QUESTION: Erik in Colorado Springs just got married. He and his wife are attacking their debts, and they have $36,000 in debt. They make $90,000 a year. Most of it is medical bills, and they have a $5,000 student loan. The medical bills are accruing interest. Should they still pay those last?
ANSWER: It doesn’t really matter because you’re going to be done with this in a year. The number of dollars of interest we’re talking about is going to be very small.
Think about this: If it were 10% interest, and this is nowhere near that high, on a $36,000 debt would be $3,600. Given the year-long timeline you’re talking about, the interest on the whole deal is only about $900 or less. Changing it around might make a $100 difference, but not much difference.
The big deal here is your attitude. You’ve decided that you’re done with this and you’re cleaning this mess up. You’re getting in attack mode. That is your secret sauce, man. You’re in good shape and you’re heading the right way.
If you have a medical bill that you can knock out and it will keep you out of court, that’d be a good thing to do. That’s a different matter than the interest. If they went to court and you’re already set up on a payment plan, then I wouldn’t worry about it. I’d treat it just like it’s a payment plan and work your debt snowball straight down.
But if you can knock some $1,000 or $2,000 bill out and stay out of a garnishment or court, I would break the rule for that. But if it’s just based on interest, I wouldn’t break the rule.
QUESTION: Rachel on Facebook asks how to determine expenses in order to save for the emergency fund.
ANSWER: No, I think it’s what it takes—your basics—to run your life. You wouldn’t have a Caribbean vacation figured into your expenses for emergency purposes, but you would want to maintain your life.
The whole idea here is to have a rainy day fund. What does it take to operate your household right now in a given month? And if you were out of a job or something bad happened, what would it take to operate your household? It’s more than just the Four Walls. You wouldn’t want to take it all the way down to just base necessities, but it doesn’t have a bunch of luxuries in it either, so somewhere in between those. It’s just kind of a medium ground and then that times three months or up to six months of those expenses.
QUESTION: Chad on Twitter asks if you can have more than one life insurance policy. Is there ever a reason to do this?
ANSWER: Sure. You can have more than one. There are several reasons you might do this. One is that—like in my case—I have a lot of insurance regarding our business, our estate plan, and those kinds of things, and I’ve reached the limits, in some cases, that a company will write on me. They won’t write but so many millions on one person from one company, so I go to another company to do that, so that’s one reason to do it.
Another reason people do it is so that they feel more secure that if the one policy that they have goes bad—if that company goes bad—then they’ve still got the other policies in place. That’s not a real good reason because most of the companies you’re going to buy from now are financially stable and/or have insurance to back them up with the state and that kind of thing, so that’s usually not the issue.
The only problem with it is it just creates more complication for your life in that you’ve got two checks to write for the same amount of insurance rather than one check, and you do pick up … each life insurance policy has a policy fee—an annual policy fee—plus so much per thousand. Generally speaking, all things being equal, it’ll be cheaper to have one policy that totals your $600,000 or $1 million or whatever coverage you’ve got versus three that do that because those annual policy fees will get you.
Most people don’t have more than one because it does cost you a little bit more in most cases, and it’s a little bit more complicated to keep up with. But there’s no prohibition with it—nothing keeping you from doing that.
QUESTION: Erin in Baltimore says her husband is leaving his full-time job in a year so that he can attend school full time. They will go from an income of $90,000 a year to $40,000 a year. Once they complete Baby Step 3, should they move to Baby Step 4 or continue saving?
ANSWER: You need to save like crazy to be able to pay for school. You say that you have tuition assistance from your work and he has a veteran’s stipend. That’s great! If you guys will save like crazy to cover the deficit, that will work. You’ll have some out-of-pocket expenses that those things won’t cover. You have to get ready.
Let me tell you what you’re doing. You are in Baby Step 4 but you’re not investing in retirement directly. You are investing in your husband. That’s a great investment, by the way, provided he’s studying something that has marketplace application. I don’t want him getting a PhD in German polka history. Let’s have a job where we can get that money back.
As long as he’s doing that, this is a great investment and a great plan. So build your emergency fund and just keep piling up money to make sure he gets through school.