Saving priorities


April 23, 2014

Dave Ramsey

Dear Dave,

I noticed that your Baby Steps list puts saving for retirement before saving for your kidís college fund. Sending your kids to college would come first on the timeline, so what is your reasoning behind this?



Dear Jen,

I advise this approach because everyone is going to retire someday, unless, of course, they happen to die before reaching retirement age. Retiring and eating are necessities. College is a luxury. Lots of people succeed in life without going to college, and thousands have worked their way through college. I worked 40 to 60 hours a week in college, and I still graduated in four years.

Having a college fund set aside by your parents is really nice, if they can afford that kind of thing. But you can go to school by getting good grades, applying for scholarships, working your tail off and choosing a school you can afford. I believe in education, but there are lots of ways to get a college degree other than having your parents foot the bill. Besides, the last time I checked there werenít any good ways to retire that didnít include saving and preparing for retirement beforehand. I mean, you can always try to live off Social Insecurity, but I donít consider that a plan.

In short, college funding is not a necessity. Thatís why it follows saving for retirement in the Baby Steps. Should you try to save up for your kidís college education? Sure, if you can. But there are lots of parents out there who wonít be able to pay a dime toward someoneís college education. And that doesnít make them bad parents!

- Dave


What should I do now?                               

Dear Dave,

I think I made a big mistake when I bought my car. Iím having a hard time affording the $500 a month payments, because I only make minimum wage at my job and work 35 hours a week. My boyfriend, who was supposed to help me pay for it, has moved out and left me. I owe $20,000 on the car, but I know itís still worth about $19,000. What can I do?



Dear Rachel,

Sell the car! You went car crazy and bought a vehicle that was way out of your league.

Right now, your entire financial world is wrapped up in paying for this thing. And depending on a boyfriend to help make the payments was a big mistake, too. When he left, so did the financial support.

At this point all you need is enough to cover the hole you dug. Go to your local bank or credit union and try to get a very small loan from them - about $3,000. I hate debt, but you really donít have a lot of options here. Then, if the car will sell for $19,000, get it sold and use $1,000 to cover the difference.

After that, take the remaining money and buy yourself a little beater. Iím talking about basic, ugly transportation. The next step is to pick up a part-time job on the side, and work like crazy for a few months to get that loan paid back as quickly as possible. Donít ever do this kind of thing again, Rachel!

- Dave


Problems with no credit score? 
April 18, 2014

Dear Dave,

Iím 20 years old, and Iím trying to get out of debt. However, Iím concerned about what might happen when Iím older and donít have a credit score. My girlfriend says I wonít be able to get a job or rent an apartment without a good one. Is this true? Ė Ian

Dear Ian,

No, itís not true. Iím sure your girlfriend is a sweet person, but she has no clue what sheís talking about in this situation.

In either case you can simply explain that the reason you donít have a credit score is because you have no debt. Since you donít have any debt, you have something known as money. That makes you very stable, and it makes you a fantastic candidate as an employee or tenant.

Listen to me, Ian. Iím a landlord, and if I had my choice between a tenant with no debt and no credit score and someone with a high credit score but lots of debt, Iíd take the one who has no debt in a heartbeat. Why? Because thatís the one who is most likely to pay.

Besides, you already have a good credit history if youíve paid your bills on time. Show them proof of that, if necessary. But taking on a pile of debt to have a high credit score or increase your current score is just plain stupid! Ė Dave

No CDs for kids

Dear Dave,

Would it be a good idea to open CD accounts for my two small children? Ė Abe

Dear Abe,

No. A CD is a Certificate of Deposit. Basically, theyíre not much more than savings accounts which carry early withdrawal penalties. They earn about the same as a regular savings account, too, which at the moment is next to nothing. Thereís no reason to open them for your kids.

Now, is it a good idea to save money on behalf of your children? Of course, it is. But if the idea is simply to teach and help them save money, Iíd recommend simple savings accounts. If youíre talking about wanting to save money for them Ė like for a college fund Ė Iíd suggest an Educational Savings Account (ESA) with good, growth stock mutual funds inside.

Even if you want to put aside college savings, Iíd urge you to go ahead and open regular savings accounts for each of them. We did that for our kids, and I can tell you from experience, youíll find tons of teachable moments about saving, giving and life in general!


Your bankís advice is bad
April 11, 2014

Dear Dave,

I want to roll over a 401(k), and my bank is encouraging me to roll it over to fixed annuities. Is this a good investment?


Dear John,

More times than not, when you go to a bank for investment advice, what youíll get in the bargain is bad advice. And thatís the case here.

Iíd move toward a traditional IRA, in a series of good growth stock mutual funds. Put it across four types of accounts: growth, growth and income, aggressive growth and international. What youíre looking for, John, is a great track record for your investments. You want a track record so ridiculously good that it gives you a great sense of comfort, even though thereís no guarantee of whatís to come. And there are mutual funds out there that can do just that for you. I own one thatís over 70 years old, and it has averaged nearly 12 percent over that time.

Lots of people talk in ďwhat ifsĒ when it comes to investing. Well, you can play that little game all day. But if the economy goes completely down the tubes, and the government destroys things like mutual funds and real estate completely, your little bank-recommended annuity isnít going to make it, either. The banking system as a whole will fail if all the mutual funds close because theyíre all based in publicly traded companies. And that means virtually every business you drive by on your way to work would be out of business. A bankís not going to survive that kind of thing.

If youíre looking for things to help you survive the apocalypse, youíre talking about food and water. But if you want rational, well-reasoned investments, you need to look at growth stock mutual funds and paid-for real estate. Thatís what I do!

- Dave


Number of payments isnít the problem

Dear Dave,

Why do you think debt consolidation is such a bad thing?



Dear Tessa,

Debt consolidation is a bad thing because it makes you feel like you really did something to get out of debt and change your financial world when you didnít. People come to me all the time saying stuff like, ďDave, I got a second mortgage. I paid off all my debt!Ē Well, no you didnít pay off all your debt. You just moved it around.

Thatís part of the catch when it comes to debt consolidation. If you get a lower payment and move things around a little bit, you feel like you actually accomplished something. The problem with that is you donít do anything to address the real problem, which is you.

Interest rates arenít your problem, and the number of payments isnít your problem. Your problem is the person you look at in the mirror every morning, Tessa. Until you fix that person and get mad enough at your financial situation and the real cause of it, youíll never make any progress toward getting control of your finances.

Trying to borrow your way out of debt is not a good plan!

- Dave

Extravagant giving, foolish spending?
April 1, 2014

Dear Dave,

My husband and I are debt-free, and we have several hundred thousand dollars in savings. We pay for our children and grandchildren to visit during Christmas each year, but my mother thinks this is foolish spending. What do you think?



Dear Linda,

Iím sure your mom loves you guys a lot, but sheís wrong twice on this one. First, she should mind her own business. Second, you guys have obviously worked hard and been extremely smart and disciplined with your finances. For someone in your situation, bringing your family together for one of the most important days of the year isnít foolish on any level. I think itís awful that youíre even having this conversation with her.

One of my great dreams years ago was to have the ability to do things like that for my family. When I was 22, I worked for a real estate guy who would bring his entire family in from all over the country once a year to go skiing for a week. He and his wife would pay for everything. They would rent a nice chalet, and spend that time having fun as a family and growing closer together. I sort of borrowed that idea a while back. Once a year weíll take all our kids and their spouses on a nice vacation. We pay for everything, and itís just one of our gifts to them because we love them.

So, I think your mom is completely wrong. There are three things you can do with money: spend, save and give. Trust me, giving is the most fun of all!



Book a hotel room without a credit card?

Dear Dave,

Is it possible to book a hotel room without a credit card?


Dear James,

Absolutely, it is. Just use a debit card.

I donít have a credit card. When it comes to finances, the only pieces of plastic youíll find in my wallet are two debit cards - one for my business, and the other for my personal account.

A Visa or Mastercard-branded debit card can be used anywhere credit cards are accepted. And the best part is that youíre not borrowing money when you use one. The funds come directly from your checking account. Some hotels might put a temporary hold on your account for the amount in question, so you need to make sure you actually have the money in the bank. But that just makes sense, doesnít it? You shouldnít be traveling without money in the first place.

If youíre too broke to travel, then you need to stay home. Pretty simple!



Financial Russian Roulette
March 25, 2014

Dear Dave,

My wife and I are debt-free except for our home. She travels one week per month and charges her expenses to a personal credit card for reimbursement later. Iíd rather we open a checking account with debit card privileges just for these expenses. What do you think?



Dear Dustin,

Iíve got to say I like your idea better. The problem youíre both facing now is this: if her company ever shuts down, thereís a good chance you guys are stuck with credit card debt.

Years ago I had a client who was working for a company, and heíd run up travel and business expenses on his American Express card. Like your wifeís situation, his company would then reimburse him for expenses. Then, he made a business trip to Europe, and, while he was there, his company asked him to pick up some computer equipment. The cost of the trip and equipment was about $22,000. When he returned to the office with all the computer stuff in tow, the front door was padlocked. The IRS had shut them down, and they went into bankruptcy. And guess what else? He never got the $22,000 from the company!

Credit card companies donít care about the circumstances. They want their money, period. You guys have done pretty well if youíre debt-free except for your home. But your wife is playing a game called Financial Russian Roulette, and it could backfire on you both at any time.

Never take personal responsibility for company expenses.



Trading debt for a career

Dear Dave,

Iím considering a career change and becoming a financial advisor. It would mean a 45 percent cut in salary for three to four years, and Iíd have to take on debt in order to survive the cut. Is this a smart move?



Dear Travis,

No, itís not. You didnít give me a lot of details about what kind of ďfinancial advisorĒ youíre thinking about becoming, but there are all kinds of people who put themselves in the category of financial advisor. A little voice in my head tells me youíre actually talking about life insurance sales. If thatís the case, then there are some things you need to understand. One, you wouldnít be a financial advisor; youíd be an insurance salesman. And two, thereís about an 80 percent fallout in that world. Eighty percent of the people who start as insurance salesmen donít make it in that line of work.

Now, you could be making $200,000 right now. And if that were the case, youíd still be making good money while this new career takes root. Still, Iím not going to send you into debt for a career change. Thereís got to be a way around that, whether itís delivering pizzas at night or beginning your career change on a part-time basis before making the jump.

Travis, I want you to live your dream. I also have no qualms about you going into the financial world if itís what you really want to do with your life. But Iím not going to tell you itís OK to go tens of thousands - maybe even hundreds of thousands - of dollars into debt to make it happen. Going deeply into debt to become a financial advisor sounds pretty oxymoronic to me. Doesnít it to you?

Donít do something really dumb with money in the name of advising other people on their finances. That just seems wrong


Keep the lifestyle simple

March 22, 2014

Dear Dave,  

I recently got a new job that will increase my income by $20,000 a year. Iíve got $65,000 in debt, and Iím trying to pay it off, so I know I need to adjust my budget. Do you have any suggestions for a situation like this?  

- Mitchell  

Dear Mitchell, 

Congratulations on your increased income! The first thing Iíd tell you is not to get used to any permanent luxuries while youíre paying off debt. Go out and celebrate with a really nice dinner or something like that after you get your first paycheck. But donít go nuts or pick up any big, new stuff. The more you put toward debt, the faster it goes away.  

Iíve been doing this financial thing for a lot of years, and the one thing Iíve found that gets people out of debt is passion. I want you to be so passionate about getting out of debt that you donít even consider doing anything else until itís all gone. Your thought process needs to be, ďWow, I got a new job making more money. I can get out of debt even quicker!Ē  

Again, Iím okay with you adjusting a bit that first month and having a little fun to celebrate your good fortune. But after that, I want you to turn around and attack the debt with even more intensity than before. Way to go, Mitchell!


Giving a tenant mercy

Dear Dave,

I own a one-bedroom condo that Iím using as a rental property. The current tenantís old agreement is up soon, but she signed a new lease less than a month ago and gave me a deposit, plus the first monthís rent. Just the other day, she called and wants to back out of the agreement. She said she discovered after she signed that her ex is having serious health problems, and she needs to move to help take care of their kids. What do you think I should do?


Dear Flavia,

I own a bunch of rental properties, so I know for a fact that as a landlord you run into all kinds of situations. Some are more genuine than others. I would want some proof as to whatís going on, but on the surface it sounds like sheís got a valid reason for wanting to cancel the agreement.  

Basically, sheís asking for your understanding and mercy. If it were me, and what sheís said turned out to be true, Iíd try to lease the place to someone else as quickly as possible, and Iíd refund her the deposit plus any money it doesnít cost you in the process. In other words, if it took two weeks to find another tenant, then Iíd give back the deposit and two weekís rent. Of course, if sheís in really bad shape-and youíre on solid enough financial ground to withstand the blow-you could let her out of the agreement completely and move on to finding another tenant.     

You donít want to profit from someone whoís genuinely struggling. But you have to look out for yourself and, if possible, try to break even. Regardless, I wouldnít take advantage of anyone whoís truly going through hard times. Thatís just not right.



You don't inherit debt
March 11, 2014

Dear Dave,

My in-laws have lots of debt. In fact, theyíre always joking that the debt theyíll leave us is more than the inheritance. How will this affect my wife and family if they die with all their debt still in place?


Dear Matthew,

You do not inherit debt. Either your in-laws are misinformed, or itís just a bad joke on their part. Now, if you were foolish enough to co-sign on a loan with them, then youíd be liable for the remainder of that loan. But if they ran up $100,000 in credit card debt on their own before they died, then the credit card companies just donít get paid. It wouldnít cost you a dime, except that you might get no inheritance from them, because what they left behind would be sold to pay off as many creditors as possible.

Hereís an even bigger example. Letís say they owned a home, and theyíre behind on the mortgage or upside down on the house - meaning that they owed more on it than itís worth. You can just hand it back to the mortgage company. Youíre not legally or morally obligated to accept the house and the situation surrounding it because it was left to you in a will. Just because itís family doesnít make it jump over onto your plate!

Let me say it again, Matthew. You donít inherit debt. Donít let creditors, or anyone else, tell you differently.


Investing in land

Dear Dave,

What do you think about land as an investment?



Dear Tara,

Iím okay with the idea of raw land as an investment. Someone has to buy the dirt that holds the earth together, right?

The only problem with this kind of investment is that it doesnít really create cash flow, unless itís farmland. In the real estate world, we call raw land an alligator because it eats. You have to pay taxes on it every year, plus you have upkeep and maintenance of some form or fashion, and it doesnít create an income. The only time it creates income is on the back end, when you sell the land.

Itís not a terrible investment, Tara. But itís not a great one, either. I buy pieces of raw land here and there, every once in a while. But mainly I stick with income-producing investment properties.



Saying no to extended warranties

Dear Dave,

I recently traded in my old truck for a much newer one. I purchased an extended warranty at the time, and now I feel like I was pressured into buying it and that it was a mistake. What do you think?


Dear Laura,

Cancel it, if you still can. The reason you felt pressured is because you probably were pressured by a pushy salesman. Seventy-five percent of what you paid for that plan went straight into the dealershipís or salesmanís pocket as commission. Thereís even a chance they made more off the extended warranty than the sale of the truck!

Extended warranties are only about 12 percent actual, statistical risk. The other 12 to 13 percent goes to miscellaneous overhead and profit. On top of that, the company that wrote the warranty probably didnít make as much on it as the dealership did. Itís weird, but thatís how a lot of those models work.

I donít buy extended warranties, Laura. In my mind, theyíre just crap. Besides, if you buy something and canít afford to fix it if something goes wrong, then you couldnít really afford the purchase in the first place!


Gambling entertainment?
March 7, 2013

Dear Dave,

How do you feel about gambling at a casino, as long as you limit your spending and donít expect to win big money?



Dear Brian,

I donít really have a moral problem with it, but I donít understand the concept. Call me crazy, but I do not get a thrill from losing money Iíve worked hard to earn. Thatís not my idea of entertainment.

When someone tells me they gamble for fun or recreation, my first thought is theyíre delusional enough to believe that theyíll actually win - that they think theyíre the exception to the rule. Otherwise, there would be no thrill. You may see a news story once in a while about someone winning big money in a casino, but that rarely happens. Think, too, about how much money those people had flushed down the toilet previously while gambling. Thereís a really good chance they didnít really ďwinĒ anything. In most cases, they probably just recouped a small portion of their previous, substantial losses.

My advice is donít waste your time and money on that stuff. One way or another, the house always wins. Thatís how theyíre able to build those giant, billion dollar places called casinos. Did you know that some of those companies are so big and expansive that theyíre publicly traded entities? And guess what? The profits they make off people who are foolish enough to gamble their money away inside their fancy halls - and call that entertainment - drives their stock prices!

Think about it, Brian. Why do all the folks sitting at slot machines and card tables look like they canít afford to lose money? Most of them look like sad, broken, lonely people. Maybe they change when they sit down. Maybe they were winners in life and with money before they walked through the doors, and their slumped body language and the look of stress and hopelessness they carry is just a coincidence or the indoor lighting. But I donít think so.



Nobody ever saves enough

Dear Dave,

What happens to the money in an ESA if the child gets a scholarship and no longer needs the money?



Dear Jonathan,

In an Educational Savings Account (ESA), and in a 529 Plan, you are allowed to pull out money tax free in the amount of the scholarship. But very rarely do you find someone going to college completely free and clear. Often tuition is covered, and even tuition and a dorm room in some cases, but zero-cost college is almost unheard of. There are always living expenses, books and other miscellaneous items, and you can use the money in an ESA for any education-related expenses.

The chances of your money getting trapped and you as parents winding up in a situation where youíve actually saved too much and a child has leftover money just doesnít happen. This is a bunch of drama found only in the nightmares of nerds. Real human beings donít have this problem, Jonathan, because nobody ever saves enough!


Check cashing for the unbanked

Feb. 25, 2013

Dear Dave,

I know you hate payday loan companies. Do you feel the same way about check-cashing companies?


Dear Brian,

Check-cashing companies are not a good deal, but theyíre nowhere near as bad as payday lenders. All check-cashing businesses do is charge a fee to cash a check.

Honestly, itís kind of silly to me that places like this can make money when all you have to do is walk into a bank and open an account. But thereís a percentage of our population that people in financial circles call ďunbanked.Ē This means they avoid banks for whatever reason, but in the process they leave themselves susceptible to bad deals like this.

So I donít feel the same way about check-cashing companies as I do about payday lenders. Itís still not a financially smart move to pay a storefront operation a fee just to cash a check, but these businesses arenít nearly as abusive as payday lenders.



Letting kids make money mistakes

Dear Dave,

My 6-year old son has saved up $400. He said he wants to buy a motorcycle with it someday, but he recently changed his mind and wants to buy a computer tablet. Is it okay for him to change his mind like this, and how should I handle things?


Dear Christina,

Iím not really concerned whether itís a motorcycle or a tablet, especially if heís saved his own money. I think the big thing weíre looking for in all this is a teachable moment.

Certainly regret is a concern, especially with a kid so young. But the reality is that neither the decision nor the possible regret afterward will ruin his life. If you talk to him and try to advise him beforehand, and he gets upset later because he feels like he made the wrong choice, it gives you the opportunity to step in and gently say, ďIím sorry you think you made a bad choice, but thatís why I wanted you to really think about it first. You had a chance to listen to momís wisdom and didnít. Iím sorry you feel sad now, but I want you to remember it and learn something from this bad decision.Ē Itís a process of controlled pain and natural consequences.

One of my daughters did something similar years ago when we went to an amusement park. All the kids had a set amount of money for the day, and we warned them not to spend it too soon. She turned around and blew all her money on carnival games, then she spent the rest of the day whining while her brother and sister rode the rides and had lots of fun. We didnít give her any more money, but a controlled amount of pain taught her some valuable lessons that day. She learned to listen to her mom and dad, she learned that carnival games are a rip-off, and she learned to control herself a little bit and think things through.

Allowing kids the emotional dignity of making some decisions for themselves is vitally important. You just have to make sure this liberty is supervised and comes with parental warnings and protections. Just because they saved the money doesnít mean they can do whatever they want. It still has to be used in a way that you, as a parent, are comfortable with and deem appropriate.

There will be some natural tension in the process, but itís a great way to teach kids about money, decision making, maturity and life choices!


Budgeting - Invest now or pay off debt?

Feb. 14, 2014

Dear Dave,

I went to medical school, and now I have $70,000 in debt. I just started a three-year residency making about $50,000 a year, while my wife makes $40,000. The student loans represent our only debt. Do you think we should be paying this off or investing in a Roth IRA?



Dear David,

If I were in your shoes, Iíd work on paying down the student loans. That means you may never be in a Roth, but there are other things you can invest in and grow wealth.

I realize this may not seem right mathematically, but I donít always make financial decisions based exclusively on math. Many times I do things based on changing money behaviors - stuff like paying off debts from smallest to largest because it actually works. Personal finance is 80 percent behavior, and only 20 percent head knowledge. So sometimes you have to go with what actually works best overall, in spite of what the technical math shows.

In your case, I think itís going to be very valuable to have no student loans by the time you complete your residency. With three years to go, and living on a $90,000 a year income, you can do it. Then, when you come through the other side as a full-fledged doctor, youíll have the great income and be sitting there debt-free. Not a bad place to be, right?

I understand the Roth seems like a pretty good idea right now, but my advice is to stick with becoming debt-free as quickly as possible. Once thatís done, you and your wife will be able to invest, save, and build wealth like crazy!



Investing -Donít risk the family farm

Dear Dave,

My wife started working at a pharmaceutical company that gave her a few thousand dollarsí worth of stock. In the last year that stock has doubled in value. Weíve considered buying more just to see how it does. What do you think about this?



Dear Robert,

I understand why you guys would be excited, but youíre still looking at a very risky proposition. Any stock that doubles its value in just one year is highly volatile. Itís very unusual when things like that happen, and the fact is, it could go down in value just a quickly.

I think you should be completely debt-free, except for your house, and have an emergency fund of three to six months of expenses in place before you start any outside investing. You should also make sure that 15 percent of your income is already going toward retirement.

I donít mind you dabbling a little bit as long as all the other stuff is taken care of first. But Iíd advise you to never put more than 10 percent of your nest egg into single stocks. If youíve got $50,000 in a 401(k) right now, limit yourself to $5,000 in this area. That way, if the stock tanks and you lose it all, itís only a small blip on the radar. Youíll still be financially intact and able to retire with dignity.

It would be fantastic if this stock went through the roof and you two made a ton of money. That would be awesome! But make sure you limit the potential for damage by limiting your exposure. Donít risk the family farm, as they say, to make this play.


Getting them to stop

Feb. 14, 2014

Dear Dave,

How can I get credit card companies to stop sending us preapproved offers? My wife continues to sign up for these, and now we have $40,000 in credit card debt.


Dear Dan,

Chances are youíll never get credit card companies to stop sending stuff, but there a few things you can do that might help slow things down. Access your credit bureau report, and opt out of marketing offers. You can also freeze your credit report, and send direct requests to the credit card companies to take you off their mailing lists.

Iíve been telling people not to use credit cards for 20 years and, believe it or not, even I get offers in the mail. The more mailing lists you get on, the more your mailbox will fill up with junk mail. If you have magazine subscriptions and things like that, your contact information is circulating all over the place.

The next thing Iím going to say may sound cruel, but I really donít mean it that way. You donít have a junk mail problem, Dan. You have a relationship problem. You two are not on the same page about money. Either she doesnít feel like you two have enough money, and sheís resorting to credit cards for this reason, or she does this because sheís a spoiled brat who thinks she should always have what she wants when she wants it. Her behavior is destroying your financial lives and driving a wedge between you.

My advice would be to sit down and have a gentle, loving talk with her about all this. Try to find out why she feels the need to have all these credit cards, and explain that youíre worried about what itís doing to your marriage and your finances. That may mean having to spend some time with a marriage counselor, but thatís okay, too. Thereís no reason to be ashamed of something like that. The truth is, most of us who have been married more than 20 minutes could use a little help in that area of our lives!



Balance transfers donít do much

Dear Dave,

Iím trying to pay off my credit card and get out of debt. Do you think I should transfer the balance to one with a lower interest rate while I do this?


Dear Kelsey,

Iím not against this idea, as long as you understand that youíre not really accomplishing much. All youíre doing is moving money around, and maybe saving a tiny bit on interest. If you were planning on keeping the debt around for 30 years it would become a big deal. But if youíre talking about a few months, just until you get it paid off, itís not that much money.

The problem with balance transfers is that you feel like you took a big step forward when you really didnít. Lots of times this causes people to lose focus on other things they can do to get out of debt, like picking up an extra job or selling a bunch of crap they donít want or need. That kind of stuff, along with living on rice and beans and a strict written budget, is 98 percent of the battle when it comes to getting out of debt!



Whatís so special about $1 million?
Feb 4, 2014

Dear Dave,

Iíve heard you say many times you shouldnít buy a brand-new car unless you have a net worth of $1 million. Whatís so special about a million dollars?


Dear Angela,

In all honesty, thereís nothing particularly special about a million dollars. A brand-new car will lose about 60 percent of its value in the first four years. So, if youíre going to turn a $30,000 investment into $12,000, youíve got to have a bunch of money. Youíve got to be in pretty great financial shape in order to absorb the blow.

If your entire net worth is $100,000, and you put $30,000 of it into a vehicle that will lose 60 percent of its value, youíre just being financially and mathematically stupid. Your income is your largest and most powerful wealth-building tool. If youíre buying things that go the wrong way in terms of value, youíre not gaining wealth; youíre losing wealth.

Thereís really nothing special about $1 million. I could have said $2 million or $900,000, but $1 million is easy to remember. Plus, itís nothing to sneeze at in terms of an individualís net worth. When you lose a lot, and itís a small percentage of a lot, you donít have to worry so much. But when you lose a lot and you didnít have much to begin with, thatís a recipe for financial disaster!



Do fewer dumb things

Dear Dave,

My parents co-signed on government loans so I could go to college. Would my forbearance or non-payment affect their credit if I donít pay?



Dear Tiffany,

Yes, it would. Iím not trying to lay a guilt trip on you, kiddo, but youíll be trashing your mom and dadís credit if you donít pay the bills on time. If they co-signed for you, theyíll start getting phone calls, too, if you donít do the right thing and pay back these loans.

The truth is, your mom and dad shouldnít have co-signed for you in the first place. Thereís only one reason lenders want a co-signer, and thatís because theyíre afraid the person taking out the loan wonít be able to pay back whatís owed.

My goal here isnít to beat you up, Tiffany. Itís to give you information that you - and your parents - need in order to make different, smarter decisions in the future. We all do dumb things sometimes. In the past, I did some really dumb things with very large numbers attached. The goal is to grow, learn, and try to use what we learn in order to do fewer dumb things in the future.



Where to save?

Dear Dave,

Iím 26, and I just started a new job making $50,000. Iíve also been offered a 401(k) with no match. Should I put money into the 401(k) or open a high-yield CD?


Dear Crystal,

Iíve got another idea. Iíd open a Roth IRA with good growth stock mutual funds inside and fund it up to $5,500 a year. Make sure these mutual funds have been open at least five years  - preferably 10 years or more - and have performed well. Mathematically, this investment, growing tax-free, will be superior to a non-matching 401(k).

Then, if you want to invest more than $5,500, you could put some additional money into the 401(k) offered by your company. Again, make sure youíre invested in good growth stock mutual funds with long, successful track records.

Congratulations, Crystal. And good luck!