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Dave Says: If you can pay off your car loan with cash, do it now (if not sooner!)

Dear Dave,

I can’t decide what to do about my car. I owe $8,000 on it, and I have the cash to pay it off with plenty left over. One of my co-workers said I shouldn’t pay it off, because I have a very low interest rate on the loan. What do you think?

Derricka

Dear Derricka,

What do I think? I think your co-worker is broke. Taking financial advice from broke people is like taking dieting advice from fat people. In other words, it’s dumb.

Pay off your car, and never borrow money to buy a car again for the rest of your life. If you want to win with money, you have to get out of the land of car payments. The idea that you’re stuck with car payments — that you’re always going to have one — is the mantra of those who’ve given up hope. You are in charge of your life. You are in charge of your financial situation. Don’t be like all those folks out there who whine about stuff like stagnant wages and are unwilling to get up off their stagnant butts to make their lives better.

Derricka, pay off your car today. And please, don’t take any more financial advice from broke people!

—Dave

 

Emergency fund in cash?

 

Dear Dave,

My wife and I are completely debt-free. We would like to have part of our emergency fund in cash inside a heavy duty safe at home. How should we document this cash in the event of fire or theft? Also, would our homeowners insurance policy cover cash?

Will

Dear Will,

Typically, homeowners insurance policies have a limit as to how much cash they will cover. I’d advise re-reading your policy, and double checking with your insurance agent just to be sure. When it comes to documenting valuables, I’d suggest making a video or taking photographs. Just to be extra cautious, you could store these in a safe deposit box at your local credit union or bank.

Having some cash on hand is never a bad thing. When it comes to the portion of your emergency fund you keep at home, I’d recommend just being reasonable. If you’ve got $10,000 set aside for emergencies, I’m okay with you keeping $5,000 at home in a quality safe. I wouldn’t put all, or even most of it, in a safe, though.

Again, just make sure your homeowners policy covers anything you might put in there. A strong, fireproof safe is a must!

—Dave

 

Spending money in the budget?

 

Dear Dave,

We are debt-free except for our home, and we have six months of expenses set aside in our emergency fund. Every time we do our monthly budget, we set aside a small amount of personal spending money for us both. Do you see anything wrong with this?

DeAnna

Dear DeAnna,

There’s absolutely nothing wrong with having a little fun money calculated into your monthly budget when you’re in good financial shape. The problems start when couples don’t agree on these kinds of things — or worse — when they start hiding stuff and lying to each other about where the money’s going.

People either grow together or they grow apart when they get married. When you start hiding things from your spouse you’re essentially keeping separate lives. That’s a bad sign in any marriage, and in many cases, this kind of thing leads to divorce.

Having an agreed-upon budget isn’t just telling your money what to do. It’s also an important part of a healthy sharing and communication process between husband and wife!

—Dave

 

Close up small business?

 

Dear Dave,

I have a small business, and I love what I do. Unfortunately, things haven’t been going well the last several months. On top of that, I’ve committed a lot of money to advertising in the coming year. Recently, I got a great job offer from a company that would pay me twice what I’m making now. What do you think I should do?

Hugh

Dear Hugh,

If it were me, I’d want to keep my options open. Closing your business would mean giving up all your customers. I’m not sure that’s a good idea when the offer has just been made, and you know so little about the actual job.

If you think this new job is something you might like, why not accept the offer and see if you can continue your other work on the weekends? That would help cover some, if not all, of your advertising commitment. Plus, it would keep some money rolling in if the new job doesn’t work out.

If you find you like this new job, then you’ve got a great income and something you like doing on weekends that pays. If you keep your business open — even on a small scale — there’s always a chance it will begin to grow again. Who knows? It might give you the opportunity to jump back into it full-time somewhere down the road!

—Dave

 

Mortgage disability insurance?

 

Dear Dave,

If someone is following your plan, is it a good idea to get mortgage disability insurance during Baby Step 2?

Craig

Dear Craig,

No, it is not. Mortgage disability insurance is a gimmick, and I would never recommend it to anyone.

I think I know where you’re going with this. During Baby Step 1, I encourage people to save up and set aside a beginner emergency fund of $1,000. Baby Step 2 is where you start paying off all your debts, except for your home, using the debt snowball system. A thousand dollars may not seem like a lot in savings during that time, but in the beginning it’s an attainable amount to save. Plus, it’s more than a lot of people have when they make the decision to get out of debt and gain control of their finances. Then, after finishing Baby Step 2 you move directly in Baby Step 3 — fully-funding your emergency fund with three to six months of expenses.

What I would recommend is having long-term disability insurance in place. It’s fairly inexpensive, especially if you get it through your employer.

 

Fix it, or buy another?

 

Dear Dave,

I’m driving a 12-year-old car with 210,000 miles on it. The car needs close to $2,000 in repairs, and it’s worth $5,000. I have $40,000 in cash saved, $40,000 in investments, and I make $80,000 a year. I also have $15,000 in student loan debt, but the only other thing I owe on is my house. Should I pay to repair the car, or buy something else in the $15,000 price range?

Brett

Dear Brett,

Let’s see, if you wrote a $15,000 check for a newer car and wrote a $15,000 check for the student loans, it would leave you with $10,000. I wouldn’t buy a $15,000 car in your situation. I’d buy a $10,000 car. You could probably sell the old one for around $3,000 if it needs repairs, combine that with your money and get a $13,000 car. Then, you could write a check and pay off the student loan debt.

With no car payment, no student loan payment, and a good car, you can really lean into your budget and saving money. You’d have no debt except your home, and you could rebuild your savings in a hurry. You’d be in really good financial shape in about six months. Plus, you’d have $15,000 in the bank in the meantime!

—Dave

 

Stick with the plan

 

Dear Dave,

I follow your advice and live on a budget, but it’s really hard to save up for a down payment on a house because property is so expensive here in New York. My family in Indiana says I should buy a cheap property there, then fix it up and sell it to get the money I need. I’m not sure how I feel about this idea. What do you think?

Adam

Dear Adam,

I think you’d be smart to back away from their idea. Your family loves you and wants to help, but this is a bad plan. Fixing and flipping properties is a hands-on business. There’s no way I’d try something like that from 700 miles away. It would be a nightmare!

When you take on that kind of work you need to oversee every single step of the process. You’re also keeping an eye on the help you hire to make sure they’re doing things right. Think about this, too. You can’t just find a house and expect to get a good deal. Professionals who flip houses for a living often look at dozens of different properties to buy just one. It’s not an easy way to make money, and it’s not something I would advise doing from a distance.

I know it can take a while to save up cash for a down payment on a home. But don’t let a case of house fever push you into making a bad financial decision. Have you considered getting a part-time job for a while to bring in some extra cash?

A house should be a blessing, not a burden. Trust me, waiting a while and saving up is a lot smarter than fixing and flipping houses three states away!

—Dave

 

Get a fresh start

 

Dear Dave,

I got laid off a couple of months ago, and I’m behind on the payments for a rental property. I found a full-time job recently, but it doesn’t provide enough income to cover my other bills and the mortgage on this property. The other day, I received an offer from someone who is willing to buy it for what’s owed on the property. I’m not sure that’s the best thing, because I owe $70,000 and it’s worth around $150,000. What do you think?

Travis

Dear Travis,

You’ve got one thing right. You definitely need to get rid of the rental property. I’m not sure I’d jump at the offer you just received, but if I were in your shoes I’d slash the price way below value and sell the place.

Right now you’re broke, and you’re still trying to play real estate investor. That’s not a good plan. I’d put a price tag of $100,000 on it, so you can move it fast and still see some equity in the deal. But sell it today!

By doing this, you’ll have a nice chunk of cash in your pocket, and you can get something of a financial fresh start — one that includes living on a written, monthly budget and staying out of debt!

—Dave

Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 14 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

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