Dave Says: Be careful of how you structure a new family business venture

Dear Dave,

My two brothers-in-law and I have been thinking about going into business together as a side project in the real estate world. One of them is an architect and licensed general contractor, one has a successful painting business, and I’m a chief financial officer with a CPA background. Plus, I had a lot of construction experience as a young man. I know you’re not a big fan of business partnerships, but how do you feel about a family business like this?

Dan

Dear Dan,

Going into business with family isn’t my big concern here. I’ve said many times that partnerships are the only ships that won’t sail, and I’m a firm believer in that philosophy. I would encourage you guys to set up a situation where one of you is the owner, then figure out a plan where the other guys get paid off the bottom line—as if they were owners. Trust me, anything with three heads is going to end up being a monster at some point.

Here’s the thing about family businesses. When everyone understands their role and has the best interest of the company in mind, family businesses can be a lot more fun and more successful than non-family businesses. Statistics show the average family business lasts 60 years, while the average publicly-traded company lasts about 15 years.

So, there’s nothing inherently wrong with the family part of the equation. It’s the partnership aspect I’d stay away from.

—Dave

Renter’s insurance offers more protection than just apartment contents

Dear Dave,

We just helped move our son into a cheap, off-campus apartment a few blocks from where he is attending college. We signed the agreement, and are paying the rent, because he makes very good grades. Do you think renter’s insurance is a smart buy? It’s less than $12 a month, but the minimum coverage I can get is $15,000, and he probably has less than $1,000 worth of belongings there. 

Kevin

Dear Kevin,

I’d get renter’s insurance. My guess is it also comes with five or six figures in personal liability coverage, as well. That’s in case he’s out on the patio with his buddies, someone slips and falls, and they decide to sue because daddy’s on the lease.

In a case like this, because there’s so little to start with, it’s not theft or fire taking the contents of the apartment that you’re worried about. It’s the liability portion of the coverage that makes it worth every penny of what you’d be paying. That alone makes it worth $10 to $12 a month just to make sure a slip-and-fall doesn’t mess with your life!

—Dave

Live like your income hasn’t changed

Dear Dave,

I’ll be graduating from college in December, and I’ll have a job waiting for me that pays $50,000 a year. This will bring our household income up to about $95,000. The problem is we’ve got $18,000 in student loan debt, $2,500 in credit card debt, and $4,000 to pay in medical bills. We’re living in an apartment right now, so how should we handle this income increase regarding our debt situation?

Mikayla

Dear Mikayla,

Congratulations on your decision to get control of your finances and your degree! If you two just keep living the way you have been, minus the debt, and put the rest toward the debt you’ve incurred, you could be debt-free in a year or so.

Remember, just because you’ve got a lot more money coming in doesn’t mean you should double your entertainment budget, take an expensive vacation, or run out and buy a new car. The first thing I’d recommend is sitting down together, and working out a written, monthly budget. Give every dollar a name and a job to do before the coming month begins.

Don’t forget the debt snowball, either! List all your debts from smallest to largest, and attack the smallest—that credit card debt—first with a vengeance, while making minimum payments on the medical bills and student loan debt. Once you’ve paid off the credit card debt, roll the money from that payment over and apply it, plus any other cash you can scrape together, toward the medical bills. Once the medical bills are out of the way, repeat the process and roll the payments over again targeting the student loan debt. At this point, you should have a bunch of cash to throw at those student loans each month until all that debt is off your backs once and for all.

I’m really proud of you two, Mikayla. If you’ll follow my plan from here on out, you’ll gain control of your money and be set to start saving and building real wealth!

—Dave

Parents should let working son clean up his own debts

Dear Dave,

Our son is 27, and he has a good job making $55,000 a year. Recently, we learned he financed an expensive car he’s now upside down on. In addition, he has accumulated over $15,000 in credit card debt. He lives in a small town, and only pays $650 a month in rent, but he is asking for money. We taught him about living on a budget and staying out of debt when he was younger, and now it seems he didn’t listen very well. How do you think we should handle this situation?

Bryce

Dear Bryce,

The first thing I’d advise telling him is that you and his mom aren’t going to whip out the checkbook, and make his problems disappear. That may sound harsh, but he had a really good thing going until he messed it up by acting impulsively and irresponsibly with his finances. Nope, I wouldn’t take care of it for him—not at his age. This young man needs to have some skin in the game.

I’d tell him to sell the fancy car, and get something way cheaper to drive for a while. I’m talking about a little beater in the $2,000 to $3,000 range. It sounds like he’ll have to get a small loan to cover the difference, but a little car debt is better than a lot of car debt. I’d also advise him to pick up a part-time job nights or weekends until he gets that credit card debt paid off.

In other words, let him wallow in it and worry about things for a while. Then, if he’s willing to accept responsibility for his actions, and starts handling money more wisely, you two might help out every so often with a little extra cash on the payments.

But I’d test his resolve first. And I’d want to see proof he has learned from his mistakes!

—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 16 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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