QUESTION: Justin and his wife have completed the first two Baby Steps, and now they’re building a fully funded emergency fund in Baby Step 3. They would like to move out of their current home, so Justin asks Dave if selling the house is a viable option for funding the third Baby Step. They currently have about $32,000 equity in their present home.
ANSWER: Well, I wouldn’t sell the house just to do Baby Step 3. My goodness, that’s usually a fairly easy Baby Step after you’ve gotten out of debt. A fully funded emergency fund means saving three to six months of expenses, and you shouldn’t have to sell a house to pull that off.
But if you don’t like the house anyway, and you’re planning on selling it, then yes, set some of the equity aside. I would not put all of the equity into the next deal. I’d hold back my three to six months, so that when you move into another house you’re debt-free with a fully funded emergency fund sitting there.
There’s nothing to keep you from selling it today. So if that’s what you decide to do, just set back enough so that you still have an emergency fund in place and use the remainder for your down payment. If that equation works for you, then sell the house. If not, you may need to completely save up your emergency fund before you sell the house in order to make it work.
When you move, I want you to have an emergency fund and be debt-free in addition to your down payment. That’s what we’re after.
QUESTION: Michelle and her husband are on Baby Step 2 of Dave’s plan, and recently they had to rent a car at a combined Thrifty and Dollar rental desk while on a trip to Florida. They tried to pay for the rental with a debit card, and the attendant told them he would have to pull their credit report if they used a debit card instead of a credit card. In the process, he mentioned a concern about people stealing the cars and closing their checking accounts. He tried to ease their minds by saying that all rental companies operate this way. Dave sets the record straight and explains that he always uses a debit card for car rentals.
ANSWER: That’s a bunch of crap. That’s just a particular company that didn’t offer the service. There’s a really easy way to alleviate that kind of stress – just walk to a different rental desk.
It’s not true that all the big companies operate that way. I have a debit card I use to rent cars everywhere I go. I have no trouble doing things that way. Now, there may be some companies that don’t take them. But him telling you it’s the only way to rent a car without a big hassle is a bunch of crap. Lots of rental companies take debit cards without all that.
When you’re setting up your reservation, you need to have cleared that to make sure that company you’re dealing with takes debit cards. But almost all of them do. I wasn’t aware Dollar didn’t. Thrifty, maybe that’s who it is. They may not. Enterprise is sporadic; sometimes they do and sometimes they don’t. So check before you go. There are plenty of people who rent to folks with a debit card.
QUESTION: Joan from San Antonio, Texas, is worried that she may have too much money invested in certificates of deposit (CDs). She is a recent widow, and her husband handled all the finances, but he left her in great shape. Her total nest egg is more than $1 million, with about $300,000 of that in CDs. A $317,000 annuity, a 403(b) and IRAs worth about $900,000 round out the investments. She also has two homes that are paid for, plus a brand-new, paid-for car. Joan asks Dave and his guest, Chris Hogan, for guidance going forward.
ANSWER: You and your husband did a very good job. You’re worth well over $1 million. Congratulations, you’re a millionaire. You’re set, but you’re wise to be careful. The CDs do give you some stability, but obviously they’re not earning anything. If you’ve had good luck with a variable annuity, that’s fine. But you’ve also had very good luck with your mutual fund investing. Chris, what do you see?
Chris Hogan: Joan, I think you and your husband have done a great job setting you up for your future. The position you’re in financially, with a paid-off home, a paid-off vacation home, and a paid-for car, you are focused. You are allergic to debt, and I want you to keep doing that. With all this money in different areas, you’re diversified. It’s now a matter of you wrapping your arms around it and truly understanding what will work for you going forward. The CDs are not going to offer you any great growth. I kind of allude to them as money kicked up in a hammock. It’s not working for you. You all worked hard for that money, so I’d like to see that money now working hard for you.
I would encourage you to reach out to one of our Endorsed Local Providers (ELPs). We have them in the San Antonio area, and you can have a great conversation, feel comfortable, and not feel like someone’s trying to sell you some stuff.
Dave: The big thing is that you’re trying to understand this. You need someone in your corner who’s teaching you, not selling you. If you get a weird feeling like there’s a little bit of slime in the room or you feel like your arm’s being twisted, get out of that room. You need to learn, and your job — every time you see your investment person — is to leave that room a little bit smarter.
Chris Hogan: What I would tell Joan, too, is that you guys have done well, you’ve worked hard, and you need to be focusing on what’s next for you. What are you going to do, and what are you going to do to enjoy this money? I can hear that angst in your voice — that being unsure of what to do next. An ELP can help that.
QUESTION: Brandon and his wife are 31 years old. They have no debt except for their house, and they also have an emergency fund and college savings in place. They’re motivated to save for retirement, so they’re also investing 15% of their income. They make around $100,000 annually and have $50,000 in their nest egg. Now, they’ve saved $22,000 for a newer car. Brandon wonders if they should spend the entire $22,000 on a car.
ANSWER: At 31 years old, you’re going to be more than fine for retirement if you keep doing what you’re doing. A $22,000 car is not unreasonable. You have your emergency fund in addition to your nest egg and car savings, so I’d buy the car.
You’re doing all the right stuff. Your kids are going to school debt-free, and you’re going to have the house paid off in no time. Chances are you’re going to retire a multi-millionaire at the rate you’re going if nothing changes. If things get better, and most people’s incomes go up throughout their lives as a general trend, then you’re going to make and invest even more money. You could have $5 million to $10 million, dude. You’re going to be in great shape!