Personal finance isn’t all about math. Personal finance is only about 20 percent math. The other 80 percent is behavior.
We list debts in the debt snowball in order of the smallest to the largest balance, putting as much as possible toward the smallest while paying the minimum payments on the others. The reason, as I mentioned earlier, is behavior modification. It helps you see yourself making a dent in your debts.
It’s easier to change bad habits when you see quick results from your efforts to eliminate negative behaviors. Paying off the smallest debts first, instead of the debts with the highest interest rates, will give you quick wins that will help keep you motivated. It provides proof that you can succeed and become debt-free.
I wouldn’t put money into a pension. For one thing, when you die after putting money into a pension, in most cases it dies with you.
Number two, when you put money into a pension, you’re going to get about a 6 percent rate of return in the current environment — maybe even as low as 5 percent. You’re not making much on it while you’re alive, so I don’t advise putting money in pensions. We let employers put money in pensions, if they want to. That’s a nice benefit, but I wouldn’t add to it.
Dear Dave,
My husband and I heard about your plan, but we're not sure what to do next. We have between $400,000 and $500,000 in a 401(k) for retirement, but we don't have any other savings. We're both in our forties, and the only debt we have is our house, so what should we do about Baby Steps 4 and 6? — Mary
Dear Mary,
Overall, you two have done a great job with your money. Let's go over the Baby Steps you mentioned. Baby Step 4 is putting 15 percent of your income into Roth IRAs and pre-tax retirement plans. Baby Step 6 is paying off your home early.
The thing that worries me is you've completely skipped Baby Step 3, which is having three to six months of expenses in an emergency fund. This is money set aside strictly for emergencies. The problem right now is if you have a real emergency, you may have to cash out your 401(k). If you do that, you're going to be penalized 10 percent, plus your tax rate. That's a real kick in the teeth just because you didn't do things in the right order.
My advice is to temporarily stop your 401(k) contributions until you get a fully funded emergency fund in place. By temporarily, I mean six to eight months at most. That way, you'll be covered when life happens without having make a big dent in your retirement savings!
— Dave
Q. My daughter is 15, and she’s had jobs around the house and been on commission and the envelope system for years. She’s very good about saving and not spending on silly things. We recently opened a checking account for her, and I was wondering what bills you think we should assign for her to pay on her own?
A. This sounds a lot like we did with our kids. She’s obviously bright and motivated, so the first thing you do is explain to her the seriousness and responsibility associated with a checking account. The next step is for her to balance the checkbook with you looking over her shoulder. Do this with her for several months, while you keep one on the account, too. After that, I want her to do it alone and show you her work. Her balance should match yours and the one at the bank.
As soon as she demonstrates competency and you feel comfortable that she can handle things, I want you to start putting her clothing budget in the account. You know, the weirdest thing happened with our girls at this stage. They suddenly started shopping at less expensive stores. It’s amazing when they see that the dollars associated with these purchases can run out. My bet is you’ll see some changes in her value choices.
Just take it step-by-step, a little at a time. The more they exhibit competence, wisdom, and confidence, the more you can release them.
Q. My wife and I argue a lot about finances. We’re trying to get more control over our money, and she has been listening to you. That’s helped a lot. She’s also a lot more frugal than I am, and our biggest point of contention right now is how we handle our spending money. Whenever I work overtime at my job, I feel like I should be able to put the overtime pay toward my spending money. What are your thoughts on this?
A. No way, dude! You don’t work overtime for your little-boy wants. You work overtime and rake in that extra cash, for the good of your family. That’s the manly thing to do.
Now, that’s not to say you both can’t have a little spending money. It also doesn’t mean that you can’t treat yourself once in a while if you’re working your tail off. I mean, if I’m working 70 to 80 hours a week I may give myself a little inexpensive treat in the midst of all that. So, my spending money budget should reflect that. But it shouldn’t reflect a sense that I get to play more because I work extra, while the rest of the family suffers.
Sorry, man. I think you knew what I was going to say. Step up, be good to your family first and then your good times will come. If you haven’t learned it already, you’ll soon discover that those good times are best ones!
via djournal
