QUESTION: Tiffany follows Dave on Twitter. She writes in to ask what Dave did to celebrate when he became debt-free.
ANSWER: Well, we didn’t. We didn’t know to do anything, and nobody said it was a big deal. We just knew that our debt was so huge and we had gone bankrupt — and a lot of it was the IRS and stuff like that — so it was kind of weird. We should have stopped and celebrated, but we didn’t.
The truth is we didn’t really have a good debt-free scream. We didn’t have a debt-free scream at all. We didn’t even know you were supposed to do a debt-free scream. I invented that later!
QUESTION: Chandler is 19, and he’s putting himself through college debt-free. He usually works part time during school, but right now he’s working full time. Chandler asks Dave and his guest Chris Brown, the host of Chris Brown’s True Stewardship, what he should do with the extra money he’s making from full-time employment. He has about $2,000 in mutual funds at the moment, and he’s wondering if he should add on to that or simply pile up the cash to help pay for school.
ANSWER: I’m going to invest in Chandler. That is, make sure you graduate from college first and foremost, and that you do that debt-free. So I’m piling it up. What do you think, Chris?
Chris: Yeah, during this season of your life, you want to keep that money liquid. Keep it available and on hand. Don’t tie up that money right now, because you’ve got too many things that are up in the air.
Dave: It’s best to get you graduated and landed into the new job and new place you’re going to be living in, wherever that is. If it’s the same place, that’s fine. But all of that takes money, so let’s make sure that happens. You are a better investment that mutual funds are. I know you are, as long as you go do something with the education and you get an education in something that’s useable.
Hey, good job, man! Thanks for the call.
QUESTION: Ryan follows Dave on Twitter. He asks how to determine how much house you can afford based on your annual income. Dave explains his formula and the reasons behind it.
ANSWER: We tell folks never to take out a loan where the payment is more than one fourth of your take home pay on a 15-year, fixed rate mortgage. That’s the most you should ever buy. That’s a pretty conservative number, because you actually, technically qualify for almost twice that.
But a fourth of your take home pay on a 15-year, fixed rate mortgage is what we recommend, Ryan. The idea is to get the house paid off as soon as possible, because being debt-free is your shortest path to wealth. When you don’t have any payments it’s easy to build wealth and increase your generosity.
QUESTION: Justin is in the military. He and his wife are debt-free and have $19,000 in their emergency fund. He’s currently in a Tuition Assistance (TA) graduate school program, so the Army is paying for everything and he gets active duty pay throughout. Justin and his wife are toying with the idea of taking out a $20,000 student loan and putting it into a savings account. When he graduates from the program, the Army would pay back the loan in two to four years. You already know Dave’s answer, don’t you?
ANSWER: No, thank you. No, no, no, no! Here’s the thing: That only works if it works. But if life happens, and things don’t play our exactly like you think they’re going to, you’ve got a mess on your hands.
I know you’re talking about sticking the money in a savings account and not touching it until it’s actually paid off, but what happens if someone gets really sick and you have to use the money for that? I’ve heard every story you could possibly hear about the whacky things that go wrong in people’s lives. Suddenly, their plan that was put together in a moment of sanity goes insane. Life happens, and it’s just not worth it. You’re walking out there on thin ice, praying it doesn’t crack. Don’t do it, man. You’re doing so good. Just stay right where you are; stay right on track. Don’t play games with stuff like that. It’s a real good way to get your tail in trouble. Please, please don’t do it!