QUESTION: Meghan’s husband is a recovering drug addict. He’s been clean from heroin for two years, but she feels they still shouldn’t keep cash in the house even though he needs some from time to time. Her husband agrees with their precautions, and Meghan says they’re also trying to get on a budget at the same time. Dave walks her through a difficult situation and offers Meghan suggestions for helping her husband, their marriage and their finances.
ANSWER: He’s been clean two years? Congratulations, that’s wonderful! The longer he has been clean, the more he’ll normalize his mechanical activities with things like money. I’m with you on the thought that you’re not going to put him in control of sums of money. But you can’t have cash in your house when he’s been clean for two years? I don’t agree with that.
We work with addicts all the time. I mean, I don’t want large sums of cash lying around that he can get his hands on, but there’s no reason that you can’t run the envelope system out of your purse. If you can’t trust him to stay out of your purse, then you’ve got issues other than cash. The cash envelope system works. He doesn’t need a debit card, just give him the amount of cash he needs weekly or daily — whatever you’re comfortable with. I think you need to be on a debit card and the envelope system for the things you’re controlling, which is probably 95 to 98 percent of the money in the house.
For what he’s doing, I’d do daily cash allowances expanding to weekly cash allowances when you’re comfortable with it, and ask for some accountability from him as to where the money went. Ask him to keep receipts and turn them in as if he were working for a company and taking a petty cash withdrawal. That holds him accountable for spending it on what he said he was spending it on, and that’s healthy for someone who’s a recovering addict. You need to put some checks and balances in. And you might be able to evolve into a separate checking account just for his weekly expenses, and he could have a debit card on that. Just make it a very small amount of money in that account. Then, you’ll know exactly where the money goes because you’d have the debit card receipts showing up on the account. You can even watch it online or have them email you every time there’s a transaction. That’s very accountable.
But I think a combination of being wise and having checks and balances, not putting big piles of cash right under his nose, will work. But if he’s at the point where he’s going to steal cash out of your purse, we’ve still got addictive issues. And I don’t even care whether or not he’s on the household account right now. When someone’s fresh recovering from being an addict, and especially because heroin is so addicting, I probably wouldn’t let him legally have access to the household account for a long time. Now, he can look at it and you two can make good husband and wife decisions together, but you are in control of it. I wouldn’t want it where he can just reach over and clean out the account if he has a relapse.
As you can tell from the way we’re discussing this, we work with a lot of addicts. There are very few addicts who aren’t broke. Eventually, they destroy everything in their wake if they don’t lose that addiction. Obviously, this guy has gotten some healing and I’m very proud of you both. Heroin is a big deal, and this guy is a hero. I give him props, you know? That’s a hard one to bust. The fact that he has done it this long is awesome!
QUESTION: Adam is going through a divorce that’s about to become final in two weeks. He moved in with his parents temporarily, while he saves up money to get his own place and start over. Adam makes $30,000 a year, and it looks like he’ll have around $43,000 in debt when the divorce is finalized. He asks Dave and Rachel Cruze, Dave’s daughter, if he should pause his debt snowball in order to financially get back on his feet again.
ANSWER: Yeah. You’ll just need to rent the cheapest place you can as soon as possible. And you’re going to have to push pause just to get that place. Then, once you get in there and get your life on operational mode again, so to speak, financially — I know your heart is still hurting and you’ve got all the emotional and spiritual things to deal with, but financially once you’re in an apartment — you’re ready to rock on. What do you think, Rachel?
Rachel: That’s exactly what I thought. There are reasons to pause the debt snowball, and one of those is going through a divorce. Not only are there expenses, but you may have payments you don’t even expect. I think the motivation, the heart behind the debt snowball is that you gain momentum and traction, and you do it quickly when you’re in a position emotionally. You may not have that right now, so I think pressing pause and building up for expenses that may come — plus getting your own place — is great. I think it’s important for people to know that there are reasons to pause the debt snowball.
Dave: And that’s pause, not stop. It’s a different button. Don’t push stop, push pause.
QUESTION: Ashley from Memphis makes about $73,000, and she has reached the cap for paid time off accrual at the company she’s been with for over a decade. She’s also about to begin Baby Step 6 and pay off her home as quickly as possible. She asks Dave and his guest Chris Brown if there’s a reason she should not sell back to her company some of her 10 weeks of paid time off, two weeks at a time, to get traction on paying off the house. Dave learns she’ll get 100 percent on the PTO, and, as a result, the company will suspend accrual of PTO for six weeks regardless. Dave and Chris tell her to go for it.
ANSWER: I’d probably do four weeks at a time. If I understand you correctly, if you don’t do this you’re not going to get PTO for the next six weeks, and if you do it you’re not going to get PTO for the next six weeks. I don’t really hear a downside. Even if it happened to throw you into another tax bracket I wouldn’t really care, because none of the tax brackets are 100 percent. It’s your current tax bracket. Chris, what do you think?
Chris: I think it’s a no-brainer. If someone were to come up to you and say they wanted to give you three percent on that 10 weeks, you’d say yes, right? Well, when you apply it to your mortgage that’s what you’re doing. You’re going to get three percent on that money instead of it just sitting there.
Dave: I’d do it in a little bigger chunks, just because you’re going to start the six-week accrual over every time you do it. So, I’d go ahead and do four and that way it takes a little longer before you have to take a six-week hit.
QUESTION: Jay on Twitter asks what is the best formula to use in determining at what amount to set his homeowners insurance deductible. Dave explains that it begins with a break-even analysis.
ANSWER: You do a break-even analysis. The way you do that is take a current deductible that you have, and let’s say you have a $250 deductible. Your premium is “X,” so you ask them what is the premium at a $500 or $1,000 deductible. Let’s say your premium is $500 a year cheaper with a $1,000 deductible. Well, you’re taking $750 more risk but you’re saving $500 a year. How often do you have a homeowners claim? If you have one once a year, you’re probably going to have a different homeowners policy.
So, you’re going to make that money back in the second year even if you had a claim and every year thereafter put $500 in your pocket. That makes sense. But let’s say you went from $250 to $1,000 and your savings was $75 a year. Well, that means you have to go 10 years, 750 divided by 75, you’d have to go 10 years without an event. That’s not likely to happen. At that point, you go ahead and keep the $250 because it’s a good buy.
Most of the time the deductible gives you a break even — the extra risk you’re taking of a higher deductible breaks even with your savings —somewhere in the two to three year mark most of them time, unless you’re just accident prone and you’re constantly having something happen. But that’s how you do it, though. You do a break-even analysis on the extra risk you’re taking.