Q. I owe the IRS $6,000 and currently I’m making monthly payments. Should I roll this debt into my debt snowball, and then really attack it when it gets to the top of the list?
A. My advice would be to put the IRS at the very top of your debt snowball. Usually, when it comes to paying off debt, I advise people to arrange their debt snowball from smallest to largest, then start with the smallest one and work their way up. This doesn’t always seem to make mathematical sense, but the truth is personal finance is 80 percent behavior and only 20 percent head knowledge. Paying off some small debts quickly energizes you and gives you motivation. It makes you feel like you can really do it. Besides, if you were such a math genius you wouldn’t have debt in the first place.
But the IRS is a different animal altogether. Their interest rates and penalties are ridiculously high. Plus, they have virtually unlimited power to collect. So put them at the top of the list, and get them paid off as fast as you can.
Article originally published at http://djournal.com/news/dave-ramsey-dont-cash-401k-pay-debt/
Wednesday, May 14, 2014
Monday, May 12, 2014
Cash out 401K to pay debt good idea or bad ?
Q. I’m 23, transitioning jobs, and I make $32,000 a year. I have $11,000 in a 401(k), and about $15,000 in debt. Should I cash out the 401(k) to pay down my debt?
A. I don’t think so. When you take money out of a 401(k) they charge you a 10 percent penalty, plus your tax rate. Your tax rate is about 20 percent, so that means you’re going to take a 30 percent hit. While I love dumping debt, your idea would be kind of like saying, “I want to borrow $11,000 at 30 percent interest to pay off my debt.” That doesn’t make a lot of sense, does it?
I never tell folks to cash out a 401(k) or IRA to pay off debt, unless it’s the only way to avoid foreclosure or bankruptcy. You’re not facing either one of those situations, so my answer is no.
A. I don’t think so. When you take money out of a 401(k) they charge you a 10 percent penalty, plus your tax rate. Your tax rate is about 20 percent, so that means you’re going to take a 30 percent hit. While I love dumping debt, your idea would be kind of like saying, “I want to borrow $11,000 at 30 percent interest to pay off my debt.” That doesn’t make a lot of sense, does it?
I never tell folks to cash out a 401(k) or IRA to pay off debt, unless it’s the only way to avoid foreclosure or bankruptcy. You’re not facing either one of those situations, so my answer is no.
Wednesday, May 7, 2014
Dont spend more than you can afford on a car
Dear Dave,
I think I made a big mistake when I bought my car. I’m having a hard time affording the $500 a month payments because I only make minimum wage at my job and work 35 hours a week. My boyfriend, who was supposed to help me pay for it, has moved out and left me. I owe $20,000 on the car, but I know it’s still worth about $19,000. What can I do?
— Rachel
Dear Rachel,
Sell the car. You went car crazy and bought a vehicle that was way out of your league.
Right now, your entire financial world is wrapped up in paying for this thing. And depending on a boyfriend to help make the payments was a big mistake, too. When he left, so did the financial support.
At this point, all you need is enough to cover the hole you dug. Go to your local bank or credit union and try to get a very small loan from them — about $3,000. I hate debt, but you really don’t have a lot of options here. Then, if the car will sell for $19,000, get it sold and use $1,000 to cover the difference.
After that, take the remaining money and buy yourself a little beater. I’m talking about basic, ugly transportation. The next step is to pick up a part-time job on the side and work like crazy for a few months to get that loan paid back as quickly as possible. Don’t ever do this kind of thing again, Rachel.
— Dave
I think I made a big mistake when I bought my car. I’m having a hard time affording the $500 a month payments because I only make minimum wage at my job and work 35 hours a week. My boyfriend, who was supposed to help me pay for it, has moved out and left me. I owe $20,000 on the car, but I know it’s still worth about $19,000. What can I do?
— Rachel
Dear Rachel,
Sell the car. You went car crazy and bought a vehicle that was way out of your league.
Right now, your entire financial world is wrapped up in paying for this thing. And depending on a boyfriend to help make the payments was a big mistake, too. When he left, so did the financial support.
At this point, all you need is enough to cover the hole you dug. Go to your local bank or credit union and try to get a very small loan from them — about $3,000. I hate debt, but you really don’t have a lot of options here. Then, if the car will sell for $19,000, get it sold and use $1,000 to cover the difference.
After that, take the remaining money and buy yourself a little beater. I’m talking about basic, ugly transportation. The next step is to pick up a part-time job on the side and work like crazy for a few months to get that loan paid back as quickly as possible. Don’t ever do this kind of thing again, Rachel.
— Dave
Tuesday, May 6, 2014
Retirement funding is more important than kids college fund
Dear Dave,
I noticed that your Baby Steps list puts saving for retirement before saving for your kid’s college fund. Sending your kids to college would come first on the timeline, so what is your reasoning behind this?
— Jen
Dear Jen,
I advise this approach because everyone is going to retire someday, unless, of course, they happen to die before reaching retirement age. Retiring and eating are necessities. College is a luxury. Lots of people succeed in life without going to college, and thousands have worked their way through college. I worked 40 to 60 hours a week in college, and I still graduated in four years.
Having a college fund set aside by your parents is really nice, if they can afford that kind of thing. But you can go to school by getting good grades, applying for scholarships, working your tail off and choosing a school you can afford. I believe in education, but there are lots of ways to get a college degree other than having your parents foot the bill. Besides, the last time I checked there weren’t any good ways to retire that didn’t include saving and preparing for retirement beforehand. I mean, you can always try to live off Social Insecurity, but I don’t consider that a plan.
In short, college funding is not a necessity. That’s why it follows saving for retirement in the Baby Steps. Should you try to save up for your kid’s college education? Sure, if you can. But there are lots of parents out there who won’t be able to pay a dime toward someone’s college education. And that doesn’t make them bad parents.
— Dave
I noticed that your Baby Steps list puts saving for retirement before saving for your kid’s college fund. Sending your kids to college would come first on the timeline, so what is your reasoning behind this?
— Jen
Dear Jen,
I advise this approach because everyone is going to retire someday, unless, of course, they happen to die before reaching retirement age. Retiring and eating are necessities. College is a luxury. Lots of people succeed in life without going to college, and thousands have worked their way through college. I worked 40 to 60 hours a week in college, and I still graduated in four years.
Having a college fund set aside by your parents is really nice, if they can afford that kind of thing. But you can go to school by getting good grades, applying for scholarships, working your tail off and choosing a school you can afford. I believe in education, but there are lots of ways to get a college degree other than having your parents foot the bill. Besides, the last time I checked there weren’t any good ways to retire that didn’t include saving and preparing for retirement beforehand. I mean, you can always try to live off Social Insecurity, but I don’t consider that a plan.
In short, college funding is not a necessity. That’s why it follows saving for retirement in the Baby Steps. Should you try to save up for your kid’s college education? Sure, if you can. But there are lots of parents out there who won’t be able to pay a dime toward someone’s college education. And that doesn’t make them bad parents.
— Dave
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