bank to pay the note on the house anymore. I’m comfortable with that.

I’m 58, and I’m 100 percent into stocks through mutual funds. I don’t have anything else, and I don’t ever plan on changing that.

QUESTION: Kristi works for a community college where a mandatory 20 percent is taken out of her paychecks for retirement. She asks Dave’s thoughts on this practice.

ANSWER: That is a lot to take out. I’ve heard of a few places that have a mandatory 12 percent contribution, but 20 percent is very unusual—and it’s unusually high.

I’m not sure what to tell you. I mean, you took the job. It’s what you signed up for. You may have to decide at some point if you’re still willing to work there under those circumstances. But at least you’re not losing the money, so it’s not the end of the world. It’s your money that’s going in there for your use some day.