Dave Says: Is it an emergency?

Need some financial advice? Debt and income crisis? Pay off the house mortgage first? Check cashing? Taxes? Credit Cards? Check out what folks are asking Dave Ramsey.

 

Is it an emergency?

Dear Dave,
My husband and I just completed Baby Step 3, and we have six months of expenses saved for an emergency fund. How should we determine when something is actually an emergency?
Riley

Dear Riley,
Congratulations on doing the work, being disciplined, and saving like crazy! Now you’ve got peace of mind, and a pile of cash, that will help turn an emergency into nothing more than an inconvenience.

There’s no shame in using your emergency fund if you really need to. That’s what it’s there for. Just remember to ask yourself a few questions anytime something pops up to make sure you’ve got a real reason to use it.

Is the expense really unexpected? Christmas happens on December 25th every single year. You know your semi-annual car insurance payment is coming, too. Make sure things like this are part of your regular, monthly budgets. Some examples of unexpected expenses might be a job loss or pay cut. Emergency medical expenses and car accident repairs might fall into this category, as well.

Is it absolutely necessary? Most people say they know the difference between a want and a need, but that’s not always the case. Replacing your only mode of transportation would be a need. Upgrading to a newer, fancier car is not. If your car goes down for the count, you need transportation. Use your emergency fund to buy something affordable and reliable you can pay cash for. But don’t dip into it just to upgrade your decent car for one with a million bells and whistles.

Is it urgent? Practice the art of patience whenever possible. If your home’s air conditioning unit goes out in the middle of summer, that’s probably an urgent fix. But hearing about the “sale of the century” at your favorite retail store? Grabbing the newest, hottest cell phone when yours works just fine? Nope!

Your emergency fund is all about long-term security, not instant gratification. Don’t blow it impulsively, but don’t be afraid to use it when it’s really needed. Be wise, and ask those three questions. Check yourself so you don’t wreck yourself—or your budget!
—Dave

READ: Dave Says: Great start, but follow the steps

 

Tighten up!

Dear Dave,
I’m beginning to think we got in over our heads with our house. My wife and I make about $125,000 a year combined, but we’ve never been able to put anything aside for an emergency fund. Our mortgage payment is 35 percent of our take home pay each month. We have two young children, so we eat out a lot, but we have no debt other than our house. Do you think we should refinance our home?
Jeff

Dear Jeff,
You two are making good money, and you’re debt-free except for your home. You can’t tighten up your budget enough to save up an emergency fund? Stay out of restaurants, dude! There’s no law stating you have to eat out a lot just because there are kids in the house. I mean, you’ve got no emergency fund. That’s a pretty basic thing.

You guys need to get on a written, detailed plan, and start hitting your goals. I’m talking about a strict, monthly budget. Now, I’ll admit your mortgage payment isn’t exactly what I would’ve signed you up for. Your house payments, or rent, should be no more than 25 percent of your monthly take home pay. But your house payment isn’t what’s holding you two back. What’s holding you two back is the fact that you haven’t been willing to tighten up the finances in other areas of your life to offset biting off more than you could chew in terms of a home.

No, I wouldn’t refinance. You’re fairly close where the mortgage payments are concerned, so I think you can make it through this by looking at ways to increase your income and selling stuff you don’t need to build an emergency fund. You two have been smarter than some, but you’re really going to have to buckle down and rearrange your priorities to make this happen!
—Dave

 

Cash out my Roth IRA?

Dear Dave,
I have around $15,000 in a Roth IRA. I just recently started studying your advice, and I was wondering if it would be a good idea to cash it out and put the money toward debt.
Sarah

Dear Sarah,
I teach people to stop investing temporarily while they attack their debt. So, I wouldn’t add anything to it at this point, but the worst thing you could do is cash it out. If you do, taxes and penalties will steal a huge chunk of that cash. The only time I take money out of a retirement account to pay off debt is to avoid bankruptcy or foreclosure.

Start working the Baby Steps from the beginning. Baby Step 1 is saving up $1,000 for a starter emergency fund. Baby Step 2 is paying off all debts from smallest to largest, except for your home, using the debt snowball method. This will free up a ton of money! Then you’re ready for Baby Step 3, which is increasing your beginner emergency fund to a fully-loaded emergency fund of three to six months of expenses.

Now you’re ready for Baby Step 4, which is 15 percent of your income going into retirement!
—Dave