QUESTION: Donna makes $38,000 to $40,000 a year working in the trade show industry, and she’s about to start Baby Step 3, which is saving three to six months of expenses for her fully funded emergency fund. It took her 14 months to pay off $8,000 in consumer debt, and she asks Dave how long it should take to complete her emergency fund, how to stay motivated, and how to handle her retirement worries.
ANSWER: Six months to a year at most. Your take-home pay should be about $3,000 a month, so three to six months of expenses will probably be in the neighborhood of $8,000 to $10,000. If it took you about a year to pay off that much in debt, then it should take about a year to accomplish this.
Here’s the problem. If you start building retirement right now and have an emergency, you know what you’ll use? You’ll use your retirement. That’s why the emergency fund comes before retirement in the Baby Steps. But you’re only 52. You’re a spring chicken! I’m 55, so we’re going to make it, kiddo.
The average household income, which is often two incomes, is $52,000. So at $38,000 you’re on the lower end of the spectrum, even as a single. One thing I would challenge you to do is to think about and work toward what you could be doing at age 60 that will make you $80,000 a year. Instead of looking at this like you’re already old and you’re just going to kind of slide into home plate, let’s go ahead and say it: the number-one decade of income earning for Americans is their fifties. The reason is that you finally get enough wisdom and life experience, and it finally starts to come together within a career. They slow down, typically, in their sixties, and in their forties they haven’t quite hit the top yet.
In your case, you’re probably working really hard for that $38,000. In your fifties, if you’re starting over — or if you start making a lot more — we call that an “encore career.” That’s what I want you to do. I want you to start thinking fresh again, and stop telling yourself that you’re old. You’re really not. I’m not saying you quit today, but I am saying you’re going to be making $38,000 eight years from now unless you start aiming at something else.
My point about all of that, mathematically, is that’s as much an answer to your retirement fears as trying to leapfrog over and start doing retirement without an emergency fund in place. So put your emergency fund in place over the next 12 months, and start doing some goal setting and reading and thinking about what you want to be doing. Maybe you want to own a trade show company by that time. I don’t know. Bu think about what you want to do and what it is that has brought you to this point.
I’m going to send you a copy of a book we sell a lot of called Start. I want you to treat your emotions and your mind like you’re 19 or 20 years old, and you’re just coming out of high school or college again. Ask yourself, “What would I do if I could do anything?”
Because you know what? You can do anything!
QUESTION: Josiah asks Dave at what point “outrageous generosity” becomes foolish overspending. Dave gives his thoughts and lays out some biblical criteria in the process.
ANSWER: Well, to start with, your first mandate is to take care of your own household. The Bible says if you don’t take care of your own household, you’re worse than an unbeliever. So you start with your house. Are you able to take care of the basic needs and basic lifestyle of your family? If your outrageous generosity has interrupted the food on your own children’s table, then that would be foolish. And it’s not “overspending,” it’s foolish “overgiving” if you went to that point.
In the house of the wise, the Bible says, are stores of choice food and oil, but a foolish man devours all he has. So you need to be saving money to be called wise biblically. If you spend everything you make, or for that matter if you gave away everything you make on an ongoing basis, it would be foolish. Now, there are individual times where different people may be called to do that — and I don’t doubt it — but I’m talking about as a pattern of living or a way of life over an extended period of time. If you just say you’re going to give away your whole income and let the government support you, well that’s not biblical. That’s not how you live your life; it’s just silliness.
So, if it’s interrupting reasonable living for you or your family — and you’re not able to save or invest — then your generosity, as a pattern, has gotten too deep. But very few people struggle with overgiving, Josiah. Almost no one struggles with that in our culture. I run into people occasionally who give the wrong amounts at the wrong time or to the wrong things, or sometimes they even get caught up in toxic reasons for giving. But I don’t find many people who just straight up suffer from overgiving. I would say less than one percent of the people I’ve worked with have financial issues from that. It just doesn’t happen.
QUESTION: Neal and his wife are trying to decide how much of their savings to put toward paying off debt. They have $49,000 set aside in what he calls the family savings account. They also have $30,000 saved for their kids, who are 12 and 15, outside of their 529 for future expenses such as cars and extra college needs. Their debt totals nearly $60,000, and they have a household income of $95,000 a year. Dave has a tough, but solid, answer for him.
ANSWER: Well, what we teach is that Baby Step 1 is to save up $1,000. Baby Step 2 is to pay off all debts except for your home. The third Baby Step is to fully fund an emergency fund of three to six months of expenses. Baby Step 4 is starting to save for other things, so you’ve done this out of order in that sense.
Were you to start our classes and do the things we teach — be on a written budget, carefully managing your money and making it behave, cutting up your credit cards and all that stuff — we would take everything out of your family savings except for $1,000 to throw at this debt. It almost makes you pass out when I say that, but then you’re going to be on a tight budget and finish off this little bit of leftover debt really fast. Then, you’re going to build up your emergency fund.
I would never have a family slush fund. All investments and all savings should be done with some kind of goal in mind. I don’t care what you’re saving for, but slush money without a name on it ends up getting wasted. So you need to say we’re saving for a car, we’re saving for a vacation, or we’re saving for Christmas. But keep it separated so that the couch money doesn’t get confused with the bass boat money. And you certainly never confuse any of that with your emergency fund; that three to six months of expenses is your foundation.
So, all of that to say, I’d put $49,000 on your debt today. I’d seriously consider, too, using some of that kid money to pay off your debt completely. Then I’d build the emergency fund to three to six months of expenses. If you wanted to replenish a little of the kid money later, you could. That’s what I would do if I woke up in your shoes. I’d be debt-free by the end of the day!