The Ramsey Show - App - Believe in What's Possible, Not Just What Has Happened (Hour 2)

Episode Date: August 4, 2020

Debt, Retirement Tools to get you started:  Debt Calculator: http://bit.ly/2QIoSPV Insurance Coverage Checkup: http://bit.ly/2BrqEuo Complete Guide to Budgeting: http://bit.ly/2QEyonc Interview Guide: http://bit.ly/2BuGnZE Check out other podcasts in the Ramsey Network: http://bit.ly/2JgzaQR 

🎵 Live from the headquarters of Ramsey Solutions, broadcasting from the Dollar Car Rental Studios, it's the Dave Ramsey Show, where debt is dumb, cash is king, and the paid-off home mortgage has taken the place of the BMW as the status symbol of choice. I'm Dave Ramsey. Chris Hogan, Ramsey Personality, is my co-host here on the air this day on the Dave Ramsey Show. Open phones if you want to talk, 888-825-5225. That's 888-825-5225. Joseph is on the line, and Joseph in Michigan is going to start this hour off.

Hi, Joseph. How are you? I'm focused and not finished, Dave. How are you doing? Sounds like a Chris Hogan fan to me. What's up? So I got a car that I was trying to sell. It's brand new from last year, and I got a dealer willing to pay it off for me,

and I just didn't know if i should try to sell a private party and make a little bit more on it or if i should just get rid of it how much is it it's uh 21 21 000 what is it i think it's worth like it's a subaru cross track okay why can't you sell a private sale and make more? I could. I just, a friend recommended this person. I was like, well, we're trying to sell it because, you know, we're gazelle intense. So what are they offering you? They're offering me $21,000. And what could you sell at private sale for?

I think $24,000. And how long would it take you to make $3,000? I'm not sure. Just however long it's on the market, I guess. Yeah. Okay. I mean, do you have any indication that the car is something that can be sold quickly, or is it going to sit on there?

I mean, I think it could go pretty quick. Okay. Or I don't know if I should try another dealership first. No, they're all going to be about the same. Yeah, they're not going to. They're in the business of making money on the car. They're going to make the three grand. Joseph, what other debt do you have outside of this car?

Just another vehicle that we owe $9,000 on. Okay. What's your household income? $60 a year. Okay. So once we clean up this vehicle situation, you're not going backwards, right? Oh, absolutely not. Okay, alright, because you got car-itis, it sounds like.

Oh, for sure. You got to cure that bad boy. But listen, if you can make another $3,000 to $4 four grand, why wouldn't you do it? That's why I called in, to have you guys make my decision for me. No, no, no. We want you to make the decision. We're just trying to teach you. The thing is, if it takes a month to sell it and you make an extra $3,000, that's like making $3,000 a month.

Yes, that makes a lot of sense and uh you know but i think what's happening is is you're just like you want the relief yeah right and you know you're you're okay so what if it hurts i'm gonna rip the band-aid off and you know you can always get the dealer will buy it anytime so you could try it for a month and then drop it to own the dealer if you wanted to. Call us back and let us know if a month from now you made an extra $3,000 or if you ended up having to sell it to the dealer after all. Okay, will do.

All right. I appreciate it. Thanks, man. That's a good way of thinking about it, Dave. I mean, you're right. The dealer's going to give you a dollar amount. They're going to honor it for 30 days. Give it a month.

Slap a sign in it. Take it somewhere in a high traffic area and get to see what happens. Get it in Craigslist. Get it on Trader.com. CarGuru. Whatever it is, you're going to post the thing. Post it a bunch of places and give it a run.

Because that's three grand he could use toward the next day. It's not a bad part-time job to make three grand. No, but people don't think about it that way. Yeah. Yeah. No, it's, yeah. And if that dealer won't honor it. Somebody will.

They're going to all be, they buy cars. That's right. At wholesale. It's what they do. And right now there's a bit of a shortage on cars. The car market's heated up, believe it or not, during COVID. And a lot of new cars are, well, there's a shortage of inventory because the factories have been shut down. And then people got bored and went and bought cars.

And so these dealers are sitting with low inventory in some cases. And so some of these vehicles are going over on a new car lot, going over a sticker because there's a shortage okay so and that's going to pull the used market up as well big time so uh you know the new market supports the used market in that regard so we'll see i mean i just um but it you know people it's weird houses are selling at record rates cars are selling at record rates boats you can't find a boat i talked to my boat guy the other day he said in one month we made more money than we did three years ago in a year how well because everybody goes i can go on the lake and not get covid and i don't have to wear a mask nobody's out there chasing me around with a mask and social distancing and right bitching

and whining about everything i can go play on the water. And it feels like normal again. Right. I'm not crammed up amongst a bunch of fear porn people and all this stuff. And so boats are selling like crazy. Anything where people can get out and have a sense of normalcy is going crazy. No, it is. Golf.

Golf. You can't get near a golf course. You can't get on a course. That's a good point. Alright, so this is all happening while businesses are closed and things are shut down. Okay, we got people buying homes, buying cars, buying boats.

But they're not working. I see a storm coming here in the next couple months. You think people are buying stuff they can't afford? Absolutely. You think that's unemployed people not doing that? I hope not. No, no. Well, I mean, I think you got, Dave, we had people that were unemployed making more off

work than they were working. Yeah, until last week. Until last week. That's exactly right. And now, with that shut off, now what we're about to see in the next 45 to 60 days. I don't think those people living on unemployment are the ones out buying buses. No, there's no way. Most of the time. Right. There's no way. But there's just certain

segments of the economy that have gone bananas. Yes. And so you need to just kind of be aware of that if you're selling a car. Right. You know, it's something to think about. It really is. Justin's in Houston, Texas. Hi, Justin. How are you? Hi, Dave. Doing good. How are you? Better than I deserve. What's up?

Hey, I'm just hoping that I could get some Uncle Dave wisdom from you. My wife and I, we are in baby step six and are working on trying to pay off our house. Good. With the COVID situation, everything going on, I work in oil and gas. Things have been really kind of a roller coaster ride the last few months. The company I work for, they had to lay off about a third of the workforce, and I'm still there, but they're having people do involuntary furlough weeks and kind of going on and off, so it's just kind of dicey at the moment.

Yes, it is. I'm wondering if it would be a good idea to look into refinancing our house right now because we have a couple of friends that have been buying houses and the interest rates they've been getting have been pretty low. And I'm wondering if maybe just kind of as a precaution, I guess, it might be good to lower that monthly payment down a little bit while still kind of working towards our goal of getting it paid off. I think we can have it paid off in three, maybe four years with the rate that we're going.

If you can save enough on interest rate to justify the closing costs before you get it paid off, you would refinance. I would not refinance it and lower the payment. I would lower the term and keep the payment the same. That's exactly right. No, I would not do it in an effort to feel better about their situation. If you need to do that, just quit paying extra on it and pile up some more money in your emergency fund. But I'd do that before I'd refinance in order to get a lower payment to feel better. No, not a chance.

This is the Dave ramsey show most people's money problems come from not paying attention that's why before i spend a dime of my money on something i do the research and i make sure it's going to live up to what it claims. Recently, I got a great pair of sunglasses from a company called Shady Rays. When you're looking for sunglasses, it feels like your options are limited. Name brand sunglasses cost too much. And the cheap knockoffs are ugly and they don't really protect your eyes. Discovering Shady Rays is a game changer. With Shady Rays, you can count on premium sunglasses that protect your eyes and, get this, they're affordable.

They give people the best overall value in sunglasses. They also replace your shades with a brand new pair if you lose or break them from day one of your purchase. Plus, they offer an exclusive for Ramsey Show listeners. Right now, you can grab most polarized pairs for just $28 at ShadyRs.com a 100 satisfaction guarantee means you mess up and they will still replace your blinds for free if you pick the wrong color you mismeasure they'll replace them for you get free samples free samples, free shipping, new promos all the time. It's a great company. Blinds.com. Use the promo code Ramsey to get the best possible deal.

Chris, our question for the day. Sure. Dave, today's question comes from Chris in Nebraska. He visits DaveRamsey.com, and he asks this. I have a mutual fund account with $11,000 in it that is not a retirement account. My wife has a retirement account through her job as a teacher, but I don't have one at all. I'm wondering if we should cash out the $11,000 in the investment account to put towards our baby step two. Ah, Mr. Ramsey.

I would tell Chris this is designated as non-retirement. He absolutely could cash that out to use it to attack debt and continue to stay focused and work in his baby steps. And then once he gets out of debt, build up that emergency fund and then start investing. Yeah, exactly. Chris, what we've discovered is that the shortest distance between you and wealth is to get control of your largest wealth-building tool, which is not your $11,000 mutual fund. It is your income. That's right. And when your income is all going out the door to other people,

here's a mathematical fact for you. You don't have the money anymore. It all went out the door to other people. And so as soon as you can get clear of debt, that is the shortest distance between you and wealth and shorter than investing heavily in mutual funds and the mutual funds get you out of debt. That doesn't happen. The number of times we found that in our millionaire study was almost zero. Yeah. The number of times we found someone said, I'm going to borrow on my

house, put the money in mutual funds, or I'm not going to pay off my house. I'm going to put the money mutual funds in order to build wealth and stay in debt. The number of times we found that in the millionaire study was almost zero. Right. Yeah, it's just it's it's about math, Chris, but it's also about being intentional. And so, buddy, definitely take care of that. Liquidate that. Get on that debt. But again, have that mindset, getting control of your money. And I want you to hop over into Ramsey Plus. We'll tell you about that here in a little bit. But it's a great opportunity for you to have community as well as tools and tracking. Well, you're right, Chris. A lot of people are saying

never again after coming out of COVID or sitting in the middle of COVID or having watched other people go through COVID. Never again am I going to be broke. Never again am I going to be in debt. Never again am I going to be in a situation where I don't have any savings to take care of my family. I've been there. It is a scary butt place to be, and you don't want to be there.

And if you've been there, you know what I'm talking about. And we have the right plan, the right tools, and the right teaching to where you never again have to be here. Ramsey Plus gives you all of that. It's our brand-new all-access membership, and you can try it for free, a free trial starting today. Here's how it works. You learn all the proven money plan with our best-selling content,

including all of Financial Peace University. You budget, taking control of your money with every dollar. It syncs up with your bank, syncs up with your spouse. The budget finally will work. And then, as you're budgeting and you're working the principles, you're going to track your progress with the new Baby Steps app. All of that is in Ramsey Plus, and all of it is available on a free trial. So you can start this and do the next right thing for your money. It is your choice to start a free trial of Ramsey Plus today.

Text TRIAL to 33789. That's TRIAL to 33789. That's trial to 33-789. Jake is with us in Eau Claire, Wisconsin. Hi, Jake. How are you? Good, Dave. Thanks for having me. Sure. What's up? Hey, we just discovered your program recently and my wife and I have differencing

opinions on Baby Steps. We're on Baby Step 2. When we bought our new house, we kept their old one and we decided to rent it out and we've been renting it out for now for about four years. And we owe about $100,000 on our primary residence. We owe about $40,000 on our rental unit. And I would like to sell it and be free and clear, but we've had pretty good luck renting it for the last four years. So you have $100,000 more or more in equity on the rental? No.

Okay. What's the rental worth? It's worth about $110,000. Okay. So you get $70,000 out of it minus some expenses, so maybe $60,000, and you would apply that towards your $100,000 mortgage? Correct. We also have $50,000 saved in our bank account.

And that would make you 100% debt-free house and cars and everything? Correct. We have no other debts other than the two mortgages. Okay. Jake, do you have an emergency fund? Well, okay, I guess that $50,000 was part of the emergency fund. So probably $20,000 emergency fund and then $30,000 savings. Yeah, you pay off the house and still be sitting there with a pretty decent-sized emergency fund. So here's the way that the two of you can discuss it and talk it through. What's your household income? About $110,000 a year. Okay.

So you can kind of map it out one way and say all right we're going to keep the mortgage and we're going to keep the rental and we're going to get the 50,000 down to in either case we're going to get the 50,000 down to an emergency fund and use it in the baby steps okay so we're going to pay down on the mortgage or pay down on the rental one of the two okay okay and then you map that out and say with $110,000, how fast can we pay off $140,000 minus $30,000 of the $50,000? So $110,000. Making $110,000, how fast can I pay off $110,000 and have both properties free and clear?

And am I willing to be on beans and rice to pull that off for that period of time? So let's call that four years. Okay? I'm making up a number, but y'all look at it. Yeah, I'd say about five, but four is probably good. Yeah, somewhere in that range. All right? And so, or we can be debt-free in a month.

And we would use all of those payments we don't have anymore in order to build wealth. Now, a good way to look at that part of the discussion would be to say, let's pretend our house was paid for and we didn't have, our home was paid for and we didn't have a rental. Would we take out a $100,000 mortgage on our home to buy a rental on our paid-for home? it's the same discussion isn't it yeah i'm just reverse engineering it but it makes you feel it with your heart not just your head and uh you might pose that question to your wife and just say if our house was paid for and we didn't have a rental since you like the rental would you borrow on our house our paid for home in order to buy a rental? Because effectively,

that's what we're doing if we keep the rental. Right. And she wants to keep it, right, Jake? Yeah. The reason she's given me is because she didn't get much for her retirement and past employers, and she wants to keep it long-term as a potential retirement plan. But now it's like we're putting 15% of our retirement worth. She's 33, I'm 30. In my mind, we still have time to... You're going to be multimillionaires. Plenty of time.

Either answer to this question, you're going to be multimillionaires if you'll stay on task. So she's okay on that. But the question is, really what the whole thing boils down to is, as you talk this through, what do the two of you come to believe is the shortest path to wealth? The paid-for house and no rental, and then save up like crazy, buy another rental with cash, and continue to invest, which is what I have done.

Or we're going to take five years and clean up these two mortgages, and then we're going to go do that with a paid-for rental, a paid-for house, and an income. We're going to go use all of that cash flow to buy more rentals and build up wealth. Agreed? So which of those gets you there the fastest and with the least risk and with the most peace? For me, and I love real estate. I've got a bunch of it. But for me, I'm selling that rental in about 30 seconds.

Yeah. Yeah, me too. And that's where I feel like the risk. The big thing for me is risk and going that path where we sell that apartment and become free and clear and save up for the next one, to me, makes sense. But I hope that I can convince her of that. Well, just play this back. She's not wrong in her having those feelings. Right. But the question is just, you know, ultimately you have the same goal,

and the same goal is her retirement statement is the goal, is Bill Wealth, right? That's the goal. So the only argument is not what the goal is. The only argument is... Which path. Which is the fastest. That's right. Which path do you take?

Most efficient. Go to the short one, Jake, from State Farm. Oh, no. No, Jake's a good guy. No, I know. I'm just playing. It slipped. This is the Dave Ramsey Show. Families all over the country are discovering a faith-based and budget-friendly way of meeting health care costs, whether they're anticipated or completely unexpected. For example, take the Olcheski family from LaGrange, Texas. Jeff and Carice had just celebrated the birth of a new baby boy. Shortly after, they had another expensive medical issue come up.

They could have faced a huge financial setback. But thanks to Christian Healthcare Ministries, the Olcheskis were spared from a ton of medical bills. As members of CHM, they're part of a group of believers who financially and spiritually support each other. CHM is the longest serving health cost sharing ministry and is a Better Business Bureau accredited charity. It's Christians helping other Christians. And it shared nearly $97,000 to help the Olcheskis. To be a part of Christian Healthcare Ministries, visit chministries.org. That's chministries.org. CHM is a proud sponsor of Dave Ramsey Live Events.

My co-host today on the Dave Ramsey Show, Ramsey Personality, Chris Hogan. In the lobby of Ramsey Solutions on the debt-free stage, Jeremy and Gene are with us. Hi, guys. How are you? Doing great, Dave. Doing wonderful. Good, good. Welcome. Where do you guys live? We live in Iowa. Oh, cool. And all the way to Nashville to do a debt-free scream.

Yes, sir. I love it. How much have you paid off? We paid off $131,000 in four years. Good for you. Great. And what was your range of income during that time? We started at about $100,000 and finished at $110,000. Good.

Cool. What do you guys do for a living? I'm a pharmacist. And I'm a technical writer. Oh, great. Very good. Great careers. Good for you guys.

What kind of debt was the $131,000? What did you people buy? Her student loans. Ah! Pharmacy. Pharmacy degree. Yeah. All student loans. 100% of it. $96,000 was student loans, and about $35,000 was personal loans. Okay. Cars or just...

Just personal debt. Just odds and ends. Fit off a little more than we can chew when we built our house. Oh, okay? Just personal that. Just odds and ends. Fit off a little more than we can chew when we built our house. Oh, okay. That makes sense. All right. So how long have you guys been married?

We've been married for 12 years. Okay, cool. What happened four years ago that got this whole thing started? Well, it started about four and a half years ago. We had just finished building our house. We were settled in and we were just coasting. Thought everything was doing just fine. I got this pressure, like this stress and constant wait. I falsely assumed it was because my house wasn't clean enough.

And so I thought, oh, let's get a cleaning lady. So we're trying to find in the budget where we could get, you know, just $80 a month for a cleaning lady. And we couldn't find it. We just started noticing every month we were spending more than we were bringing in every month. And we're like, this is not okay. We're not okay. We're not in Congress. No, this is not okay. So we met with a new financial advisor and I was really stressed out having him work on that budget and help me find that $80. And he's like, you know, budgeting's not my strong point, but I know a guy. Oh. And he wrote down your name and the total money makeover said, get this book,

read it. Wow. Ask me if you have questions. Wow. So we got the book kind of grudgingly going, okay, it's just going to be fixed expenses, variable expenses. Okay. Budgeting. Yay. But when we got reading the book and I read the first success story, I had my never again moment. Wow. I read that. I wanted to be on the stage right here, having that peace and not feeling the stress. It wasn't from my house being not clean. It was from the money stress and us not being on the same page and not feeling like we're in control. Wow. That's powerful. We jumped in with both feet and here we are. Very cool. Okay. So you, you, you immediately adopted the book.

And so, Jeremy, were you right in there? I was kind of on the fence with it to start off with. I was like, okay. You're kind of a systems guy with what you do, right? So you had to be suspect of the system. I would have been. Well, you go into it, and you're like, okay, what's the catch? Yeah, yeah.

What's the catch? My cynical shield goes up. And so she got the book, she started reading it and she's like, Oh, Jeremy, I love this book. You got to read it. Like, okay. Okay. So she was like maybe a third of the way through the book and I said, I'll just pick it up and start reading it. Read through the book that night, crawled into bed at three o'clock in the morning and she was just, what were you doing? Wait, you finished the book, didn't you? Yes, yes, I finished the book. I have to clean my plate. You finished the book and what's your mindset, Jerry? My mindset went from, yeah, right right to this makes sense right it's just

this isn't a rack of science but nobody talks about this kind of stuff exactly and going going through it like build up an emergency fund you know pay off your your debt snowball and he's like oh yeah that makes sense you know the next baby's, yeah, that makes sense. You know, the next baby said, oh, yeah, that makes sense. I'm like, okay. And just got through it. I'm like, okay, we're on. Let's do it. Let's go.

That's fantastic. Jean, what was the biggest sacrifice for you throughout this? Biggest sacrifice. We had to say no to a couple things. And, you know, I refused to buy a purse or new socks during this whole thing. Is this just for you or the whole family? Just me. They keep growing over there.

They need socks here in Iowa. Going to have to have those. That's awesome. Very cool. Very cool. Now that you've done it, if you were sitting down with someone that was like you were right before you started reading the Total Money Makeover, they're scared, but they're a little bit cynical, which is most of us. I mean, we've all kind of been there.

And they say, okay, right, but how'd you do it? What's the real key? What would you tell them the two or three things you have to do if you're going to get out of debt? Because you're a success. You paid off $131,000 in four years. Touchdown, baby. They're talking to somebody who did it, okay? And you can answer the question.

What would you tell them? They're listening right now, by the way. What would you tell them how you got out? What do you got to do to get out of debt? My biggest thing is contentment. Rachel Cruz talks about it all the time, but being content. Look around us. We are in this wonderful country.

We all have so much stuff in our house. Use what you have. Wear out all your old socks. Be happy. Be content. Find those things that make you happy. It's not your stuff. It's the people that you spend your time with.

I think for me, it's just with the eye at the goal line, you know, thinking that's my money, but it doesn't belong to me right now. And I want that to be my money. I want it back. I want that money back. I want my money back. It's like if you get bad service, I want my money back. That's good.

Very good. Well done, you guys. And you brought the kiddos with you. What ages and names are they? Bring them over. Let's get them in the shot. We have Rowan, who is 10. Come on over.

Miles is 2. He's working on coming up. All right. We have Aubrey. She is 8. And we have Cora, who is 6. All right. The gang is here.

That's right. And how much did they understand what was going on? It really sunk home when we read Smart Money, Smart Kids. And they each have a chore chart and work on commission. And they have their own savings envelopes and savings goals. So now they know what mom and dad were doing. Yes. Yeah, with the no socks, no purses thing.

Okay. Very cool. Very proud of you guys. Well done. Very well done. We've got a copy of Chris's book for you, Everyday Millionaires. That is the next chapter in your story for sure. So excellent, excellent job.

All right, it's Jeremy and Jean. Rowan, Aubrey, Cora, and Miles from Cedar Rapids, Iowa. $131,000 paid off in four years, making $100,000 to $116,000. Count it down. Let's hear a debt-free scream. Three, two, one. We're debt-free! That is a family that has changed right there.

Yes, it is. Wow. That's really, really cool. I love that mindset. That's my money, and I want it back. I want my money back. I want it back. I want my money back.

Yes. We ought to tell Washington, D.C. that. You guys suck. I want my money back. Right now. I want my money back. Yes. You suck. I'm not going to give you money more because you suck. I want my money back. That's great, you guys. You know what occurs to me when I'm looking at that beautiful family and their whole thing that they got the kids involved. Their family tree has completely changed. And so many

families, sadly, too many families in America have taught their kids that they're victims. Right. And they taught their kids that they're not victims. Not only mom and dad not a victim, but they told the kids, you're not a victim. Yeah. No, they sure have, Dave. And I'm going to tell you that passing along that mentality of the victim mentality is

a shame. It's a detriment. And what you're doing is perpetuating a cycle instead of breaking it. And so you do have to think differently. You got to make some decisions for yourself. And hopefully we can get more people believing in what is possible, not what's happened. Right? That's the key.

Yeah. I mean, there's evil out there. Oh, yes. Evil's out there. But you got, you know, those kids have been taught by watching their mom and dad for the past four years with four kids. Yeah. Scratching and clawing. I mean, that wasn't an easy trick.

No. That's not an easy trip right there. They made some sacrifices. They watched them, and then they'll remember the time we went to that weird bald guy's place and stood on stage and screamed, we're debt free. And I'm talking about you. No. Go to commercial break. Wow.

This is the Dave Ramsey Show. Thank you. This is the Dave Ramsey Show. Chris Hogan, Ramsey personality, number one best-selling author, is my co-host today on the air. Open phones at 888-825-5225. That's 888-825-5225. That's 888-825-5225. Gabriel is with us in Honolulu. Hi, Gabriel. Welcome to the show. Morning, Dave. Morning, Chris. How are you doing? Better than we deserve, sir. How can we help? Well, the reason I'm calling is I just finished baby step two, and we're going to be moving to baby step three, and we should be done with that by the end of the year. I was going to ask about the 15%.

I'm a military retiree. I received VA disability, but I also work a full-time job with the government. And my question is, should I incorporate the 15% with all the three different sources of income I'm receiving and make that one lump sum of 15% or should I just do 15% of my income from my actual job? Okay, so you've got three sources of income coming in right now correct yeah yes me my wife works she's going to be doing her 15 as well okay but me i'm yeah you definitely want to do yeah you would do yours based off the 15 off of your income all sources all sources and the reason is real simple uh it's not there's not a technicality involved here.

It's the more you save, the more you're going to have. Exactly. Yeah, I understand. Yeah, so, I mean, if you say, I don't want to include my retirement in that, I'm going to do 15% on the other portion, you can do that. You're just going to end up with less money is all. That's right. And, Gabriel, guess what? We're not counting the company match of any type. So this 15% is just yours. Why? Because as we've seen throughout this

COVID situation, there was some major companies that just shut down their match for a little while in a way to conserve cash. So you want to control what you can control. So investing 15% is the way to go. Yeah. And I really wouldn't say your wife puts 15% in her plan, you put 15% in your plan. You combine your household income, your total household income, 15% of that amount needs to go somewhere. Right. And the best place to put it is with a match. And this next best place to put it is with a Roth. The best place of all is a roth with a match

that's right but you take match first then roth and once you've maxed out those then you would do traditional wherever you have the best options to invest the best mutual funds to invest in and so it might be that you load up hers more than 15 of her income because she's got a match with a roth over there and you don't. You might end up doing that because it doesn't matter. It's marital assets either way. And so I'm going to add up all three of your sources plus hers. That's four sources of income and say that total annual times 0.15 is going into something. That's what I'm looking for, into the most advantageous thing,

regardless of whose name it is in. Allie is with us in Houston, Texas. Hey, Allie, welcome to the Dave Ramsey Show. Hey, Dave, how are you doing? Better than I deserve. How can Chris and I help? I'm actually going through a refi right now. I'm going from a 30-year to a 15-year,

and I'm just having trouble calculating my break-even point. Because you're trying to use the payment. Use the interest rate difference. What is your current interest rate, and what will your new interest rate be? My current interest rate is 3.75, and the new 15-year will be 2.125. Okay, so we got 1.875 difference, right? Did I do that right? 1.63. 1.6, I can't do that. Okay, crap, I'll round it. All right, so let's call it one and a half spread, all right? What's your balance? My balance right now is3.58. Okay, so every 1% you save is $3,500 a year. And so we put another $1,750 on top of that,

and so we're at $4,500 or so, $4,600, right? And so we're saving $4,000 or $5,000 a year in interest as a result of this, regardless of the payment. That's what your actual savings is. The payment is the rest of the portions of the payment, in's what your actual savings is. The payment is the rest of the portions of the payment in either case are going to principal. So this is the change in your expense, which is your interest.

And so if you're saving $5,000 a year in interest, which it sounds like with my rounding error, you're probably over $5,000. What is your closing costs on this? My closing costs is between $4,000 to $5,000, and I have to bring another $10,000 to the table to get my LTV to 80%. Yeah, but that doesn't affect it either, okay, because that's actually principal. So your actual expense is only $5,000, so your break-even period is about a year. Okay, that's awesome. And you're going to keep the house longer than a year you do this deal yeah i think i'm

going to keep it for about 18 months that's kind of my target right now yeah it's borderline to screw with all this yeah why why 18 months what are you going to go do after that i don't know i'm just a very indecisive person i don't know what the future holds for me so i know for the next 18 months i'm going to be here okay well listen well yeah do the refinance refinance because you're just waffling and stuff and so you you put yourself in a good position within a year you're going to recoup uh it's a smart move overall without a doubt and when your next real estate buys, go with the 15-year fixed on the front end. Okay, let's not have to redo and update and clean up all that. 15-year fixed right out of the gate if you're not paying cash.

Yeah, okay, there we go. But the way, folks, the recap is, what is your change in interest rate? Hold on, I'm going to write this down. Change in interest rate. That is the only expense you're saving on. Right. Everything else, the payment change from a 30 to a 15 is a principal change. That's right.

But the only thing you're actually saving is, so if you're saving 1% on $200,000, you're saving $2,000 a year. And if it costs you $3,600 to do that refinance, you've got a break-even period of just under two years. You divide your expense by your savings, and that gives you your break-even point. There you go. It's a break-even analysis. And if you're not going to keep the house longer than that, and most of the time the general rule of thumb is it needs to be under three years. Your break-even point needs to be under three years because because something's going to screw up or flip or something during that three years the average mortgage stays on the books only 5.6 years in america due to refinances

and resales gotcha okay and so which makes sense but you've also said you would not refinance just to lower the rate no just to lower the term lower the term i to lower the term. Lower the term, I mean, I'm sorry. We definitely do for a rate. If you've got a 1% or better rate difference, then it's something to really take a good look at, but not to refi just to reduce term. Yeah, the reason, and just run it out and say, how quickly do I get my closing costs back with the interest saved?

Right. And is that three years or under, and am I going to stay in the house that long? Then the answer is yes, you refinance. If you have a 30, let's say you're sitting on a 3% 30 right now. You're not refinancing that. You're not refinancing a 3% because you're not going to get enough savings. If you've got a 3% 30, just calculate what a 15-year payment is, calculate what your 30-year payment is, and make the difference as an extra principal payment, and it will pay off magically in 15 years.

That is true. Because the reason it pays off in 15 years is the extra principal payment. Right. The interest doesn't change that. And, you know, sometimes people get the idea because they look at an amortization schedule that, oh, I paid all the interest on the front end. No, you paid the interest on the outstanding balance the entire time you had an outstanding balance.

That's exactly right. Because the way amortizations work on mortgages, if you have a traditional mortgage, not a rip-off mortgage of some kind, is it's calculated like simple interest. How much interest is charged that month on that outstanding balance, and all the rest of your payment, other than that amount, is going to principal. And so anytime you reduce the principal, you reduce that amount of interest. Right. And it slides you forward in the AM schedule.

That's right. And I want to warn people out there with all the rates that are happening, you want to know the difference between an APR and your contract rate. Okay? The contract rate is the advertised thing. The APR is what your payment's based on. Yeah. So any other points or hidden fees are going to be

inside the apr so when you call a bank or lending institution you want to know i want to know the contract rate and i want to know the apr you want to know both of those yeah you can get snookered messing with just one not the other yes you can't oranges without a doubt it's good it's good discussion because it's a great time to refinance right now. It really is. It's way down. Yes. But only if you're going to stay in the house. Only time it makes sense. That puts us out of the Dave Ramsey Show and the books. Our thanks to James Childs, our producer, Kelly Daniel, our associate producer, and phone screener. I am Dave Ramsey Show.

This episode is over, but if you heard about an event, product, or service and didn't have a chance to write it down, don't worry. We list everything you've heard about during this episode in the podcast show notes section or head over to DaveRamsey.com and click Dave Recommends. Thanks for listening.