Dear Dave: I’m shopping around for a new bank because my current big bank has gone fee-crazy. They want $15 to tell me my mortgage payoff amount. Besides asking about fees, do you have any other advice when it comes to looking for a good bank? – Jim
Dear Jim: I learned to stay away from the mega-banks a long time ago.It seems to me that somewhere along the line they forgot how to treat their customers like human beings.
That’s why I stick with community and regional banks. I love local credit unions, too. These are the kinds of places where you can go in and talk to the branch manager if they go fee-crazy. They have the power to waive fees, or fix situations if something gets out of whack or is just plain stupid! – Dave
Dear Dave: My wife and I are both in our mid-thirties, and the only debt we have is $14,000 in credit cards, student loans and a car payment. We’ve got $40,000 in our 401(k) plans, and we have no children. What steps can we take toward becoming good investors? – Kirk
Dear Kirk: A rock-solid foundation is a must, whether you’re building a house or building wealth. Without this, everything will fall apart. The first brick you want to lay in your financial foundation is to become debt-free. The second one is to have an emergency fund of three to six months of expenses in the bank. This is money that you never, ever touch except in the case of a real emergency. It doesn’t go toward Christmas, a vacation, or anything else.
When you’ve got these elements in place, they help form a firm foundation from which you can build wealth. Most people skip these steps and jump right into funding 401(k)s, Roth IRAs and mutual funds. These are all great things, but the problem in doing it that way is that you’ve started work on the house before you’ve laid the foundation. This can cause all kinds of problems and setbacks down the road!
Basically, we’re talking about the first Baby Steps in my plan. Baby Step 1 is to get your emergency fund started with $1,000 in the bank. Baby Step 2 is pay off all of your debt, except for your home, using the debt snowball. And Baby Step 3 is to finish growing your emergency fund until you have three to six months of expenses saved.
The debt you have is not the problem, Kirk. It’s the symptom of you guys buying a bunch of stuff you couldn’t afford. Get on a written budget, and give every dollar a name before the month begins. I want you guys to break the debt cycle by having a permanent game plan. Once you do that, you’ll have freed up your largest wealth-building tool—your income! – Dave
Dear Dave: Can you please explain how a home equity loan works? Do you ever recommend them? – Patti
Dear Patti: It’s simple. A home-equity loan is a second mortgage. You’re borrowing money against your house. Some people in the banking business call it a HEL, but considering what these things can put you through, I think they left off one “L.”
I don’t like home equity loans, and I never recommend them. Most of the time the terms are crummy, with higher, variable-interest rates, and they usually have annual calls or a balloon payment tacked onto them. I would never recommend putting your home at risk to pay off credit card debt that piled up while you were out buying that fancy restaurant steak you couldn’t afford. Talk about financing a depreciating asset!
Right now, lots of people who thought they were being smart or financially sophisticated by taking out home equity loans because the interest rate was lower than the one on their credit cards are really stuck. Their houses have gone down in value and created a real mess. Plus, the banks have been handing these things out like candy, and they’re feeling the pinch, too.
Stay away from home equity loans, Patti! – Dave
Dear Dave: I’ve got my beginner’s emergency fund in place, and I’m close to wiping out my consumer loan debt. I still have about $32,000 in debt from six different government-insured student loans, but they’re in deferment at the moment. I was wondering if I should try to consolidate them. – Jason
Dear Jason: Well, you get to consolidate these one time. After that, you’re stuck. So, you’ll want to make sure that the net interest rate you get through consolidation is lower than your current rate. Also, make sure the interest rate is fixed. You don’t want to jump through hoops to make this deal happen, and end up with an interest rate that’s equal to or higher than the one you had before!
Student loans are the only things I’ll tell people to consolidate. They’re a little different animal than ongoing loans and other kinds of credit. Chances are you’re not addicted to going to class, so you probably won’t go out and ring up more student loans after you’ve finished your education and paid off these things.
Just maintain the intensity, keep working hard to get out of debt, and pay these things off early. Remember, too, that in lots of cases consolidating student loans will move them out of deferral. There’s a good chance you’ll have to start making payments right away! – Dave
Dear Dave: When does reaching the point of being debt-free become more important than marriage? We’re following your plan and doing the debt snowball, but my husband’s been working a second job, and it’s really cutting into our together time at night and straining our relationship. I’m afraid we’re going to end up debt-free but divorced. When does one outweigh the other? – Tracy
Dear Tracy: When does one outweigh the other? Maybe when you stop whining?
Seriously, getting out of debt is never more important than your marriage. But families go through all kinds of stuff, and one of those things is cleaning up messes they’ve made. It’s not always fun, but there’s a price to pay if you want to win with your money or anything else.
It sounds to me like your husband has gone gazelle intense about getting out of debt, and in the process may have left you behind a little bit. I don’t recommend that! He probably needs to take some time to come back and emotionally reconnect with you. And I’m sure some good, old-fashioned back rubs and words of encouragement from you are in order. Your man could use them if he’s been working two jobs!
But there’s plenty of time for snuggling and stuff later. Right now, you’re trying to do something—something really important—for the good of your family. I know it can be difficult, but it won’t last forever. And I can promise you this: Once you’re done, you’ll be very glad you toughed it out! – Dave
Editor’s Note: Best-selling author and money expert Dave Ramsey is host of the nationally syndicated radio program, “The Dave Ramsey Show,” heard by 4.5 million listeners each week on 450 radio stations throughout the United States. He is the creator of Financial Peace University (FPU), a 13-week program that helps people dump debt, get control of their money and learn new behaviors with money that are founded on commitment and accountability. More than a million families have attended FPU classes at their workplace, church, military base, nonprofit organization or community group. The average family pays off $5,300 in debt and saves $2,700 in the first 91 days after beginning FPU, and is completely out of debt—except for their mortgage—in just 18 to 24 months. For more financial recommendations, visit daveramsey.com.
