The Ramsey Show - App - How Can I Help My Mom Get Out of Debt? (Hour 1)

Episode Date: January 19, 2021

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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, your host, Chris Hogan. Ramsey Personality, number one best-selling author, is my co-host today as we talk to you about your life and your money. The phone number to do that is 888-825-5225. That's 888-825-5225.

Julie in Dallas is going to start this hour off. Hi, Julie, how are you? Hi, how are you? Great, how can we help? Well, thank you for taking my call. I just wanted to ask you about paying off debt before investing into retirement while being exempt from Social Security tax. Can I give you a few facts and figures first? Sure.

Okay, so I'm a stay-at-home mom. My husband's a youth minister with a salary of $40,800. That increases by 2% each year. And because he's a minister, we accepted the option of being exempt from paying into Social Security and instead invest on our own for retirement. Because we live rent-free, it's part of the package. We have a parsonage home. That value of the home, $14,400, it has to be added into our income when we calculate the 15% self-employment tax.

So our combined debt is a little over $123,000. Why would you be paying self-employment tax? Well, the 15.3% that would be going to Social Security, we don't have to pay self-employment tax well the 15.3 percent that would be going to social security we don't have to pay self-employment tax i know you don't um that's just the church um gives us half of that and we can invest that on our own they just give you half of it you can do whatever you want to do with it. Right. So there's not a self-employment tax. We're not sure what to do yet. Yeah, okay.

You have the $765,000 as income from the church additionally because you opted out of Social Security. Okay, I'm in. Yeah, okay. That doesn't mean you have to send it there. No, no, no, we don't. We've been saving what they give us and our half until we figure out what to do with it. So our combined debt is a little over $123,000. About $13,000 of that is a car loan and the rest is student loans.

Goodness. Yes. Expensive seminary degree. Yes. Yeah. Yeah. So our loans are on income-based payment right now, so all we're required to pay, even though we do try and pay more sometimes, is $127 a month.

So obviously not very much. And you don't work outside the home? No, I don't. Why? Hello? I think we lost her. Well, she didn't like that question. Might have been.

Yeah. Might have been a glitch in the phone. Might have been a glitch in the system. I know. But, I mean, in looking at this, Dave, I mean... $40,000 income. Let's go ahead and answer her question in case she hears this. Yeah, $40,000 income with the housing allowance, but they're staring at $13,000 in a car loan and $110,000 in student loan debt.

Right. You know, it's not time to be investing. No. It's time to start chopping. Yeah. And I'm thinking, I think the path you were going, and I was going to say it, she needs to get plugged into some type of job or side gig to help chop this debt down faster. And he does, too.

Yeah. He does, too. Yeah. They're going to have to pick up extra income. Because the problem is a shovel-hole ratio. That's what you were saying. That's right. How much hole they're in is $100,000 versus a $40,000 income.

So I've got to get the income up so that the debt is not a death sentence. That's right. It doesn't ride you all the way into the grave. Right. And you've got to be able to attack it. And so if you've got your income up $20,000, you'd be done in five years yeah if you put all that on the on there and if you got your income up more right be out faster so i i think you should be out of debt in three to five years a hundred percent debt free yeah and uh then and only then would you build

your emergency fund baby step three and then you'd do, and then you start saving 15%. Right. Is it wise for pastors to do this? Yes. Yes. It's a conscientious objection. The IRS form says I have to object to the, if you're a pastor, your pastoral income only, not your side gig income. Side gig income, but only your pastoral income, ministerial income, if you conscientiously object to, on a religious basis, the Social Security system, then you cannot pay into it and not receive from it. Now, what does Social Security do for us?

Well, it's a horrible savings plan. It's absolutely horrendous. It has a negative rate of return. Right. You don't even get back what you put into it. That's right. So from an investment standpoint, you could invest it in a fruit jar and come off better. Okay?

But you need to do some investing, which is her fear but we're still going to work the baby steps they got plenty of time to get to investing and it also covers disability in the event you become disabled you get ssi and in the event of the death of one of the parents the children would get would get benefits and none of that occurs if you opt out now uh then the question has always come up for our friends in the christian community uh because since we're believers and we're always in that community they're always asking well should we opt out um i said yes mathematically financially as long as you're going to buy disability insurance life insurance and do your retirement you're going to come out much better out off millions of dollars better off right i

wish i could opt out right uh matter of fact they could keep everything i paid in so far if they just wouldn't take any more that's how bad it is you know uh it's just bad it is bad math and so oh it's awful so if you had worked let's say he's the dmv managing your retirement plan that's what social security is if he had worked a job for four or five years, paid into Social Security, then became a pastor, and he opts out, he's forfeiting. He would get Social Security based on what he paid in. Okay. All right. Yeah.

Very good. But not – and if you work a side hustle, it's a non-ministerial. You cannot opt out except on the religious income, ministerial income. Okay. And I advise pastors to opt out as long as they're going to do those three things that's long-term disability life insurance and save for retirement which by the way we're teaching them to do anyway that's right that's right it's just light years better off now can i in good conscience be a conscientious objector uh on a religious basis, if I'm in their shoes, in an instant. Because the Bible says to be a good manager, to be a good steward, to manage the assets that God has allowed you to manage well.

Sending any of it to the government to mismanage does not qualify as being a good manager. You're right. So on a religious basis, I instantaneously can object to it. Okay. Now, I don't get to, because I I instantaneously can object to it. Okay. Now, I don't get to because I don't have a ministerial income. Right. But if you're a pastor out there, that's the basis for it. And you have to do it right at the start of your pastoral career.

Okay. And so it's a one-page thing. And from a matter of integrity, you are signing up not because you don't like the math, but you're signing up to say, well, on a religious basis, I object. Okay. And I can do that. I can show you how. I mean, as a Christian, I object.

Right. But I don't get to. You don't get to opt out. Okay. That's interesting. And you don't either, by the way. Right, right. Mar is with us.

Mar is in Cleveland, Ohio. We're going to come back to Mar after the break because we discussed that whole concept all the way into the break, which is perfect. Hey, people wonder what this is. Yeah. Yeah. And your parsonage is taxable income. Mm-hmm. So that's why they're allocating a portion of it to that.

Still got to work the steps, though. Still got to work the plan. You're going to get out of it what you put into it. Only way it works. This is The Dave Ramsey Show. If current times have shown us anything, it's that the least expected events can and will happen, and we have to deal with it. That's why everyone who has a family counting on them needs term life insurance. For over 20 years, the only company I've recommended is Zander Insurance. Not only because they search all of the top term life plans to find you the best rates, but over the years, they have constantly changed and updated their systems

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baby. That's the saying over there. So be sure you jump in and check that out. Phone number again here, 888-825-5225. As promised, Mar is in Cleveland, Ohio. Hey, Mar, how are you? Hi, Dave. Hi, Chris.

How are you two doing? Great, man. What's up? Hey, so my wife and I are on baby step two. We have 15,000 left on our car. So my question is, after we get our emergency fund done, our car should be paid off this year. After we get our emergency fund done. So we continue to pause on our baby

steps and not start my son's college fund and just get off our house. We owe $110,000. Last year I made over $90,000 gross income. $68,000 was bought home. So I was thinking if I pay

we were to pay $2,000 a month extra to our principal, which would be $24,000 a year, our house can be paid off in three and a half years. What do you guys think about that? Well, when you finish Baby Step 3 and you've got your emergency fund in place and you're debt free then you move on to four five and six that's right and they're simultaneous that's exactly right and so mar you will have up to then done things one at a time but getting to that fully funded emergency

fund doing four five and six you're going to be investing 15 saving some for college and paying extra to the house so now if that means it's $2,000, if that means it's $1,700. That's okay. Then that's fine. Yeah, but here's what you're not counting, Mark. Your income should be increasing. So that in itself should give you the opportunity to pay off that house faster, buddy. How old are you?

I'm 31, and my wife is 29. And how old are your kids? My son, we only have one, and he's three years old. Okay. You sound focused, man. And I'm going to tell you this. You will find the extra money to pay off that house. I have no doubt in my mind.

But at the same time, you're making progress in these other areas. So don't avoid doing one thing so you can focus all in another make progress in it all so i'm okay baby step five save for kids college we're okay if you're doing anything there i just want you to start building that muscle if you just set up an account to do 100 bucks a month 50 bucks a month whatever it doesn't have to be a lot but let's get started on it to kind of get the rhythm in your brain and in your household and in your spirit that we're saving for college, we're saving for college, we're saving for college. And then everything else, we're going to start dumping on six. We're going to get the house paid off as quickly as we can.

Now, you said you brought home 58 out of 90. Where's all that money going? You're not having taxes. I brought home 68. Oh, 68. Yeah. Okay, that's much better. That's much closer.

All right, good. I agree with Chris. I think you're doing great. I do, too. Oh, 68. Yeah. Okay, that's much better. That's much closer. All right, good. I agree with Chris. I think you're doing great. I do, too. I really do. And I think, you know, being laser-focused on that. But, Dave, people oftentimes don't account for either income increasing or finding other ways to bring in extra money. You can still make progress.

Well, what ends up happening, for real, is you do get raises periodically. You get bonuses and then other money is just found money comes across our our life it always does in our lives i mean you might get a little small inheritance a little five thousand dollar inheritance or something you might get a uh a twenty thousand dollar or something uh you know you may you may find something you may find a gold rock in your backyard and sell it i don't know i mean there's little stuff happens and as long as all the little stuff above 15 going to retirement above whatever you're doing for college is all going on six then you accelerate the process and i would rather you

do four and five and paying off your home take four years or four and a half years instead of three and a half years and not be doing any four and five. Gotcha. Yeah. And that's the clarification he's looking for. Good job, man. Well done. Stella is in Dallas. Hey, Stella, how are you? Just fine, thank you. Thanks for taking my call today.

Sure. What's up? I'm on baby step number seven. I'm single, 45 years old. I maximize my 401k and Roth IRA contributions annually. Great. When should I make a conversion

from my 401k at work to Roth 401k? How old are you again? I'm trying to focus on my saving 45. I'm 45. Now? Yes, sir. Now, when you flip, how much is in your 401k today uh about 840,000 oh way to go stellar millionaire stella stella's on the ball all right now wait

a minute i gotta back up then because you're gonna create taxes on whatever you roll right do you have other cash do you have roll, right? Do you have other cash? I know, but do you have other cash? I do. How much? I have about $100,000 on my savings account. Okay. So I don't want to flip it all, and you have to use some of that money,

cashing it out early to pay taxes and that's what would happen because you're going to have a couple hundred thousand in taxes so i'm going to move i'm going to move as much as i can pay the taxes without touching it so let's call that 400 grand and you use the 100 grand to pay your taxes or whatever it works out right something like that my tax record is about 32 percent this last year okay then then you can back into it and say based on that i've got and you got a hundred but you have an emergency fund in addition to that hundred no okay so i have a non-retirement investment account that i could liquidate oh how much is that uh about eight hundred thousand okay then let's do it now. And let's use some of your cash and some of your non-retirement investments to pay the taxes.

Because effectively what that does, mathematically, is that is as if you have just invested another $250,000 into your Roth IRA. Yep. Because the Roth's going to grow 100% tax-free from here on out. See, so you freed all of that up. Now, I'm assuming, since you're such a freaking rock star here, that this money is invested in good mutual funds and you're getting good rates of return, right?

Yes, sir. You are killing it. Yes, sir. Stella, you're on the ball. What do you make? Thank you. How much do you make? Oh, I'm sorry.

About $200,000. How did you learn how to do all this? You are really good. I am focused but not finished. Stella, you're just making me feel good today. I'm telling you. He just turned into one big goose bump over here. Seriously, I really did.

No, but seriously, where did you learn? Did your parents teach you or are you self-taught? Pretty much self-taught, yes, sir where did you learn? Did your parents teach you, or are you self-taught? Pretty much self-taught, yes. Are you really? Well, you have done a wonderful, wonderful job. You really have. 45 years old, $2 million. Yeah, and this $100,000 you have in your savings, Stella, leave $30,000 in there as your emergency fund.

Yeah. Just so you keep that cushion. But, girl, I'm proud of you. I'm going to tell you. And you know what? That high-definition dream you've been chasing, I hope you're living. I hope you're having fun knowing that you're on the path to be a blessing to people and giving, but also living and enjoying some stuff. Way to go.

Yes. Well done. Well done. Rock star. Trevor's in Cleveland, Ohio. Hey, Trevor, how are you? Good, Dave. Chris, thank you guys for taking my call.

Sure. How can we you? Good, Dave, Chris. Thank you guys for taking my call. Sure. How can we help? Yeah, Dave, I've got a business started here, and my lease payment's coming up on my truck for my landscaping business, and I was really honestly not sure where I want to go this summer when the leasing payment comes up, whether I want to just buy the truck outright and keep it with my business or maybe try and find something else.

I'm kind of in a predicament there. So I was going to see if you can kind of help me out with that. Just pretend like you didn't own it. Would you buy it? Yes. Okay. And would you buy it for that price? Not knowing what the price is is kind of where I'm at on it.

There's a stated price on a closed-end lease at the end of the lease that you can buy it for. Right, yeah. I would probably end up buying it, but I also have the alternative of maybe going and getting something cheaper. I know. And I'm really not sure. I'm on about baby step number three. So what is the truck? The trick is, what's the buyout number, and then look the truck up and see what the truck is worth.

Don't pay more for it than it's worth just because you're leasing it. But if you can buy it $2,000 under what it's worth and you can pay cash for it, then let's go ahead and buy it if it fits in your plan. And if you want to move cheaper, then just turn it back in. Give them the keys. Go. Just don't go higher. Yeah.

There's no reason to go up. And don't do another lease. For God's sake. Yeah. You've earned your way out of this thing, so quit it. Stop that. Fleeces are a bad idea. This is the Dave Ramsey Show. We'll be right back. Chris Hogan, Ramsey Personality, is my co-host today.

Open phones at 888-825-5225. Julia is in Gaithersburg, Maryland. Hi, Julia. How are you? Hi, how are you? Thank you so much for taking my call. Sure. What's up? So, I'm an 18-year-'m freshly i'm a first year college student i have a 14 000 car loan um i only got it because i need it i needed it for school i got it right before the pandemic hit and for work as well um i'm able to pay for it so um the loan is

um me and my mom co-signed it, but I paid for it. But my question is, I just finished baby step number one, which is, you know, save up that $1,000. I'm trying to get out of baby step number two, which is pay off all my debt, which as of right now is just my car loan. But my main question is, my mom is in a lot of debt as well. How can I help her get out of her debt? But not only help her get out of debt, but how can I help her listen to your steps so that we can become financially free together, you know, work together?

Well, I love your heart. I tell you, I love your heart. I really do. And, you know, unfortunately, what she's done is she shared her taste of debt with you and you know i'm going to tell you you know one of the strongest things you could do julia would be to get intentional and look at getting this car sold and get it out of your life and then you saving up and paying cash for a car and talking to your mom about how you know that that's not helping.

And I think you living it is going to be one of the best ways. But, you know, I mean, you can talk with her and you can try to plant the seed, but you can't make her. And Dave and I have found this out after many, many years of until someone decides they're ready, they're not ready. Yeah. And so, yeah, you living it in front of her. And you've got the powdered butt syndrome.

Once someone's powdered your butt, they don't care about what your opinion is about money, sex, stuff like that. So mom doesn't, you know, she's not going to listen to you that much. I mean, you can just, the only thing you can always do with anybody is not to wag your finger at them and say, you know, you need to listen to this podcast because you're stupid with money because you could do better, Mom. You could do, and don't wag your finger that way. Instead, just talk about yourself because your story is not debatable. You know, I feel so much better now that I'm on a plan. I got a budget.

I feel so much better now that I'm getting this car paid off or getting rid of this car. I feel so much better now that, and man if i could ever help you i mean you just if you want me to share with you what i'm doing that's fine and so um you ever had a friend uh julia that lost a bunch of weight yeah yes they have yeah they inspire you don't they right without without coming over to you and saying you know you need to do you need to take better care of yourself they they just they just take better care of themselves right in front of you. Yeah. And then you go, well, how'd you do that?

That's right. What'd you do? You know, I've had a lot of those discussions. I've lost 37 pounds since the pandemic. And so I needed to because I was just straight up fat. And so but everybody's all my buddies are like, what'd you do? You know, it's the same thing. And I didn't go around and say, you know, you need to be doing this and didn't look at my buddy and go hey you got one of those things hanging on the front of you

like i do so i didn't do that i didn't shame anybody else right i just said you know that belly there's you know i didn't i didn't talk about his belly i didn't i didn't pick on him you know but i just you know my stuff my clothes just fit again you know that kind of stuff well and you're right dave her doing it herself and i'm going to tell you at 18 years old that's impressive for her to have the presence of mind to reach out to call in is a big deal. I wouldn't think him like that at 18 years old. And so, you know, Julia, live the principles, young lady, live them and be intentional for yourself. And please, please, please don't take on student loan debt.

You said you've got that car loan. I want you to sell that. Get that out of your life. Go to school part time if you have to while you work. But avoid student loan debt. You said you've got that car loan. I want you to sell that and get that out of your life. Go to school part-time if you have to while you work. But avoid student loan debt. Don't add it to your plate. Yeah, well done. Michael is with us.

Michael's in Alexandria, Virginia. Hey, Michael, how are you? Good. How are you doing, guys? So my wife and I are planning on paying off our house in about a year. Great. I'm looking ahead, and I I'm wondering after we do that and we put the 15% into retirement, what I'm looking to do is what should we do with the additional money

we'll have to invest? Would you suggest maxing out all retirement avenues possible prior to like a regular brokerage? What would you use a brokerage account for? I'm thinking more of just like low-cost index funds that have a little more accessibility. Okay, I mean, you can do that. But if you get with a SmartVestor Pro, they can help you lay that out. But, yeah, you max out all the retirement. All of it.

All of it. And then if you want to just open some, I do that. I've got some S&P 500 funds that are no loads. And I store up money in that until I get ready to buy something else with it. Usually a piece of real estate is what I'll use it for because that's the two things I invest in. But that's the beauty of it. The other thing you'll find is if you've got that sitting there and you said it's accessible, that's a good word, liquid, then if something comes along and you you

you feel prompted by god to be really generous to something and and you know you may write some sizable checks out of that investment account just to be a blessing at some point too that's the other thing we have used ours for absolutely and michael i tell you i'm gonna ask uh uh to get your info i'm gonna send you my book everyday millionaires uh kelly will get your info, I'm going to send you my book, Everyday Millionaires. Kelly will get your information and send that to you because also in that book, I talk about the bridge account. And so this is where you would start to using gross stock mutual funds outside of retirement to allow you to kind of continue to save as well. Yeah, and what you're doing is building up money that you can utilize before 59 1⁄2.

That's exactly right. You're bridging from where you are now until 59 1⁄2 because you can't touch the retirement stuff without penalties prior to that. So that's a good suggestion. Kent is with us in Kansas City. Hey, Kent, welcome to the Dave Ramsey Show. Hi, Dave. If I could provide you with some dollar figures,

could you help me estimate the value of my small business I'm about ready to sell? I'll give it a shot. It's a small service business. I'm the boss. I'm the only employee. I drive around and distribute printed materials like magazines, brochures, and I put on about $23,000 to $24,000 a year. So gas expenses are my main expense. The average, I started it in 2013, and so the average total amount of income for the past seven years is about $41,000. So it's a low of about $38,500 to a high of about $49,500.

Now, that's the gross revenue. That's not before expenses. That is before expenses, not after. Yeah, that's the gross total revenue, not with it. Now, when I figure it with the tax stuff, it's different from what all the deductions, and they have depreciation, and they take off for my my home office use and for using my garage as a business purpose and stuff like that. But so then what I figure for my, you know,

gas expenses and stuff like that is a little bit different, but do you need to have what the total average? Yeah. What was your taxable income? Um, Yeah, what was your taxable income? That averaged the past six, seven years about $18,000. Yeah, I was going to say $20,000. That was going to be my guess. Okay, cool.

Well, here's the thing. Some of those categories are what we call ghost categories for purposes of valuation, and some of them are real expenses that the tax thing is just allowing you to admit. Now, your home office is a ghost expense because you're not really, you don't own that as an office. It's just you're taking the depreciation on that, which is going to cause a problem when you sell the house, by the way.

But anyway, so some of those things are real expenses and some of them aren't. All of them are not ghost expenses. So it sounds like you have an income of around $30,000. And so there's two ways to look at this. Number one, most of the time on a service business, we say, all right, do you have a series of clients? Is it a client list? Yeah, the customer base, that's what generates.

That's the value. That's where the value is. Yeah. Okay. That's what I thought. So I think you could probably sell that for about one time, roughly one time. If you could sell it for $50,000, I'd take it. Wow. time, your roughly one time, if you could sell it for $50,000, I'd take it. Because generally speaking, someone else can just go generate their own customers, and

that's what you're competing with. But generally speaking, you take the net profit of a business times four, but that would be after you paid all the employees, and we've not paid you out of this yet to do the work. By the time we pay you there's not going to be money left so i'm probably just going to try to sell the list as a value rather than the business as a value Guys, we're working on a new podcast, a special, and we're looking for some stories from you. If you've had a bad experience with this, buy now, pay later promises flexible payment options. You've probably seen these options when you're buying something online like a new pair of jeans.

You reach the checkout page and you can buy them for $3 a month, that kind of stuff. If you got caught in an installment payment program ended up costing you way more than you expected for the item we want to hear from you buy now pay later email us if you've got some stories your story could help a lot of people email us at dave on air at ramsey solutions.com put in the subject line buy now pay later dave on air at ramseyolutions.com. Put in the subject line, buy now, pay later. Dave on air at ramsaysolutions.com. Buy now, pay later. Tell us a little bit about your story, and our team will get back with you as we're producing that new podcast.

Open phones at 888-825-5225. Scott is in Washington, D.C. Hey, Scott, welcome to the Dave Ramsey Show. Hey, Dave, thanks. Thanks for having me. My wife and I are avid listeners, and thanks for your advice. Thanks. How can we help?

Yeah, so we're 29. We're debt-free and done with Baby Step 4, but no babies yet, and no house yet either. We've got a healthy emergency fund, over 12 months of expenses. Right now we're maxing out both of our 401ks at $19,500 a year, but we're over the limit for Roth IRA and over the tax advantage salary limit for traditional. So I was planning on, now that we have a time horizon

of about three to five years on both kids and a house, planning on dumping about $2,000 per month in the mutual fund for the next three-ish years. Do you think that's a good plan, or should I park that money elsewhere? That'd be fine. I mean, if you dump it into just a no-load, again, like we were saying a minute ago, a no-load S&P 500. Now, you can do a backdoor Roth. I do one, and my income is way over the limit.

And the backdoor Roth, as a matter of fact, I just finished mine the other day, is you open an after-tax traditional, not a before-tax traditional, and instantaneously roll it to a Roth. And that's a loophole in the law that allows you to do that. And regardless of your income, you can do a Roth. And that's a loophole in the law that allows you to do that. And regardless of your income, you can do a Roth. So you can pop, you know, $6,000 a piece, you and your wife, into that if you want to, in addition to maxing out your 401k at the full, which you're doing. And then above that, you're just saving towards a house, it sounds like, right?

Right. Yeah. And so... You're a little thick on your emergency fund, too. I wouldn't be at 12 months. Okay. Yeah, so, Scott, one option you could do is you could take six months of that emergency fund and lump that over and let's call, leave it in the emergency fund,

but let's call that home down payment. Okay. That's a starter for that account. It's a starter for that anyway. And if you don't have the money to fund those two backdoor Roths right now, you can use some of that for that as well. Right. Yeah, just get in touch with a smart investor pro. Tell them backdoor Roth IRA.

They can tell you how to do it. But the limits on Roth IRA, folks, are $200,000 household income. If you make over that, you technically do not qualify. But there's a workaround, and that's what I just said. That's right. And it's perfectly moral perfectly legal so um again i've done one every year for gosh as long as there's been roth iras so um just to get more money in there it's not it's not gonna that one thing is not gonna

make you wealthy but um if you keep doing a whole lot of those one things you'll end up with more than one thing that's right every little bit counts and seriously go to DaveRamsey.com you can reach out to a SmartVestor Pro where you can sit down you don't have to try to explain that to your spouse right just set up the appointment go sit down with a SmartVestor Pro with your spouse with your spouse yes both of you even if you got to do it on Zoom doesn't matter these guys and gals are fantastic they'll be able to explain it lay it out for you and you can feel confident in what you're doing. There you go. Jeff is with us.

Jeff's in Knoxville. Hi, Jeff. Welcome to the Dave Ramsey Show. Hey, Dave. Hey, Chris. Appreciate all you guys do. Sure. You too.

What's up? I got a question. You're always giving recommendations for purchasing a house, but I own land outright. We're debt-free. Good. We're saving up to build a house. Good. So I was wondering, what's your recommendation? Do I need to save up the complete 20% for the cost of the build,

or is it okay to actually use the land as my 20% collateral for the build? Well, we're not hardcore on a first home or on the 20%. The biggest thing about the 20% down is it avoids PMI. You don't pay the private mortgage insurance, which is like $75 a month per $100,000. And so it's a lot of money for PMI. And if you can put the 20% down, that's very helpful. And, yes, in the calculation for your permanent mortgage, the land is part of the valuation. And so if you are in the property, by the time you get it built with the paid-for land plus the build, if the total loan-to-value ratio is 80% or below, you've avoided PMI with a conventional mortgage,

a Fannie Mae, which is the only kind you'd want to do. The FHA and VA are more expensive and don't do those. But you can avoid the PMI if you do that. And then as far as the other percentage we use, it still applies. When you end up with a permanent mortgage, you don't want it to be more than a fourth of your income. That's right. Yeah. 15-year fix. 15-year fix. And so, you know, Jeff, here's the deal, buddy. You're just going to have to go into it. You got to plan for it. And Dave, I'm interested to hear this because you've built more times than me. You've got to plan for it. And, Dave, I'm interested to hear this because you've built more times than me. But you've got to plan for overruns, you know, like the construction, the cost things.

I mean, it's going to always cost a little bit more than you plan on. And so having that regularly scheduled meeting with your builder, staying on top of it, it becomes a full-time job. Well, it's a job for sure. I mean, you're right. And we have learned building houses, you are a nightmare to your builder if you make it up as you go. 40,000 change orders, right? Yes. And so the lady, a country music star not to be named, was living across the street from me in the house I currently live in.

We were both building at the same time and she paid almost double by the time she finished for the same square footage as i've got but i had two change orders and she had 240 and they mark every change order up and if change order means something has to be changed it's already done so that means you've done the work twice right so the first the first thing you do is you build it on paper over and over and over again. That's called a blueprint. And you spend a lot of time going over it and going over it and going over the blueprint, getting everything just right. And, you know, to the point that you're just, it's like a budget.

You're promising yourself you're going to stick to that piece of paper. Because everything you change on it as it goes up is going to be expensive. So it's a lot cheaper to build it on paper. Okay. And then you lay out a schedule with the builder. And I don't mean a completion date. I mean a when the foundation is going to be poured. Phases.

When the things are going, you know, when the framing package is going in, when the kitchen cabinets are going to be installed. I want to see dates. Okay. And then we can tell if we're on schedule or not. That's right. If we have a rain delay, some wet weather in the winter in some of your areas, then, you know, you can tell we're off by two weeks.

We're building a 200,000-square-foot, $40 million building next door. It's exactly the same thing we've done. Line item on the blueprints are unbelievably detailed, as you might imagine. Can't even. And the schedule is unbelievably detailed. And we can tell if we're one day off schedule on that project. Wow. $40 million project.

And you do that with the house, too. And so you have a budget, you have a schedule, and you have a blueprint. Okay. And the budget is line-itemed as well. All right. You go, there's so much we've got set out for kitchen cabinets, and if you pick kitchen cabinets $2,000 over that, expect that to be $2,000 more because you just changed the game. That's right.

You know, versus what you started with. And so it's a project with a lot of details. Right. And if you'll manage to the budget, to the schedule, and to the blueprint, that's how you manage the project, and you'll have a good experience, and your builder will actually like you. Because people just make up crap as they go along and then get mad at the builder yeah well you took six months longer to build it well you changed 46 things right you couldn't you didn't go down pick out your light fixtures till four weeks after you were supposed to and then they didn't come in right you know and so the the

the person the customer is the problem most of the time or sometimes a builder's just building something out of his ear you know he's everything's on the hood of the time. Gotcha. Or sometimes a builder's just building something out of his ear. You know, everything's on the hood of the truck, and he ain't got any dadgum plans. You know, it's just horrible. And so you've got to not be jack-legged as a customer or as a builder. Right. But if you'll get a professional contractor that knows their stuff and puts out those three pieces of paper, you spend a lot of time on those before you break ground.

You'll have an enjoyable— Building a house is fun then. You get the creation. I mean, we're having fun building this big old building next door. It's fun. There's lots of tractors and trucks and stuff over there. Boys, I like it, man. It's fun. Lots of things over there making noise.

It's a blast. There you go, people. You just got info on how to build a house the Dave Ramsey way. Let's just manage it in a project. This is the Dave Ramsey Way. Let's just manage in a project. This is the Dave Ramsey Show. Hey, it's Kelly, associate producer and phone screener for the 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.