Wednesday, September 17, 2014




Ask Dave: What's so special about $1 million?

By By Dave Ramsey
March 8, 2014 at midnight
Updated March 7, 2014 at 9:08 p.m.


Dear Dave: I've heard you say many times you shouldn't buy a brand-new car unless you have a net worth of $1 million. What's so special about a million dollars? - Angela

Dear Angela: In all honesty, there's nothing particularly special about $1 million. A brand-new car will lose about 60 percent of its value in the first four years.

So, if you're going to turn a $30,000 investment into $12,000, you've got to have a bunch of money. You've got to be in pretty great financial shape in order to absorb the blow.

If your entire net worth is $100,000, and you put $30,000 of it into a vehicle that will lose 60 percent of its value, you're just being financially and mathematically stupid. Your income is your largest and most powerful wealth-building tool. If you're buying things that go the wrong way in terms of value, you're not gaining wealth; you're losing wealth.

There's really nothing special about $1 million. I could have said $2 million or $900,000, but $1 million is easy to remember. Plus, it's nothing to sneeze at in terms of an individual's net worth.

When you lose a lot, and it's a small percentage of a lot, you don't have to worry so much. But when you lose a lot, and you didn't have much to begin with, that's a recipe for financial disaster.

Dear Dave: My parents cosigned on government loans so I could go to college. Would my forbearance or nonpayment affect their credit if I don't pay? - Tiffany

Dear Tiffany: Yes, it would. I'm not trying to lay a guilt trip on you, kiddo, but you'll be trashing your mom and dad's credit if you don't pay the bills on time. If they cosigned for you, they'll start getting phone calls, too, if you don't do the right thing and pay back these loans.

The truth is, your mom and dad shouldn't have cosigned for you in the first place. There's only one reason lenders want a co-signer, and that's because they're afraid the person taking out the loan won't be able to pay back what's owed.

My goal here isn't to beat you up, Tiffany. It's to give you information that you - and your parents - need in order to make different, smarter decisions in the future.

We all do dumb things sometimes. In the past, I did some really dumb things with very large numbers attached. The goal is to grow, learn and try to use what we learn in order to do fewer dumb things in the future.

Dear Dave: I'm 26, and I just started a new job making $50,000. I've also been offered a 401(k) with no match. Should I put money into the 401(k) or open a high-yield CD? - Crystal

Dear Crystal: I've got another idea. I'd open a Roth IRA with good growth stock mutual funds inside and fund it up to $5,500 a year. Make sure these mutual funds have been open at least five years - preferably 10 years or more - and have performed well. Mathematically, this investment, growing tax-free, will be superior to a non-matching 401(k).

Then, if you want to invest more than $5,500, you could put some additional money into the 401(k) offered by your company. Again, make sure you're invested in good growth stock mutual funds with long, successful track records.

Congratulations, Crystal, and good luck.

Dear Dave: How can I get credit card companies to stop sending us pre-approved offers? My wife continues to sign up for these, and now, we have $40,000 in credit card debt. - Dan

Dear Dan: Chances are you'll never get credit card companies to stop sending stuff, but there are a few things you can do that might help slow things down. Access your credit bureau report and opt out of marketing offers. You can also freeze your credit report and send direct requests to the credit card companies to take you off their mailing lists.

I've been telling people not to use credit cards for 20 years and, believe it or not, even I get offers in the mail. The more mailing lists you get on, the more your mailbox will fill up with junk mail. If you have magazine subscriptions and things like that, your contact information is circulating all over the place.

The next thing I'm going to say may sound cruel, but I really don't mean it that way. You don't have a junk mail problem, Dan. You have a relationship problem. You two are not on the same page about money. Either she doesn't feel like you two have enough money, and she's resorting to credit cards for this reason, or she does this because she's a spoiled brat who thinks she should always have what she wants when she wants it. Her behavior is destroying your financial lives and driving a wedge between you.

My advice would be to sit down and have a gentle, loving talk with her about all this. Try to find out why she feels the need to have all these credit cards and explain that you're worried about what it's doing to your marriage and your finances.

That may mean having to spend some time with a marriage counselor, but that's OK, too. There's no reason to be ashamed of something like that. The truth is, most of us who have been married more than 20 minutes could use a little help in that area of our lives.

Dear Dave: I went to medical school, and now, I have $70,000 in debt. I just started a three-year residency making about $50,000 a year while my wife makes $40,000. The student loans represent our only debt. Do you think we should be paying this off or investing in a Roth IRA? - David

Dear David: If I were in your shoes, I'd work on paying down the student loans. That means you may never be in a Roth, but there are other things you can invest in and grow wealth.

I realize this may not seem right mathematically, but I don't always make financial decisions based exclusively on math. Many times, I do things based on changing money behaviors - stuff like paying off debts from smallest to largest because it actually works.

Personal finance is 80 percent behavior and only 20 percent head knowledge. So sometimes, you have to go with what actually works best overall in spite of what the technical math shows.

In your case, I think it's going to be very valuable to have no student loans by the time you complete your residency. With three years to go and living on a $90,000 a year income, you can do it. Then, when you come through the other side as a full-fledge doctor, you'll have the great income and be sitting there debt-free. Not a bad place to be, right?

I understand the Roth seems like a pretty good idea right now, but my advice is to stick with becoming debt-free as quickly as possible. Once that's done, you and your wife will be able to invest, save, and build wealth like crazy.

Dear Dave: My wife started working at a pharmaceutical company that gave her a few thousand dollars worth of stock. In the last year, that stock has doubled in value. We've considered buying more just to see how it does. What do you think about this? - Robert

Dear Robert: I understand why you guys would be excited, but you're still looking at a very risky proposition. Any stock that doubles its value in just one year is highly volatile. It's very unusual when things like that happen, and the fact is, it could go down in value just a quickly.

I think you should be completely debt-free, except for your house, and have an emergency fund of three to six months of expenses in place before you start any outside investing. You should also make sure that 15 percent of your income is already going toward retirement.

I don't mind you dabbling a little bit as long as all the other stuff is taken care of first. But I'd advise you to never put more than 10 percent of your nest egg into single stocks. If you've got $50,000 in a 401(k) right now, limit yourself to $5,000 in this area. That way, if the stock tanks and you lose it all, it's only a small blip on the radar. You'll still be financially intact and able to retire with dignity.

It would be fantastic if this stock went through the roof and you two made a ton of money. That would be awesome, but make sure you limit the potential for damage by limiting your exposure. Don't risk the family farm, as they say, to make this play.

For financial help, visit daveramsey.com.

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