Monday, September 11, 2017

You need an umbrella, its going to rain

Monday, September 4, 2017

Painter with 3 months downtime

Question: My husband opened his own commercial painting business in May. He knows he will have about three months in the year where he’s making little to no income. We’ve gotten $1,000 set aside for our Baby Step 1 beginner’s emergency fund, but because of that down period he would like to skip paying off all our debt except for the house, which is Baby Step 2, and move to Baby Step 3 and put an emergency fund aside. I can understand his thinking, but I wanted your thoughts on the idea. 

Dave: Baby Step 3 is not a fill-in-the-gap measure for income you already know won’t be there. Baby Step 3 is an emergency fund of three to six months of expenses, and the scenario he’s talking about is not an emergency. He knows it’s coming, so it is not an emergency.

I think he needs to re-work his business model. This guy needs something to do during those three months so he doesn’t drop off to no income. Also, if you’re going to set some money aside for a down time, that would not be Baby Step 3. It would be a line in the budget where you’re setting some money aside, because you know a problem’s coming. 

If something happens around the same time every year it becomes predicable, and it’s not an emergency. So it’s not really a matter of the order of the Baby Steps. You budget for this down time, or even smarter, figure out a plan for his time during these months, based on his skill set, that will earn some money.  

Monday, August 28, 2017

Is taking a loan to pay off credit card debt a good or bad idea ?

Dear Dave: I make $48,000 a year, and I have $35,000 in credit card debt. I owe $25,000 on my home, and I was thinking about taking out a loan against my house to pay off the credit cards. Is this a good idea? — Mike

Dear Mike: I would never advise anything like this, unless it’s to avoid bankruptcy. Here’s the problem with that kind of plan. Most people who do that kind of thing don’t change their financial habits. In fact, they end up with a new mortgage and new credit card debt somewhere down the line.

You need to start building a track record of paying off debt. Cut up the credit cards, slash your spending, and start living on a tight, written, monthly budget. Prove to yourself that you’re not going to take out a mortgage and turn around and run up a bunch of new credit cards.

I want to see you not take on any new debt and reduce that $35,000 credit card bill dramatically over the next six months. If you can knock out half of it in a year, you can take care of the other half in another year or less. Then, you wouldn’t need a second mortgage!

Monday, August 21, 2017

Should one invest in Solar Panels for home ?

Dear Dave: I’m debt-free except for my home, and I’m considering having solar panels installed on the roof of the house. It would cost about $27,000. I have $80,000 in savings, but the company doing the installation will finance it all for just one percent interest. It’s almost like free money. My electric bills average around $310 a month, and I thought this would be a good way to save money in the long run. What do you think? — Michael

Dear Michael: If you have to finance the project, my answer is no. My guess is the break-even analysis you’re trying to give me is the sales pitch your solar panel company gave you. That’s how they sell solar panels, but it doesn’t justify going into debt.

You told me you have around $80,000 in savings right now. Why not just write a check? Let me ask you a question. What if you could borrow $10 million at one percent interest and put it in the stock market? Would you do that? Of course, not. It would be way too risky, right? Basically, we’re talking about the same kind of thing. I made you feel the risk by scaling things up in my scenario. You’re not feeling the risk right now because we’re talking about $27,000 instead of millions.

This move wouldn’t bankrupt you, but wealthy people don’t do the kind of thing you’re talking about. Either pull the money out of your savings account and buy the panels, or don’t buy them at all!