The Rachel Cruze Show - Common Money Mistakes (and How to Avoid Them)

Episode Date: July 22, 2024

💵 Start your free budget today. Download the EveryDollar app! From surprising exceptions to my "no debt" rule, to maximizing your home's sale, to the real costs of car loans—today, I'm sharing tips to help you avoid common money mistakes when making big financial decisions. In This Episode: ·      The Only Exceptions to My “No Debt” Policy ·      5 Mistakes to Avoid When Selling Your Home ·      The Worst Investing Mistake You Can Make Next Steps ·      🎥 Watch my video on mistakes to avoid when paying off debt. ·      🔨 Head to my video to find out which home upgrades aren’t worth your money. ·      🚙 Check out my video on 10 great cars you can get for under $10,000. ·      🏡 Sell your home with confidence! Partner with a RamseyTrusted real estate agent.    Offer From Today's Sponsor ·      🏥 Learn more about Christian Healthcare Ministries. Listen to More From Ramsey Network 🍸 Smart Money Happy Hour 🎙️ The Ramsey Show   🧠 The Dr. John Delony Show 💸 The Ramsey Show Highlights 💰 George Kamel 💼 The Ken Coleman Show 📈 EntreLeadership     Ramsey Solutions Privacy Policy Learn more about your ad choices. Visit megaphone.fm/adchoices

So if you've ever had a high school English teacher who said to you that you had to learn grammar rules so that you know when you're allowed to break them, well, again, practicing really good financial habits should always be your default. But it's also important to understand the few times that that formula might be a little bit different. Hey, you guys, welcome to this episode of the Rachel Cruz Show podcast. I'm so glad that you're here. So in this episode, we'll discuss five things to avoid when selling your home. Then we'll chat about the worst investing mistake that 40% of Americans are making. But first, I want to talk about the rare exceptions to my no-debt policy. Take a listen. So, listen, with almost any rule in life, there's always some exceptions to that rule, right? it usually happens. I mean, family dinner table exceptions, excused absences from school for your kids, you know, some exceptions there, PTO policies at work, you know, at least a couple of circumstances there, you know, that you could change or tweak just a little bit. Well, the same goes for money rules as well.

So I've been teaching people about personal finance for well over a decade now. And even though I still stand on those same principles that I always have, I will admit, there are a couple of exceptions when really get into the weeds. So today I want to talk about my no debt policy specifically, and my advice still stands, but there are three circumstances where things, you know, they're not as black and white. They may be a little gray when it comes to debt. But before we dive into my three no debt exceptions, I want to share a little bit about why I teach people to live debt free in the first place. Okay, so living debt free, you guys, not only from a financial aspect, but also from an emotional aspect, a spiritual aspect, like there is something when you don't owe anyone money.

So from just the mathematical side, instead of continuing to pay the bank interests and pay them a fee where they make more and more money off of you, what if you paid yourself that interest? What if your money was actually working for you and you got to keep that? So think about interest in one way. You pay it out when you're in debt. Or if it was your income and it came to your bank account and then you got to decide and have the freedom to choose what to do with it. So whether it was spend it or maybe get it.

give it or save and invest it, and then your money will earn money in interest, but it's actually going to you versus somebody else. So mathematically speaking, when it comes to building wealth, your income, when you can keep it all, that's going to get you further financially. It just is mathematically. But then there is that emotional spiritual aspect that when you don't owe anyone anything, and there is freedom, and there is options in your life, you're not stuck in the same cycle where you are. And, you know, if there's a point that you hate your job, but you have to make your $600 car payment and your $400 student loan and your credit card bill that comes and you charge everything on it. So, you know, it's $1,200 a month that you got to pay. Like,

stuff starts happening. You have to stay where you are. There can't be this instability. Where if you didn't have payments and you had an emergency fund, you have the ability to have options. So that's just one area when it comes to freedom and options, you know, is your career. But there's so many other things that it plugs into. It just gives you peace when you don't owe anyone anything. It is an amazing thing. And if this way, of handling money sounds impossible. There's no way I can be debt-free. Can I just promise you that if you commit to following

the seven baby steps, you will start to see a light at the end of the tunnel. Because we have been teaching these steps for decades now. And again, it is a proven plan that has gotten people, this idea of being in control of their money, but also building wealth, getting out of debt, getting an emergency fund, and on a tactical side, it walks you through a plan to really give you peace.

So again, it's everything from building up emergency fund to getting completely debt-free, having a fully funded emergency fund, even things like saving for retirement and your kids' college, paying your house off early, which sounds crazy to some people, but they're doing it. People are doing it. And then having no payments. And it's an incredible thing. So living with no debts and having these key seven steps laid out that you start walking down, it really is going to give you financial success. All right, let's talk about, though, as great as it is being debt-free. There is some exceptions. of this. So are you ready for this? There are a few times that I will tell you to take on debt to get a loan.

The first is if you are upside down on your car loan. So this means what you owe on the original purchase of the price of your car, now you actually, if you were to resell it, you wouldn't get that much. Okay. So this is really common and happened a lot during like 2020, 2021, when there was a lot of car shortages and all the prices skyrocketed. People wouldn't pay top dollar for cars, and then once the market is kind of settled down, the car is not worth as much. So, for example, let's say you have a $60,000 car loan. So you went and bought a car for 60 grand. But you go to try to sell it today, well, it's worth $50,000. This is where I would say, yeah, maybe you would consider taking out a loan for the difference. So maybe the difference there is

$10,000, but maybe you take out $15,000. So you can go get a $5,000 car. And again, you have a $15,000 loan, $10,000 with the difference of the car, $5,000 for the car that you paid for, but $15,000 is way better to be in debt than $60,000. So when it comes to cars, again, this is one that I'm like, if you can get rid of your car loan, it is huge. If you can't pay it off in 18 to 24 months, or if it's more than half of your annual take-home pay, get rid of your car, okay? So even if you are underwater, get a loan for the difference. So that's one exception. The second exception when it comes to getting a loan is if you owe the IRS money. So if you owe a large sum of money to the IRS, there's a couple of options here. You can apply for a short-term or long-term IRS payment plan,

which allows you to pay back what you owe over time. Now, the downside of this is that you're still collecting interest and fees until it's paid in full, but the upside is that you're able to start making some progress. Now, I'll be honest, that always makes me a little bit nervous because the IRS is pretty powerful and they can come in at any time and do a lot to your money if they have access to your checking account. So there's a part of me that I kind of just want them out of my life. So this is the second exception of when I would take out a loan is if I owed the IRS money. I would go take out a personal loan for that, pay the IRS off, get them out of your life, and then work with the personal loan that you have. So if you have a great credit union in your

area, I think that that's a great place to go and take out that loan. And we always say, too, if it's a small amount of debt that you owe the IRS and you can pay it off quickly, and I'm talking about like 30, 60 days, bump that up in your debt snowballs when you're paying off all of your debt. Even if it's not the smallest amount, pay it off first. But again, you want to get them out of your life. ASAP, and if that means a person alone, then so be it. All right. Finally, the third exception when it comes to taking on debt is pretty well known because we talk about it on the show a lot.

But that is a mortgage. So a mortgage is the one type of debt we won't yell at you for because, listen, real estate going and buying 100% cash is not. very realistic for people. And the other great thing is that real estate is almost always an appreciating assets. So, yes, you are going to have payments over time. You are technically in debt when you have a mortgage. But here's the deal. You're going to pay off that house ASAP. So once you get through baby steps one through five, you're going to go work on baby step six, which is paying your house off early. So now there are some rules around when you're buying a home to make sure that it's doable. We'll talk about those in a little bit.

But again, generally speaking, when it comes to debt, a mortgage is the one type of debt that I'm also okay with. Here are a couple specific conditions to remember. Number one, I highly recommend a 15-year fixed rate mortgage. Steer clear of the 30-year or adjustable rate mortgages. 15-year fix is great. Number two, don't rush into a mortgage loan. Really make sure that you're buying a house when you are ready. And that means two things have to be true.

Number one, that you are debt-free. Number two, that you have a fully funded emergency funds of three to six months of expenses. So if you have that, you have a really strong foundation under you financially to go and purchase a home. So then you're going to save up a down payment. And again, it can be anywhere from 5 to 20 percent is a really great range, but you can work to be a homeowner. And it's awesome. So if you've ever had a high school English teacher who said to you that you had to learn grammar rules so that you know when you're allowed to break them, well, again, this is kind of like that. So practicing really good financial habits should always be your default.

But it's also important to understand the few times that that formula might be a little bit different. So make sure that you are making progress with your financial goals by doing a monthly budget. Every dollar is my all-time favorite budgeting app. It is so great. My family and I, we use it literally every day. I open it up and look at it because it gives you control of your money. So if you have not tried it, go to every dollar.com slash Rachel to create your first budget for free. So everyone knows that buying and selling real estate is generally a great way to build wealth.

But it can be a really tricky process, especially when you're the seller and you're trying to get the most bang for your buck. And after all, we all want to make sure that we get as much as we can out of our investment, right? So I want to make sure that you're 100% prepared for this process. So today I'm talking about five mistakes you should avoid when selling your house and stick around to the last item because it might surprise you. All right, the first mistake to avoid when selling your home is not expecting home selling costs. So now the good news is that hopefully you've lived in your home for a couple of years, your home has gone up in value. So typically it's safe to estimate the value of your home will appreciate 3 to 5% per year. And if this is the case, then you should be able to use some of the earnings from the sale of your home to put them towards closing costs.

Now, the bad news is that people often forget how many random costs can pop up throughout the listing, selling, and closing process. So if you're expecting your home to sell for the exact amount that you listed it and you're not factoring in the additional costs, you probably are going to be in for a rude awakening. So to make sure that you're accurately planning for your earnings, here's a list of closing costs that you can expect. Agent commissions, so this is for the listing agent and the buyer's agent. And usually it's 3% each, so a total of 6% of your home's sale price. General closing costs, taxes, title transfer fees, attorney fees, staging costs, and this could be anywhere from 400 to 600, depending on the agents that you're using and the company that they're working for. Home inspection, so this varies by region and by the size of your home, but expect to pay at least a couple hundred dollars for this.

Also, seller concession. So in case you need a little bonus to seal the deal, this could be any at expense, this could be like appliances or handling repairs before they move in, that kind of thing. Also moving expenses. So this also varies based on different factors, but the cost to hire movers, you guys, could creep anywhere up to a couple of thousand dollars. So remember that. Or the second mistake to avoid is selling without an agent. So selling a house is extremely detailed and it's a really legal process when you look at it. And again, this is your largest financial investment that most people have. Okay. So you want to really think. take this seriously. So not only will you have their technical instructions if you use an agent when it

comes to signing contracts and reading lengthy documents, I mean, you can really lean on them for advice. And again, it's really key because this can get really nitty-gritty. And having peace of mind by having somebody in the industry during this is really huge. According to data from 23, the typical FSBO home sold for $310,000 compared to $405,000 when sold by an agent. You guys, That's $100,000 more somebody got because they used an agent on average. So really think about that. Now, before you call up your BFF who's launching their real estate career or your friends, nephews, baseball coach's sister, okay, don't do that.

Find somebody that is really good. A seasoned agent is key. And real estate experts, again, they are worth their way and gold. And if you need to get connected with a pro near you, I make sure to leave a link in the description so you can check that out. All right, the third mistake to avoid when selling your home is pricing it wrong. And listen to you guys, it is called real estate for a reason. You want to be realistic.

And technically, you can list your home for whatever price you want, but it's kind of a bad idea to overshoot yourself. So remember, your goal is to make a fair and accurate profit without keeping your home on the market for six months and having to lower the price eight different times. So make sure to ask your agent for a market analysis that shows you what homes in your area are selling for. Again, it's running comps. This is something they do all of the time, because they really do have that bird's eye view of what's going on in the markets, competition in your area,

and price is going to vary depending on your property. All right, the fourth mistake to avoid is hiding major repairs that need to be done. So speaking of being realistic, let's continue on that trend, shall we? There is no reason to be dishonest about the condition of your home. And any buyer who it's interested is going to pay for a full inspection before they sign on the dotted line. So they were not worried about being deceived on their end, but sometimes, again, people do it without inspection as part of the deal at times. But if you have secret hidden repairs there, again, you want to be honest about what they are signing up for. And this is a level of integrity here. You don't necessarily have to highlight every part of your home that would require extra care around, but also don't be deceiving if there are things that need to be fixed. And so with that being said, there are ways to

make your home stand out and shine even compared to its usual lived-in condition. Which brings me to point number five to avoid when selling your home. So I mentioned it earlier, but this one might surprise you. And to preference this, I will tell you that this is a mistake that I typically would advise against when it comes to buying things that you don't need or aren't going to use. But when it comes to staging, a little extra effort can go a really long way. So mistake number five is skimping on staging. Staging is a proven way to make your home sell bad. and for a higher price. Now, again, this is going to require possibly buying or renting furniture or being strategic about it. But here's the deal. It can really help with your price of your home

when it comes to selling it. So if you're living in your home while it's on the market, chances are it's full of furniture and personal items. And so in that case, your realtor will probably advise you to eliminate a large percentage of that because the less clutter that is going on, the more the buyer can see themselves in it. And a fresh coat of paint will really neutralize the space too. So people need to be able to imagine again them living in your home. Now, if you're having to sell all your stuff or you're moving and the furniture won't be in there, again, this is where staging can really come into play. And you may not want to do it right off the bat. You can see what's going on with your home. But if it's taking a little bit to sell,

again, putting some money towards staging, renting, having a company do it, can really go a long way. All right, you guys, if an investment professional approached you and said, I want you to invest $1,600 a year, and by the end of the first year, the value of your investment will decrease by 20 percent. What would you say? And what if they told you after five years, you'd lose 60 percent of your investments? You'd think, what? No, I'm not doing that.

Because anyone with common sense could recognize that investing thousands of dollars into something that loses value is not wise, right? Well, would you believe if I told you 40 percent of Americans are agreeing, to this bad investments. And I hate to break it to you, but if you've ever had a car loan, that's exactly what you're doing. So today I'm going to talk about why cars are the worst investment out there and how you can still have a vehicle without falling into this trap. So according to a recent survey, over a thousand Americans, 40% say that they have had a monthly car payment. Of that 40% with a car payment, 46% of them said that they were spending anywhere from $300 to $500 every month.

But honestly, that sounds like nothing compared to the video that I came across the other day. In this video, there was actually two of them, and the first one was this woman talking about her Tahoe payment was $1,400 a month. And people started going crazy in the comments, as you can imagine, because some people weren't even spending that on rent. Well, she came back with video number two to let us know that her husband's truck payment was even more than that, $1,600 a month. She said that he bought his truck in 2022 for $78,000, and even after two years of payments, he still has a balance of $74,000. Man, let's do the math of that, shall we? So for two full years, he has paid $1,600 a month. So that's $38,400 so far.

So subtract $4,000 of that because it makes up the principal, then he actually has wasted $34,400. This man has thrown away over $34,000 in interest alone. And the worst part is that he's not even investing it in something that's going up in value. And when you buy a home, for instance, right, you're paying a mortgage. Over time, you'll pay it off. and even if you're losing a little bit of money on interest along the way, in the end, your home is going to be worth more than what you bought it for. But unlike homes, cars are almost always a depreciating asset. But they're still a basic need for most people.

So what does it look like to buy a car while still being smart with your money? So before we dive into that, I want to talk about what you do if you're already upside down on your car loan. Because being upside down on your car means that you, owe more than what your car is worth. So there are a couple of things that I recommend if you're in this situation. Figure out the remaining balance of your loan. Also, research the current sale of your car. You can go to Kelly Blue Book to do this. It's a great resource. Also, find the difference between those first two numbers. So your goal is to pay off whatever the amount is and then sell your car to cover the rest of your loan. Now, on the other hand, if you manage to avoid a car loan

trap, which is fantastic. Here's another way to think about car shopping moving forward. Number one, buy used. So if your net worth is not a million dollars or more, you really can't afford to take the financial hit of buying a brand new car. And like I said earlier, cars are a depreciating asset. So it's not smart to borrow money on something and pay interest on it when it's going down in value. So all you're doing, again, is agreeing of throwing your money away to high interest, not smart. Number two, pay for your car in cash. So again, unless we're talking about a mortgage here, there's really no reason to go into debt. So when you're buying a car, do it with cash, and some of you are thinking, that's not going to be a great car. Then it's not going to be a great

car. It's fine. Just for a little bit while you save up some more, you sell it, put that money together, step up in car, and you just keep moving up. All right, number three, make sure the value of your car isn't too high for your lifestyle. So just like we talk about your house payment or your rent payment should be no more than 25% of your take-home pay. This is another good rule of thumb when it comes to cars, is that you never want all of the cars in your household or really anything with wheels or motors to be more than half of your annual income. And living within your means is a crucial part of handling your money well. So make sure that you do that. Keep yourself accountable to this because some people can go car crazy. Number four, save for maintenance costs

and for your next car purchase. So when you're budgeting, create, a couple of lines for your car, right? So you could have one that says car replacement, and you just have a little bit of money every month that you set aside. So when it comes to replacing your car, you'll sell your current one, take the money you've saved, you can step up in car. But also have a maintenance line item budget because cars are going to break. So whether it's tires or God forbid, like engines or something, right? Things are going to happen and you want to have some money stocked away when it comes to the maintenance of your car because, again, they're going to break. All right, number five, buy new only when it makes sense.

So we talked about buying used already, but when it comes to a new car, if everything that you own minus what you owe is more than a million dollars, then at that point we would say, go ahead and buy a new car. But again, I'm here to remind you that if you are drowning in a $500, $700, $1,600 car payment every month, you're carrying around thousands of dollars in debt. It's not a great place to be financially, so you don't need to go and buy another new car, You want to be debt-free, have savings, be investing, do some things that are actually going to help you financially and not just a car, okay? And then once you have a million-dollar net worth, you can talk about buying a brand-new car.

All right, we covered a lot today. But I want you to walk away with this one takeaway, and I really hope that you get this. Getting rid of your monthly car payment is one of the most powerful things that you can do for your financial situation. If you want to find margin, that automatically, again, freeze up $500 to $1,000 a month just by not having a car payment. And again, it's a payment that you're paying interest on something that's going down in value. It is not worth it. It is not worth being in the rat wheel of car payments for just going, going, going, going, going. Do something radical.

Sell the car. Get rid of it. Do something different and actually have your income where you are in charge of it. So again, you guys, cars, we love them, but they're not investments. Okay, so listen, don't throw your money away to car payments. All right, if you love this show, make sure to leave a review and subscribe because your feedback and all that,

it helps us out so, so much. And if you know a friend or a family member who would enjoy hearing about money, talking about money, all of this stuff, make sure to send them this episode. Thank you guys so much for listening. And remember to take control of your money and create a life you love.