QUESTION: Miranda on Facebook asks how to sell a vehicle with a lien amount higher than the value.
ANSWER: You have to cover the difference, and there are two ways to cover the difference—well, three. One is you have the money.
Let’s use an example. The car is worth $15,000. You owe $18,000, so that would leave you $3,000 in the hole—upside down by $3,000. How do you get out of that car? The bank holds the title, and until you give the bank the payoff amount of $18,000, you’re not getting the title. If I come along and buy the car for $15,000, you’ve got to have the other $3,000 covered to be able to send it to the bank. I’m going to give you $15,000. You can send that to the bank, but I’m not going to be able to get my title then, so you’ve got to have the other $3,000.
The other $3,000 can come out of your pocket if you’ve got the other $3,000. You could borrow the other $3,000 from your local bank or credit union, or if your car is financed with a local bank or credit union, you could talk them into letting you sign a note for the other $3,000 and work your way through that then as payments there. But one of those three ways, you have to cover that deficit amount or that upside down amount of $3,000 in our example. Then the buyer gives you the other. You send the sets of money over to the bank, which includes the total payoff, and they send you the title and you sign it over to your buyer. That’s how it works.
QUESTION: Mitchell in Chicago is about to start a new job with a $20,000 income increase. He needs to adjust his budget. What would Dave suggest for this new income?
ANSWER: You can do whatever you want. The more you put toward the debt, the faster the debt goes away. It’s a pretty simple formula.
Maybe you snatch enough out of that first check to have a celebration dinner, and then you go back to getting the debt knocked off. A permanent adjustment to luxury while we’re in debt? No. We’re getting out of debt.
You do whatever you want, but that’s what I teach. The thing that I have found that gets people out of debt is when they get passionate about getting out of debt—so passionate that they don’t even consider doing anything else except getting out of debt. It’s like, “Woohoo! Got a better job. Boom! I’m going to knock the debt out faster.”
If you want to adjust it a little for one month or something and give yourself a little bit of a high five, that’s fun, but I wouldn’t go too crazy. Let’s turn around and knock the debt out. The idea is we’ve got $65,000 hanging over our head. We want that thing gone. The more you focus on it, the faster it’s gone. It’s a pretty simple formula.
QUESTION: Michelle in California and her husband are newly married and currently renting. They are paying $1,200 a month. What range of houses should they look at with an income of $7,000 a month?
ANSWER: You need to clean up the debt, and you need to build an emergency fund of three to six months of expenses. Then you need to save a down payment. Then what we recommend is that you buy a home where the payment is no more than a fourth of your take-home pay on a 15-year, fixed-rate mortgage. At 3.5% on a 15-year fixed right now, that would be about $250,000 for you, because a fourth of your take-home pay is about $1,750, and I ran the numbers while we were talking. But you’ve got to get the other stuff cleaned up before that makes sense.
You need to look around and say, “What is more important to me—horses and boats or home ownership? I’d never get rid of that horse, but I’d part with that one.” That brings some money in towards the debt and it cuts down the stable bill. “I’d love to have a boat, but it’s not nearly as important as being debt-free and owning our own home someday soon.” Those kinds of things.
I don’t know, but that’s kind of how we would look at it, and I’ve got to tell you we’re fans of both—horses and boats. Bigger fans of boats. They don’t eat as much. I’m not mad about either one, but you’ve got three things there pulling at you as a priority: home ownership, horse ownership and boat ownership. And they’re pulling at each other. They’re limiting each other—your enjoyment of any of them or getting there—so you really need to say, “I’m willing to wait a little while longer so I can keep the boat.”
QUESTION: Candace in Minnesota just had twin boys five months ago and is wondering what the best option is for building up savings for them once the family’s debt snowball is finished. Dave walks her up the Baby Steps before giving some thoughts about how to accomplish her goal.
ANSWER: The first thing you do when you finish getting out of debt is you build a household emergency fund—a rainy day fund—of three to six months of expenses. Then you start saving 15% of your income in Baby Step 4 into retirement. Then you start saving for kids’ college as Baby Step 5.
You can open a mutual fund in a kid’s name with you as the custodian, and it will be taxed at their rate. Until it makes a lot of money someday—until it starts making some serious bucks—it’s not going to have any taxes. It’ll grow without any taxes because when you don’t make any money, you don’t get taxed. For a long time, depending on how much you want to put in there, you can do that in the kid’s name. That’s called UTMA (Uniform Transfer to Minors Act).
What we chose to do with our kids was we decided that—with rare exceptions where someone had just an unusual skill or an unusual aptitude—that they were going to go to college. We pretty much said that, and we just said, “All right, we’re going to start saving for college,” and then we talked to them from the time they were little as they were getting older and said, “This is your college fund. This is your college fund,” which kind of assumes you need to go to college, which really means you need to get your grades up so you can get into a college. You need to be thinking about college. We just kind of put college out there like it was just a normal process, and pretty much anybody who wants to win needs education. And we told them that. We just laid it out there.
Had one of them gotten there and been an artist or been something else and chosen not to go, then I guess we could have done something else. But we just said, “Hey, having a four-year degree under your belt is a really, really smart way to start your life, especially if it’s a four-year degree that has actually some application in the marketplace.” Does that mean that you have to go to college to win? No, but education—knowledge—is valuable in the marketplace. We brainwashed our kids. We just kind of made it like you brush your teeth, like you put on your pants when you go outside. You’ve got a college fund. It’s just normal. You’re just going to go to college.
I think it probably leaned into this idea. We didn’t really have this big philosophical discussion with a 6-year-old as to whether or not college was in their future or not. We just saved for it and said, “You’re going. Just gotta make that happen.”
You can do whatever you want to do, but that’s how we approached it with ours when they were your kids’ age.