Baby Steps: Where does the loan go?
Question: Bob filed for bankruptcy a year ago and closed his business. He has a $35,000 home equity loan and owes $10,000 on a car. The home equity loan is a balloon loan and he's on Baby Step 2, making $61,000. Should he put the home equity loan on Baby Step 2 or Baby Step 6?
Dave Ramsey's advice: Normally, I say if the second mortgage is less than half your annual income, then you put it in the debt snowball. Since this is more than half, I'd put it in Baby Step 6. What I would recommend here is that you pay off the car and get after paying off the second mortgage. If you can get rid of that, you'll get your life back.
Budgeting: Nickel & Dimed to Death
Question: Melissa is overwhelmed. They moved to Georgia and doubled their income, but they have $35,000 in debt and are upside-down in both of their cars ($10,000 each). They make $90,000 a year. They feel like little things are nickel-and-diming them to death. Dave sets them straight.
Dave Ramsey's advice: Let me get this straight. Your income doubled, and you've already adjusted your lifestyle that high? What happened is you moved cities and had stress spending and comfort spending, and now that's done and you need to roll up your sleeves and get to work. The cars are not unreasonable; you just don't have a game plan. With a written budget, on paper and on purpose each month, we're going to punch these dollars until they squeal and clean this mess up.
Let's pretend that you live on $70,000 a year. Wouldn't that leave $20,000 to pay off? At that, the nickel-and-dime stuff should be going away en masse. You need to cut your lifestyle. Cut your lifestyle to the bone, to the point that people are making fun of you. You can clean this up in ONE YEAR!
Credit Cards: Credit Card Goofball
Question: Mike just had lunch with a friend who bragged about having credit cards. His philosophy is that it's all right to have credit cards as long as you pay it off next month. Is that true?
Dave Ramsey's advice: Your friend is a goofball. Spending $3,000 at 4% interest is $120 a year. That means before he started all this nonsense, it means he made $10. I guess he's a REAL GENIUS! His time must be worth about 10 cents an hour. It's this kind of thinking that gets people in trouble.
Besides, you spend more with plastic because you don't register the emotional pain of paying with cash, according to a Dun and Bradstreet study. Your friend is an accident looking for a place to happen.
Marriage: Stupid Sea World Suggestions
Question: Adam needs Dave's suggestions on keeping his wife motivated. They are halfway through their debt snowball and have paid off about $27,000. His wife wants to take a break from paying off their debt so they can go to Sea World. Dave thinks this idea is absurd and explains why this is a metaphor for America.
Dave Ramsey's advice: The problem is that she doesn't care if she's out of debt or not. She doesn't believe that it's worth paying a price to win. If I told her one of the kids would die before the end of the year if you didn't get out of debt, you'd make it a priority and be out of debt. As far as this goes, you've got to be KIDDING ME! SEA WORLD?! You make $100,000 a year, have $30,000 in debt, you're broke and want to go to Sea World?! That concept is absurd.
She's trying to pacify you in the hopes that you'll get over this debt-free fever you've got. Your fever just needs to get more intense. Sit down with her and explain what "living like no one else" looks like, and where it will take you.
Mortgage: Killer House Payment
Question: Sherry is getting a settlement from a car accident for about $35,000. Should they use it to pay down the mortgage or save it and try to sell the house and get something cheaper? Dave's answer is immediate when he hears about how much they make versus how big the house payment is.
Dave Ramsey's advice: This house is not ANYTHING you can afford, you need to get it sold. Your house payment is 70% of your take-home pay. There is no recasting in the world that's going to fix that. Your house payment should be no more than a quarter of your take-home pay on a 15-year fixed rate mortgage. That's very conservative, but that's what you need right now.
If I'm in your shoes, sell this house and rent for a while until you get everything cleaned up. Get stabilized, because right now you're just spinning!
Student Loan: School Spending
Question: Will asks what he can say to his son to get him to reconsider going to another school where he would incur big-time student loan debt.
Dave Ramsey's advice: I'm hard pressed to tell you that one school is $100,000 better than another school. He shouldn't go to that other school because he can't afford it. If he had the money lying around, he could afford it. We hire people here every day, and where they went to college is a VERY MINOR blip on the radar.
The only thing worth less than a college degree is a college pedigree. What you LEARN is very valuable, and as long as you can employ what you learn in the market place, that's all the employer cares about. You need to tell him that nobody gives a crap about where he goes to school. He's making a BIG MISTAKE.
Behavior: Breaking the Bad Cycle
Question: Sandy is 45 and, although she grew up in a house where her parents lived below their means, they never taught that to her. She can't get her spending under control and keeps going into debt. She doesn't know how to break the spending cycle. Dave tells her about the 3 things she needs to discover.
Dave Ramsey's advice: You're a pretty normal American. You've had a Doctor Phil moment of asking yourself how this behavior is working, and you know that it's not. You've got a good edge there.
With me, 3 things happened to get me to break that cycle. It involved a little bit of disgust, a little bit of fear of the prospect of ending up broke, and the most important part ... contentment. That has to do with your spiritual walk. In this culture, marketers say you'll be better, or smarter, or happier, or sexier after you've bought our product. If we have that much marketing crammed down our throats, it affects our contentment. That's the last piece of the puzzle.
I quit going where I was tempted to spend money. If you go wandering through these places where you spend without a specific plan, you'll lose. If you have a plan and don't impulse and stay away from these places, you'll win.