QUESTION: Stephanie from Dallas, Texas, talks to Dave about their mortgage situation, student loan debt and investing. She and her husband paid cash for a house, and she thinks they’re out of the Baby Steps. Dave corrects her on this and advises that they use their $100,000-plus income to go back and knock out $50,000 in student loan debt as quickly as possible.
ANSWER: No, you’re not out of the Baby Steps. You just got Baby Step 6, which is pay off your mortgage, done ahead of time.
I would go back to Baby Step 2, which involves paying off all your debt except for your house, and pay off the student loan debt. But don’t start investing until you’ve finished paying off that loan.
The good news is you won’t have to fight through a house payment while you’re doing this. So, just attack the debt. You’ll be done with it in no time. After that, move on to Baby Steps 3 and 4 — an emergency fund of three to six months of expenses then start investing for retirement.
You’re in good shape. You’ll be rocking!
QUESTION: Steve and his wife are debt-free except for their home, and they’re currently putting money aside for a fully funded emergency fund of three to six months of expenses. They have their emergency fund account in the same bank as their checking and savings accounts. Steve asks Dave if that’s okay, or if they should move it to a different bank.
ANSWER: No, that’s okay. I wouldn’t worry too much about it. If you had two or three million in that bank, then I’d start to worry.
The only exception to that would be if you have loans that you owe to that particular bank. Then, I would probably move my emergency fund out of there just in case something went wrong with the loans. Almost all commercial loan documents now give the bank the right to take money out of your account to pay the loan — without your permission. If you had a car loan, for instance, with that particular bank, I wouldn’t keep a bunch of money in that bank.
They normally don’t do that unless you’re behind on the bill — way behind on the bill — and then it gets pretty adversarial. Sometimes there can be things like a simple clerical error, and there’s no chance of that happening if the money’s in another bank. But in your situation, I don’t see any harm in you being there.
QUESTION: Becky from Vicksburg, MS, has been following Dave’s plan. She has her emergency fund in place and is investing in mutual funds, but a financial planner has recommended bonds to her. She asks Dave for his opinion. As you will hear, he is not a fan.
ANSWER: I’m not a fan of bonds, and I don’t own any. The bond market is almost as volatile as the stock market, and it doesn’t pay nearly as much on average. On top of that, bond prices work at an inverse of interest rates. In other words, as interest rates rise, bond prices go down.
Long-term interest rates right now are extremely low, and bonds are how mortgages are funded. You know how cheap mortgages are? If you were to buy a bunch of Fannie Mae bonds, as an example right now, and interest rates went up one percent, you’d lose your shirt!
If I were ever going to buy bonds, it would not be now — because of low interest rates. I’m not a fan of bonds in general, but I’m really not a fan of them right now. It doesn’t take much of a move in interest rates for bond prices to go down dramatically. It’s a serious, serious problem for the bond market right now.
I don’t recommend that at all right now. I recommend mutual funds and good growth stock mutual funds. There are always some bonds mixed in with a growth and income fund, and I’m not opposed to that to some degree, but it’s not my favorite. The bond market is really dangerous right now.
QUESTION: Kevin in Midland, Texas, just became debt-free. He is currently a renter. He calls in to ask Dave if he should get a mortgage and go back into debt or save up and pay cash for a house. Kevin is 28, makes around $75,000 a year, and is single. He’d like to keep the price of a new home around $200,000, and he thinks he can save $15,000 a year. Dave believes he can do better and get into a new home in 10 years.
ANSWER: Since you’re going to be debt-free, let’s round that figure up to $20,000 a year. If you’re saving $20,000 annually, that sounds like 10 years to a nice, new home — and you’re still debt-free.
That’s one way to do it. But I don’t borrow money, Kevin. And I don’t tell people to do things I won’t do. The one exception to that is that I don’t yell at people for taking out a 15-year, fixed-rate mortgage, where the payments are no more than 25 percent of your monthly take home pay. You could save for one or two years and put down a really strong down payment on a home in the price range you’re talking about.
Then you could pay that house off in 15 years maximum, but you might pay it off even sooner. That’s probably what you’re going to do.