It’s no get rich quick scheme

Dear Dave,

I’m about to complete Baby Step 3. I’ve been very intense about following your plan, but I was wondering if there’s ever any kind of frustration or letdown after you’ve come this far.

- Rasheed

Dear Rasheed,

You’re right. The beginning three Baby Steps are very intense. First, you get $1,000 in the bank — $500 if you make less than $20,000 a year — for a beginner emergency fund as fast as you can. Then, pay off all your debts, except the house, from smallest to largest, and after that you finish out your emergency fund with three to six months of expenses. This is a real whirlwind of activity because everything should be wrapped up in an aggressive, we’ve-got-to-get-this-done kind of attitude.

I guess if there’s a letdown it could come from the feeling that once you’re out of debt except for your house, things should kick into overdrive and you’ll become instantaneously wealthy. That just isn’t realistic. But it does remove a ton of stress from your life, and you’ll experience a sense of freedom that you’ve never felt before. Just think about it. Try to imagine how it would feel to have no payments on anything except your home. There’ll be no more credit card bills and no more car payments. How great is that?

As for frustrations, they’ll be fewer because a huge cause of stress and frustration will disappear after you gain control of your money and get out of debt. You may feel like things aren’t moving fast enough, but things never seem to move fast enough when you’re intense and really into what you’re doing!

- Dave

Best gift for the grandkids?

Dear Dave,

What’s the best financial gift for young grandchildren?

- Anonymous

Dear Anonymous,

Well, it’s definitely not savings bonds. You get nothing in the way of a return from those things. I get mad just looking at them! I’d suggest opening up an Educational Savings Account (ESA) in a mutual fund in the child’s name. You can put up to $2,000 a year, per child, into these, and they grow tax-free.

If you started when your grandchild was born, and set aside $2,000 a year for 18 years, you’d have saved $36,000. But if you go the ESA route, and figure 12 percent average growth over that time, the kid could have about $126,000 waiting when it comes time for college. That’s a pretty sweet gift!

- Dave

The best place to put savings

Dear Dave,

Where is the best place for me to put my savings?

- Anonymous

Dear Anonymous,

Saving and investing are two things I talk about a lot. Investing is when you’re going to leave the money alone for five years or more. I’m talking about things like retirement, college planning or saving up to buy a house. For these things, I recommend good, growth-stock mutual funds. Make sure you’re looking at mutual funds that have stable track records of five to 10 years, and then spread your money across these four categories: growth, growth and income, aggressive growth, and international.

Now, when it comes to savings, I’m not really concerned with making money. Things like setting money aside for vacations, Christmas, or even an emergency fund fall into this category. One and one-half percent would be an incredible rate on a savings account right now, so you’re not going to get rich off anything like this. The idea is to park this money in a safe place, and keep it separate from the rest of your money so it doesn’t get spent on the wrong thing!

- Dave

Buy a house while in student loan debt?

Dear Dave,

I’m 31, single, and I have two college degrees. I have no money to speak of, having just come through a rough patch of unemployment, but I recently landed a job that will pay me $20,000 to start. There’s the added possibility of an increase to $40,000 in the first year. I’m thinking about buying a house, but I’ve also got $50,000 in student loan debt. The good news is that I have no other debt. What are your thoughts on buying a home in this situation?

- Trevor

Dear Trevor,

Man, you’re broke! There’s no other way to describe being $50,000 in debt with a job making $20,000. You don’t need to get wrapped up in buying a place right now. At this point, a house would end up being a curse instead of a blessing.

You’ve been through the valley, and now I want you to come up into the sunlight. I want you to start building a future on something solid, and that solid ground means being debt-free. If I woke up in your shoes, I’d get unbelievably aggressive about paying off this debt. I’m talking about rice and beans and living in a cheap little apartment for the next two or three years while you kill it off.

Whatever you do, Trevor, please don’t get complacent about this debt. Lots of times people will play around with student loans. They don’t take them seriously, because they have low payments or really low interest rates. The next thing you know, it’s still sitting there 10 years later staring at you like some kind of big, dumb pet!

Having a bunch of mortgage payments hanging over your head would completely destroy the foundation of your new financial life. Save up $1,000 for a small emergency fund. Go crazy about paying off the loan. Then, get your emergency fund of three to six months of expenses in the bank. If you get used to living on $20,000 a year, and your income rises like you mentioned, you’ll be able to get rid of your student loan fast. After that’s done, you can save enough for a 20 percent down payment on a house in no time!

- Dave

In debt to mom

Dear Dave,

We want to go into the mission field, and we’re following your plan trying to get out of debt before we do this. We’ve got about $16,000 in credit card debt. My mother doesn’t want this to stand in our way, and she’s offered to pay off our debt and let us pay her back over time at half of the interest rate we’re paying now. My husband likes the idea, but what would you say?

- Teresa

Dear Teresa,

I’d say no, thank you. There’s no way I’d be in debt to my mother.

She’s obviously a kind, sweet person, but it’s a bad plan. I’m sure your husband is a great guy, too. But he’s overlooking the spiritual and relationship implications of all this. Proverbs 22:7 says the borrower is slave to the lender. If you do this, you’re going to change the way Thanksgiving dinner tastes, because you’ll be eating with your master instead of your mom.

Money has a way of changing the family dynamic, and it’s almost never for the good. All of a sudden you’re getting raised eyebrows if you buy something for yourself, because even the nicest, gentlest person has opinions. You’d be giving her a say in your lives in a different way and at a completely different level than ever before. You just don’t need that in your life!

Now, if she wants to make paying off your debt a gift — one that will facilitate you guys hitting the mission field earlier — I’m okay with that. I’d be honored, and I’d accept the gift. But I would never tell you to go into debt — especially to a parent. I’m sure she’s coming from the perspective that she’d make a better “creditor” than the credit card company. If it were me, I’d tell her that I love her, but I just don’t want to take a chance on doing anything that might come between us later.   

- Dave

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