Dave Ramsey: Dave Says…

Dave Says

Christian School Is Busting the Budget!

Dear Dave,

We have three kids enrolled in Christian schools, and it’s very expensive. We truly believe they’re getting a great, faith-based education, but they’re only in elementary school and already we’ve had to dig into our savings.

Maureen

Dear Maureen,

Private schools can have academic advantages, and in some cases a good Christian school can have spiritual advantages. But if you can’t cash flow it, you can’t do it. It’s just that simple.

My kids didn’t go to private Christian schools, and they’re all strong Christians. They went to public schools and learned to interact with people of no faith, different faiths and how to display their faith adequately in the marketplace.

Lots of times people send their kids off to a Christian school, only to find out they still have to teach them about life – the good and the bad. And the fact is, you’re just kidding yourself if you think sending them to a Christian school means they’ll be in a perfect world where no one ever acts mean or nasty.

I hope you can find a way to continue, since this is an important decision to you. But from what you’ve said it just doesn’t make good financial sense.

- Dave

Dave Says

Stupid’s Not Illegal

Dear Dave,

Is there some way to put a block on a credit report prior to sending a kid to college, so that the credit card hustlers can’t get to them?

Trevor

Dear Trevor,

No, there’s not. Unfortunately, in today’s culture that’s part of becoming an adult. When you hand them car keys there’s no way to put a block on how they drive. And when they turn 21, there’s no way to put a block on what they ingest.

About the only thing you can do, Trevor, is teach your kids to the best of your ability and be a good parent – a good example. Teach them WHY debt is dumb, and show them how it eats away at their ability to save money and build wealth. And for goodness sake, don’t use credit cards yourself. Kids can smell a hypocrite a mile away!

But even after all that it’s still not illegal for people to be dumb with their money. If it were, there would be a lot more jails!

- Dave

Dave Says

Giving with plastic?

Dear Dave,

Our church is considering letting members use credit cards to tithe or give to other programs. I’m trying to prepare for a finance team meeting, and I want to be prepared. What advice would you offer?

Anonymous

Dear Anonymous,

My advice would be to say no to this idea. Do you really believe people should tithe or give to the church with a credit card when we live in a culture where the number one cause of divorce is money problems?

I know people will argue that it’s more convenient. Well, part of the exercise of giving is to build the character of the giver. I doubt anyone’s going to break a sweat writing a check, but if they do it probably won’t cause them any spiritual harm.

I would also challenge your finance team to find one place in the Bible where something positive is said about debt. God calls debt a curse and says the borrower is slave to the lender. When God talks that way about something, it makes me think it’s probably not a good thing.

This isn’t a salvation issue. But why in the world would leaders of a church want to steer the congregation toward something negative? Hopefully, you can put an end to this bad idea before it’s too late!

- Dave

* For more financial advice plus special offers to our readers, please visit www.davesays.org or call 1-888-22-PEACE.

Dave Says

Covering Childbirth

Dear Dave,

My wife and I are debt-free, and we just found out we’ll be having another baby. We have individual health insurance, but it doesn’t cover childbirth. What’s the best way to go about paying for this?

Justin

Dear Justin,

Congratulations on the new baby AND on being debt-free!

Labor and delivery in most areas of the country can be done for the typical retail value of $6,000 to $7,000. And there are hospitals that will knock off about half the cost if you pre-pay for these services in the last trimester.

Since you’re debt-free, it’s going to be really easy for you guys to save up about $3,500 in the next six or seven months. Then go to the hospitals in your area, tell them you plan on paying with cash and that you’re trying to make up your minds about which hospital to use. Make sure they understand that one of the main considerations is which hospital will give you the best price!
Remember, in most ways hospitals are just another business. Plus, the birth of a child is one of the few times people actually WANT to go to a hospital. It’s a happy occasion and a joyous time for family and friends.

And it’s great PR for the hospital!

- Dave

Dave Says

Will this hit me?

Dear Dave,

My husband and I are in the process of getting a divorce, and he wants to take out a car loan. I don’t think he’d do anything illegal, but how can I protect myself – just in case?

Jennifer

Dear Jennifer,

Don’t put your name on anything where this purchase is concerned. About the only way it could affect you at all is if you sign for the car.

Now keep in mind he could always sign your name fraudulently, or the judge could hold you liable in divorce court. But chances are neither of these things will happen.

No good judge would saddle you with debt he incurred on his own. If he’s the one buying the car, all the payments and other headaches should be his – not yours.

I’m really sorry you have to go through this, Jennifer.

- Dave

Dave Says

Attitude Change

Dear Dave,

Our 18-year-old doesn’t quite get where we’re headed in getting our finances in order and becoming debt-free. He’s used to us handing him at least $30 on weekends, and that amount has dropped to $10 if he’s lucky. How can we explain it when we’re ashamed as parents that we let our own financial situation get so bad?

Cheryl

Dear Cheryl,

Everybody’s fallen down at some point. Being imperfect doesn’t make you a bad parent. And if you’ve made mistakes with money it just means you’re alive and you’ve had money in your hands at some point.

I don’t think you’ve got any reason to be ashamed as parents. You’ve fed him, clothed him, he’s got shelter … that’s pretty much all you’re obligated to do. The idea that you’re supposed to just hand kids stuff all the time is ridiculous!

At his age, he’s old enough to grasp a conversation that goes something like this: “We didn’t do a good job teaching you to handle money in the past because WE didn’t know how to handle money. We’re sorry about that. But it doesn’t mean we’ve given up our rights of parenting and making quality decisions from here on out.”

No 18-year-old needs to be sitting around having money handed to him. Shove about a dozen job applications under his nose, or show him the business end of a lawnmower – something! This kid needs to be making money!

Once that happens, you can show him the lessons you’ve learned about budgeting, saving and handling money properly. Then, he can begin spending his own $30 on weekends!

- Dave

* For more financial advice plus special offers for our readers, please visit www.davesays.org or call 1-888-22-PEACE.

Dave Says

Fund Roths or pay off debt?

Dear Dave,

We have about $8,000 in car loan debt. Despite this, I’d like to go ahead and fully-fund our Roth IRAs. Time equals money, you know? My wife, however, thinks we should pay off the debt first. The fact is we can have either one done by December. What do you think?

Steve

Dear Steve,

I wouldn’t do that, because I wouldn’t borrow on my car to fund an IRA. Now, if time really did equal money – which it doesn’t – then I would borrow on the car to fund the IRA. The problem, though, is that you’re not adjusting for risk.

You’ve got to get out of the mindset that debt is okay. Once you lose that idea, then you’ll realize that missing a year of funding your IRA isn’t going to kill you or keep you from becoming wealthy down the road. But if you stay in the mindset that debt is okay and you’re going to play around with it, then it will kill you financially!

Winning with money is more about behavior than it is about math. Don’t get me wrong, you need to crunch the numbers, too. But all the mathematical components are just theory unless the behavior kicks in.

I’m siding with your wife on this one, Steve. Just follow the Baby Steps, and have your emergency fund of three to six months of expenses in place and all your debts paid off – except for your house – before you start any long-term investing.
A lot of folks will tell you it’s not mathematically correct, but it will work better in the long run!

- Dave

Dave Says

Baby Steps

Dear Dave,
I’m making a budget every month, and I’ve got $1,000 in the bank to start my emergency fund. After all my expenses I have $125 left, but I also have three credit card debts that total $18,000. Should my next step be to pay these off or should I start investing the money I have left over?

Holly

Dear Holly,

Congratulations on accomplishing Baby Step 1 and getting $1,000 in the bank to start your emergency fund! Baby Step Two is paying off all debts except the house.

So let’s put the investing off for now. Squeeze every dollar you can out of that budget, and focus on your debt snowball. To do this, make a list of your debts from smallest to largest, make minimum payments on all but the smallest debt and then attack it with a vengeance. As soon as you get that one paid off, roll the money over you were using on it – plus any other you can scrape up – and target the next debt and then the next.

Once the credit card mess is history and you’re debt-free except for your house, you can work toward Baby Step Three – a fully-funded emergency fund of three to six months of expenses. NOW, you can begin concentrating on Baby Step 4 – long-term investing.

It’s important to save, Holly. But it’s also important to become debt-free. This is what frees up your income and makes investing easy!

- Dave

* For more financial advice plus special offers to our readers, please visit www.davesays.org or call 1-888-22-PEACE

Dave Says

School spending?

Dear Dave,

My son is a sophomore at a local college, and he wants to transfer to a very prestigious university. If he did this he would incur more than $100,000 in student loan debt, and that’s with us picking up half of the cost. What do you think I should tell him?

Will

Dear Will,

I’d have a hard time telling anybody that one school is $100,000 more valuable than another one. The fact is that unless he has $100,000 lying around somewhere, he shouldn’t go to that other school for one very simple reason – he can’t afford it!
We hire people every week at my company, and where they attended college is a very minor blip on the radar screen. There will always be a few corporate types out there who play games and try to turn the office into some kind of snooty country club, but the fact is most employers don’t care where you went to college.

Here’s the deal, Will. It’s what you learn and being able to use that knowledge in the marketplace that’s really valuable. Knowledge is king, and we live in a knowledge-based economy. If you can’t retain and apply what they’re teaching, then the only thing more worthless than a college degree is a college pedigree.

This is a kid who needs guidance from his dad. Step up and explain it to him. Letting him walk out of school with a six-figure debt around his neck would be a huge mistake!

- Dave

Dave Says

Like pulling teeth!

Dear Dave,

My husband just finished school and is now a dentist. He can either build his own practice, which would involve start-up costs of about $500,000, or he can work for a company that would take 30 percent of what he makes. We also have $250,000 in student loan debt. What do you think he should do?

Teresa

Dear Teresa,

I don’t think those are the only options. But I do think that you guys going another half-million dollars deeper into debt when you’ve already got $250,000 hanging over your heads is a really bad idea.

Why couldn’t he find an established practice to work in that offers the chance for him to eventually become the owner? Lots of dentists sell their practices every year. Plus, working as an associate instead of just a hired hand offers a lot more chance to gain valuable experience and opens the door to even greater possibilities.

So what if it takes 10 years or even a little longer to become the owner of a practice? That’s a whole lot better than starting out your professional life a million dollars in debt!

- Dave

Dave Says

Difficult to stay current

Dear Dave,

I’m single and make $20,000 a year. Hopefully, this amount will increase to $30,000 next year thanks to a promotion I’m in line to receive. Do I really need $1,000 in my emergency fund or is $500 enough? I also have about $38,000 in debt right now, including student loans. I’m just wondering how to keep up with bills while trying to establish an emergency fund.

Jane

Dear Jane,

The best way to stay current on your bills and manage your money is by doing a written monthly budget. Give every dollar you make a name on paper before the month begins. That way, you’re controlling your money instead of it controlling you.

For instance, if you know you’ll get two paychecks during the month that are $750 each you plan how you’ll spend each of those checks before you get them. Take care of necessities first – food, shelter, clothing, transportation and utilities. After you’ve taken care of that, make sure you’re current on your debts then put every remaining penny you can squeeze out into your emergency fund. Make sure you keep all spending to necessities only!

You’re at a point where you really should have an emergency fund of $1,000. It will be a little tough, but that will be your first big goal. And do all this with a sense of urgency – like in a couple of months.

Remember Murphy’s Law, and how anything that CAN go wrong WILL go wrong? If you keep living without a plan and no emergency fund, Murphy will hunt you down and move into your spare bedroom!

- Dave

* For more financial advice plus special offers to our readers, please visit www.davesays.org or call 1-888-22-PEACE.

Dave Says

Business with a friend?

Dear Dave,

I just began a business with a friend as an LLC partnership. I know he’s honest and a hard worker, but I’m still a little scared that everything will fall apart and we’ll walk away mad at each other. We used a CPA to get a tax ID number and help us set up the company. Do you think we should pay a lawyer to help us map out the partnership agreement in writing?

Mike

Dear Mike,

Drawing up a written partnership agreement may be the only shot you’d have at walking away from this venture with your friendship still intact. But I don’t think you need to hand some lawyer a bunch of money to make it happen.

Chances are, your new business doesn’t need that level of detail. All you need is someone to help you draw up a template that answers all the “what if” questions. This template can be as simple as a list of all the things that could go wrong and the answers to those scenarios. These would be things like death, disability, moral failure, bankruptcy, etc., and what happens if any of these occur.

You know, there are hardly ever problems in a business venture when everyone’s happy and making piles of money. But it can get rough if you begin to disagree over the direction the company is taking. Or what if personal issues make you decide you don’t want to be in business with the other person anymore? It’s easy to go all pie-in-the-sky over these things, but you have to make plans for any and all of the worst outcomes, too.

- Dave

Dave Says

Why be normal?

Dear Dave,

I’ve been trying to talk my husband out of going into debt to pay for things for years now. His idea is that debt is normal and there’s nothing wrong with it, as long as we can afford the monthly payments. We can afford these payments right now, but I don’t think its okay and I’m worried about the future. I’d rather invest the money or save it instead of giving it to creditors.

Annette

Dear Annette,

Well, your husband is right about one thing. Debt IS normal in this country today. But that doesn’t make it smart or okay. He was wrong, though, when he said you can afford the extra payments. Here’s what I mean.

On average, about three out of every 100 people in the United States are wealthy. By wealthy, I mean they make at least $200,000 a year and have a net worth of $1 million or more. I think it’s pretty fair to say that these folks aren’t normal. You might even say they’re weird when compared to everyone else.

Financially speaking, being normal in today’s society means being broke. According to The Wall Street Journal, 70 percent of Americans are living paycheck to paycheck. And did you know that 34 percent of the people who will retire this year will do so with an income of less than $10,000 a year? That’s scary! Can you see why I don’t want to be normal?

Here’s another little fact on why you can’t “afford” to make payments on stuff, even if you can meet the monthly requirements. The average car payment in America is $378 a month over 55 months. Do you know what would happen if you took that money and invested it in good growth stock mutual funds? That money, invested from age 25 to 65 would provide you with more than $4 million by the time you were ready to retire.

So, if managing my money properly and retiring with some dignity – and wealthy to boot – is weird, then I want to be the weirdest guy around!

- Dave

* For more financial advice plus special offers to our readers, please visit www.davesays.org or call 1-888-22-PEACE.

Dave Says

Bad Business Advice

Dear Dave,

How do you save up cash to buy a commercial building without getting killed by taxes? Our accountant keeps telling us that’s what’s going to happen if we just let the money we’re saving sit there, instead of borrowing to make the purchase. What do you think?

Jill

Dear Jill,

I think I’ve got two words for your accountant – you’re fired!

If you buy a building, you’re going to get killed with taxes. You can depreciate the building and even write off the interest, but none of this creates a tax-free situation. This is America. If you make a profit, you get taxed.

Sure, you’re going to get taxed on the money as you save up to buy a building. But here’s the situation. If you pay out $10,000 a month in interest, that’s $120,000 a year. If you write off the interest, it’s only going to save you about $30,000 in taxes. A $120,000 tax deduction doesn’t save you $120,000 in taxes. It only saves you the taxes ON the $120,000.

Saving up to buy the building is a great idea, Jill. Going into debt just to get a tax deduction is a really bad idea!

- Dave

Dave Says

Same As Cash, But As Good As Cash?

Dear Dave,

Is there anything wrong with buying large ticket items using 12 months same as cash financing? It seems like an easy way to buy expensive items. You use their money, and if you pay it off early or on time you’ll incur no fees or interest.

Bud

Dear Bud,

Bad idea! To start with, 12 months is not the same as cash. If I walk into a store with cash up front I’ll get a better deal than you will. It’s called negotiating, and that doesn’t happen when you just sign up for their deal.

Let’s say you’re buying $2,000 worth of stuff. If you’ve got $2,000 sitting in a savings account for 12 months making four percent, you’re looking at about $80. We’re not talking about a bunch of money here. Do you think I can walk in and negotiate at least $80 off the price? You bet I can!

Here’s another problem. What if that company messes up on one little thing? What if they record a payment wrong and it ends up being late? They’ll back charge you through the entire period at finance company rates, that’s what. I’m talking 24 to 38 percent! And this is even in YOU do everything right and abide by all the terms.

Stay away from snakes, Bud, and you won’t have to worry about being bitten!

- Dave

Dave Says

Bad Economic Advice!

Dear Dave,

I’m a senior in college, and I’ll be doing my student teaching next semester. The tuition for student teaching has dropped, so I just got a $2,300 refund on my university loan. An economics professor told me I should invest the money in the stock market, let it grow and then use it to pay off my student loan. What do you think?

Brett

Dear Brett,

That’s really bad advice, especially coming from an economics teacher. You should never invest money in the stock market unless you’re going to stick it in there and leave it alone for at least five years. The market is just too volatile to play around like that for a shorter period of time.

Now, the stock market is a great place to invest over the long haul. But I don’t want you stay in student loan debt for five years or more. I want you to get out of school, get your teaching career in gear and get this loan paid off as fast as you can.
If I were, you, Brett, I’d apply this money directly to the student loan principal now. If you stick it in your checking or savings account you’ll probably end up blowing it on something you’ll wish later you hadn’t bought in the first place!

- Dave

* For more financial advice plus special offers to our readers, please visit www.davesays.org or call 1-888-22-PEACE.

Dave Says

Keeping the checkbook?

Dear Dave,
Does it matter whether it’s the husband or the wife who keeps the checkbook and pays the bills? Lots of people say that kind of thing is the man’s job, but I was curious about what you think.
Daniel
Dear Daniel,
I don’t think it matters one bit, and here’s why.
In each family there’s a nerd and a free spirit. The nerd is good at keeping track of things and putting everything in its place. The free spirit is just the opposite. They are not detail-oriented. Now, this doesn’t make them irresponsible or mean that they don’t care. It’s just that they aren’t blessed with a gift for administration. They want things to be good and right just as much as the nerd, but they don’t get a rush when the checkbook balances out.
But just because the nerd keeps the checkbook doesn’t mean he or she gets to make all the financial decisions. In a marriage, those decisions should be made together with input from both the husband and wife. Remember, God didn’t unite some kind of joint business venture. He made you as one – together. When you do a budget each month, you should both sit down and come to a mature, reasonable and respectful agreement on where the money’s going.
So when it comes down to the act of keeping the checkbook, I think whoever is the more organized of the two should handle this duty. But if you include these other principles you’ll experience more unity in your daily lives together AND have better communication in your marriage!
- Dave

Dave Says

Teenager in trouble?

Dear Dave,
I’ve been pretty rebellious for the last year, not listening to my parents and doing other dumb things. Now I’ve got $8,000 in debt from running up credit card bills and writing bad checks. I also totaled my car the other day, and I lost my job, too. I’m going to lose my apartment from all this, also, and I’m only 19 years old. A friend said I could stay with her for a while, but my parents won’t help and say I need to clean up this mess on my own. Do you have any advice?
Stephanie
Dear Stephanie,
Rock bottom is a scary place to be, isn’t it? But here’s some good news. The fact that you’ve realized your mistakes and want to change means there’s hope. And that’s always a good thing.
The first thing you’re going to have to do is get another job – maybe two or three part-time jobs if you can’t find full-time work. You also need to save up quick for a cheap little car to get you around. If you work this plan for about a year and a half, you’ll probably be able to pay off all the Stupid Tax you’ve accumulated.
I’m not picking on you, Stephanie. I’ve done stupid stuff, too, trust me. Stupid with lots more zeroes on the end than you’re talking about. But when you do dumb things, you have to pay the consequences. It’s all part of being an adult. And no matter what age you are, debt is a dumb thing.
It sounds like you realize that you left your integrity on the sidelines, too. So doing the right thing really needs to be a priority from this point on. The cool thing about the issues you mentioned, like finding a permanent place to live, something to drive and paying off the debt, is that these things will all get better now that you’ve made the decision to get better.
I think finding a good church and having a talk with the pastor would be a big help, too. Any good minister would be willing and honored to have an opportunity to pray with you and for you as you get your life back on track.
- Dave

* For more financial advice plus special offers to our readers, please visit www.davesays.org or call 1-888-22-PEACE.

Dave Says

How does Dave feel about the tax rebate?

Dear Dave,

I’m curious as to how you feel about the government’s stimulus tax rebate plan. Our household income is over the maximum income amount to receive the rebate, so we’ll be getting nothing but the bill – again. It seems that those who will receive this money are encouraged to do nothing but spend it. Does this bother you, too?

Keith

Dear Keith,

I’m not crazy about this plan, either. I don’t like the idea that my money could be going to help someone else buy a big-screen television or whatever toy they’ve got in mind. I understand that the “rebate” is designed to stimulate the economy and pull us away from a possible recession, but it sounds a little like socialism to me – and that’s just the opposite of capitalism.

The whole idea – increased consumer spending giving the economy a boost – sounds good in theory. But I think a much better idea would be to encourage freedom from debt. THAT would increase consumer spending, and in turn, cause the economy to flourish.

I’m sure, too, that a lot of people have already spent this money in their minds. That’s a really bad idea! It’s an open invitation for Murphy to move right into their spare bedrooms lock, stock and barrel. I’m still amazed that so many people waste this “free” money instead of making it work for them by paying off debt or investing.

Think about this. If you invest this chunk of money in a good mutual fund for a few years you’ll receive a lot more free money than just the original $600 or $1,200. Let’s say you get $600 back and park it in a mutual fund averaging 12 percent. In 10 years that investment will grow to about $2,000. Leave it in there for 20 years and it’ll be worth $6,500. For married couples that $1,200 can grow up to $13,000 over 20 years.

Don’t get me wrong. I’m not a total scrooge, and there’s nothing wrong with having a little fun with your money. But the quicker you get out of debt, the quicker you can have the fun stuff, change your family tree and bless others!

- Dave

Dave Says

Can’t afford 15-year mortgage?

Dear Dave,

We couldn’t afford a 15-year mortgage, so we financed our house on a 30-year note. Now, even after doing this, we’re still having trouble paying our debts, saving and making the house payment every month. Do you think we should sell the house?

Larry

Dear Larry,

If you couldn’t afford the house on a 15-year mortgage, then you couldn’t afford the house. Period.

When you can’t save or get out of debt because you’re being strangled by your house payment, you are what’s called “house poor.” This usually happens when your payment is 30 to 35 percent – or more – of your monthly take-home pay. That’s why I recommend your mortgage payment be no more than about 25 percent of this figure.

There are lots of cases where I tell people to sell stuff to get out of debt. But having to give up your home is an emotionally and spiritually damaging experience. Try everything else that makes sense first before you give up your home!

I want you to try living on really tight budget for the next six months. Give every dollar a name and spend everything on paper before the month begins. It’ll be tough. You may have to cut out cable television, stay away from restaurants and put vacations on hold for a while.

Then, take a really close look at the situation and see if you’re getting out of debt and into savings. If not, then you may have to consider selling the house.

- Dave

* For more financial advice plus special offers to our readers, please visit www.davesays.org or call 1-888-22-PEACE.

Dave Says

Divorced and Wondering What To Do

Dear Dave,

My husband and I divorced a few months ago, and I got custody of our children, ages 12 and 17. I’m lucky enough to be debt-free, and I own the house we’re living in, which is worth about $350,000. I also have $160,000 in savings, and we receive $1,200 in child support every month. People are all telling me I should be investing, but each one tells me to do a different kind of investing. What do you suggest?

Mary

Dear Mary,

I know going through a divorce has got to be hard on you and your kids. Make sure you spend lots of time hugging on them and letting them know they’re loved. Fortunately, things are still pretty good in your world in a financial sense. Your net worth is a half-million dollars, plus you have no debt. Most ladies don’t find themselves as lucky money-wise after a divorce.
But the trauma from the divorce is still pretty fresh, and I wouldn’t recommend making any life-changing decisions right now. You should never make important, long-range decisions when your emotions are out of whack.
I wouldn’t do too much with the $160,000 right now. Just park $100,000 of it in a CD for a year until you get over the shock of everything that has happened. You won’t make a lot of money, but you won’t lose anything, either. Then, take the remaining $60,000 and invest it in good growth stock mutual funds – ones that are very conservative and have at least a 10-year track record of success.

Also, you’ve got to take a look down the road and decide what you want to do with the rest of your life. You’re going to be an empty-nester is a few years. Do you want to go back to school or maybe start your own business? You’ve got a little learning to do about investing, too. Taking a year or so will allow for education and thinking about what you want out of life. Knowledge has a way of erasing fear. Plus, you’ve got a responsibility to your kids to invest this money wisely.

When everything settles down a bit, just take your time and make sure you don’t invest in anything you don’t understand. And spend lots of time loving on your kids, too. That’ll help with the healing process as much as anything.

- Dave

Dave Says

Husband/Wife Partnership?

Dear Dave,

The grand opening for my new business is coming up soon. So far, I’ve done everything on a cash-only basis and my husband has been a huge help the whole time. Do you think it would be a good idea to officially make him a partner in the business?

Beverly

Dear Beverly,

Way to go! I love the fact that the two of you have worked toward a dream together AND done it without going into debt. Doesn’t it feel great to own a business instead of the business owning you?

I know you love your husband, and he sounds like a great guy to have worked with you and given you all that support. Still, I don’t think I’d make him a partner in this deal. A partnership is a pretty bad form of business ownership, and it can be even worse if the partner is your spouse.

First, making him your partner won’t really accomplish anything worthwhile. Second, if things go wrong and this thing tanks you’ll both be liable. If you’re in the type of business where you have some liability and you’re afraid someone might try to come after your personal stuff, I’d look into the possibility of a Sub S Corporation.

Congratulations and best wishes, Beverly. Grow slow and keep up the good work!

- Dave

* For more financial advice plus special offers to our readers, please visit www.davesays.org or call 1-888-22-PEACE.

Dave Says

What Exactly Is the Envelope System?

Dear Dave,

I’ve listened to you for a little while now, but I was wondering about the envelope system you recommend. How does it work, and how much do you suggest saving for emergencies?

Dale

Dear Dale,

The envelope system is simple. It’s just grandma’s old-fashioned, common sense way of budgeting money.

Back in the old days when people were paid in cash, they would take their money and divide it up in different envelopes. These envelopes represented the different categories in their budgets – food, clothes and whatever else they needed. When a particular envelope was empty, they stopped buying that particular item because the money budgeted for the category was gone. So, if you wanted a shirt but the clothing envelope was empty, you didn’t buy the shirt that month. It’s just a simple cash system that keeps you from overspending.

Today, we don’t use it that way for every single category, but it’s always a good idea to at least use it for food and clothing. These are two areas where most people tend to really bust their budgets!

A fully-funded emergency fund is three to six months of expenses. So, if your total monthly expenses are $2,000, you’d need between $6,000 and $12,000 in your emergency fund. Think of it as your rainy day fund, Dale. You’ve heard the old saying, “Into every life a little rain must fall”? Well, the emergency fund is your umbrella and protection in these cases.

Trust me, if you live very long you’re going to have some rain in your life. And your emergency fund will keep you from getting soaked!

- Dave

Dave Says

Recommend Bankruptcy?

Dear Dave,

I’ve been trying to help my sister figure out her financial situation, and it’s a real mess. She makes good money, but she has a lot of debt. At what point to you recommend bankruptcy?

Jamie

Dear Jamie –

I tell people to file bankruptcy about as often as I tell them to file for divorce. In other words, I don’t. Like many of the divorces today, most bankruptcies are the result of people just giving up.

If your sister is asking for help, she’s probably feeling hopeless and overwhelmed already. When you sit down with her, get her to step back from the situation and think logically, not emotionally. She may have to sell some things or take an extra job to make this work. Living on a very strict, written, monthly budget will be a must!

But make sure she takes care of necessities like food, shelter, clothing, transportation and utilities first. She may take a few dings on her credit along the way, but in most cases you can map out a plan to get caught up and be financially on your feet again in two or three years.

Her finances may be out of control, but chances are she’s not bankrupt. It may take a little while – along with a lot of hard work and going without things she’d like for a time – but you should never file bankruptcy over a problem you can solve in two or three years.

Walk her through it, Jamie, and be there for her. Most of all she needs a plan and the hope that goes with having one in place!

- Dave

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