The Ramsey Show - App - How to Put a Value on Your Business (Hour 2)

Episode Date: August 14, 2019

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🎵 Live from the headquarters of Ramsey Solutions, broadcasting from the Dollar Car Rental Studios, it's the Dave Ramsey Show. When debt is dumb, cash is king, and the paid-off home mortgage has taken the place of BMW as the status symbol of choice. I am Dave Ramsey, your host. Thank you for joining us. Open phones at 888-825-5225. That's 888-825-5225. Starting off this hour is Obie in Maryland.

Hi, Obie. How are you? Hi, Mr. Ramsey. It's a blessing having you in our lives. Well, thank you, Obi. How are you? Hi, Mr. Ramsey. It's a blessing having you in our lives. Well, thank you, sir. My wife and I are trying to decide between doing a basement property, trying to portion out a space for rental, and we're trying to decide between that and paying off our debts. I have $31,000 in student loan debts, and she has about $20,000 in credit cards. Our objective was trying to get into a positive cash flow and trying to get the space, generating income as much as possible. That will make us more disposed to saving and being financially independent.

Gotcha. Okay. So what's your household income? $160,000 soon to increase once I'm done with my certs. Okay. And so when will that be and how much will be the increase? The anticipation is to have it by early next year. I'm doing a CCNP, which is quite difficult. Once I wrap that up, then it might go up an extra $40,000, $30,000. Okay, so in January you're making $200,000, give or take, right?

And you have $60,000 in debt. Yes. So you should be able to plow through that debt in a year pretty easy, right? Yes. Okay. So a year from now, approximately, with $160,000 going up to $200,000 after the first of the year, not counting the basement, you would be debt-free. So that's definitely a track we're going to be on. Now, what are you talking about spending to get the basement ready to rent?

About $40,000. I have a very good connection, and that's what I was trying to take advantage of before. Yeah. Well, do you have any money saved? That's the thing. Yes, we do. And it's just about enough to get the debts down so we owe maybe just $20,000. Okay, so you have about $40,000 saved.

Yes. Okay. All right. So if you put the $40,000 on the debt, you would be debt-free by the end of the year, and then you would save up and do the basement with cash after you have your emergency fund in place of three to six months of expenses. That's what I would do if I woke up in your shoes. I understand you may lose this connection, this person who's needing, wanting to do the

job reasonably right now, but when you buy something that you can't afford we can't call it a bargain and while you're sitting with debt i'm not going to be doing this basement improvement if i'm in your shoes and of course you called so i way i answer questions is what would i do if i woke up in your situation making 160 getting ready to make 200 i got 40 in the bank i got 60 in debt i'm going to plump the 40 down on the debt uh pay off the credit cards pay off a bunch of the student loans knock out the rest of it by the end of the year my income is going to go up i'm going to put my emergency fund in place over the next couple months of three to six months of household expenses and then i'm going to save the $40,000 and increase and do the basement if you want a renter in your basement.

And that's a decision you get to make. Reed is with us in Alabama. Hi, Reed. Welcome to the Dave Ramsey Show. Hey, Dave. How are you feeling today? Better than I deserve, sir. How can I help? So I am 23 and my wife and I have about 140,000 in student loans together. And we are

paying it off as furiously as we possibly can. But I think that some of our interest rates are kind of high. We have some variable interest rates as well as fixed. And I'm curious at what point do you think we should consolidate? Like how bad is too bad of interest rates as well as fixed and i'm curious at what point do you think we should consolidate like how bad is too bad of interest rates well if you can save money on the interest on a student loan and you can go from variable rate to fixed rate and you can go from a higher fixed rate to a lower fixed rate then that's when consolidation is in order. Now, the question is, you've got to go through the hassle of fooling with all of this. How much is it actually going to save you in real dollars when you do that?

And for how many years? How long are you going to be in debt? What's the total of your student loan debt? It's $140,000. Okay. And what's your household income? Take home or salary? Salaries. What's your gross income for the year

for the whole household? Bonus is everything. Probably just a hundred. My wife just got a job recently. So probably about a hundred. So in the coming 12 months you guys will make a hundred

thousand bucks yeah and then taxes out of that obviously i understand understand okay so uh what in the world who got who got the expensive degree uh we both did um we weren't smart with our money and we didn't uh we didn't hear about you until after we, well, I guess right before we got married, right after we graduated. So we've just been trying to be gazelle intense and make up for our stupidity. Gotcha. Okay. So what are your degrees in? I'm a mechanical engineer, and she's an elementary teacher.

Okay. So you just overpaid for the degrees all yeah okay pretty much okay all right so we got 140 000 to clean up making 100 and so uh i mean i just do big numbers around here so if you did 50 a year for uh three years you'd be debt free yeah during that during that three years and that's that's beans and rice rice and beans and you're not having any life and you're probably hoping to see some increases during that time to actually make that work so you have a three-year journey at least maybe a little bit more now if you save one percent on 140 000 bucks you save 1400 a year if you did that for three years of

course you wouldn't have that much out for three years because you're reducing it every year. But we're talking about a $5,000 savings through that period of time. So $5,000 does not solve your $140,000 problem. But if you send me $5,000, I'll take it. Yeah. So it isn't the answer to the issue. The answer to the issue is beans and rice, rice and beans. But it'd be nice to not give them an extra $5,000 during this three years that you're doing this.

And that's if you saved only 1% during that time. I don't know what you'll save. You can only find that out once you find out what the rate is they're offering you on the consolidation. Compare that to your existing rates and certainly compare it to your adjustables you want to get rid of those things for sure because that represents increased risk hey good question man appreciate you listening this is the dave ramsey show Are high health care costs getting you down? Are you confused trying to navigate your options? Do you wish you could find an affordable, biblical solution to your health care costs? Based on New Testament principles, Christian Health Care Ministries, or CHM, helps Christian families, churches, and ministries join together as the body of Christ to share their major health care costs.

Christian Health Care Ministries is the original health cost-sharing ministry. A Better Business Bureau-accredited organization, CHM members share to pay each other's medical bills. It's not insurance. It's Christians financially and spiritually supporting each other. It's what Christian Healthcare Ministries has done for over 35 years. And our members have shared over $2.5 billion in medical bills. To learn more, visit chministries.org. That's chministries.org. That's chministries.org. Christian Healthcare Ministries is a proud sponsor of Dave Ramsey Live Events. chministries.org. Charlotte is with us in Georgia.

Hi, Charlotte. Welcome to the Dave Ramsey Show. Thank you, Dave. It's a pleasure to talk with you. You too. What's up? I have a question regarding purchasing a, probably around $700,000. And my question is, should I take money from my retirement savings to purchase this home or should I actually take out a mortgage?

Okay. Well, congratulations. You've done very, very well. Do you own a home now? I do not. I am renting now. Okay. All right. And what price range home are we talking about? Probably around $250, $250, maybe $275. The market is so, I just think it's, you know, so pricey right now. Should I just sit back and wait for a while and continue to rent? Or if I do purchase this home, you know, how to do it?

I would buy, and I would pay cash. Okay. Here's my reasoning, and then you can decide if that makes sense to you, okay? But number one, I would buy because your biggest expense in your monthly budget is housing. And as a renter, the cost of housing is going to do nothing between now and 95 years old, the next 30 years for you, but go up. Okay. And so you can't control your largest expense as a renter,

and that's a dangerous scenario for your budget. It'll eat your budget alive over the years, a little drip at a time, but it'll eventually get there to where there's an 800-pound gorilla sitting on your checkbook. So I definitely want to own to stabilize, freeze the cost of my largest expense in my monthly budget, housing. Okay. Now, the reason I pay cash is I can't imagine spending your retirement years paying a mortgage. It's just, I can't think of anything more horrible. So I want you to be completely debt-free.

Now, do you have a teacher's retirement coming in and Social Security in addition to the income off of your nest egg? Actually, I'm not using my nest egg at all. I have a pension, and I have just started this year since I turned 65. Right. So what is your monthly income now um my monthly income um is take home 6200 okay and you're just living on that without touching the nest egg right and how much is your rent 1300 okay and so you'd have an extra $1,300 wiggle room in your budget, and you still would not be touching your nest egg.

By the time you're 72, if that $500,000 that's left over after we buy a $200,000 house is invested in good mutual funds, it would be worth around a million. By you not touching it and just letting it grow for seven years, it will approximately double if you have it in good mutual funds during that time. And that's exactly what would be my plan. So when you're 70s, early 70s, you have a paid for $200,000 house that truthfully probably will be worth $300,000 to $400,000 by then, and you'd have about a million dollars in your nest egg,

and all this time you're still living on $6,000 a month and having a pretty good life because you got not a single bill out of that. Right. I don't have any debt. Well, and you wouldn't even have a rent payment anymore if we do what we're talking about. Right. I don't have any debt. Well, and you wouldn't even have a rent payment anymore if we do what we're talking about. Right. So that's what I'm doing. I'm going to write a check and pay cash. I don't think I would buy a home any more expensive than what you're talking about.

So $300 is your cap. Right. And I want to cheat down towards $200 as much as I can just to give you tons and tons and tons of margin and tons of room but uh that's that's your projected future if you would you know do what what i teach you to do what i do with my money as well um and i'm just slightly younger than you so it's exactly how my money is invested and um but I think you're in a great place. You live off the pension and the Social Security with no rent. You'd have property taxes and insurance, so you don't save the entire $1,300.

Because you got those whether you have debt or not, but you certainly don't have a mortgage payment monthly. And then you just allow that money that nest egg to continue to grow over there even if you're not adding to it it's going to double you know in about seven eight years something like that um if you're making in that 11 to 12 percent range which is what the stock market has averaged and again invested in good mutual funds that have outperformed the averages of the stock market if you don't have that done you need to sit down with one of our smart investor pros

click smart investor at dave ramsey.com if you want to connect up with them they don't work for me but when you type in your information it'll drop down a list of the people in your area that are the ones that do stuff the way i teach. It's how they handle their clients is the way I teach. And so you're going to find them to have the heart of a teacher, and you will select among many of them as they drop down which one you think is best for you if you don't currently have someone helping you with those investments. You did a great job, Charlotte.

Very proud of you. Good job. All right, Jake is with us in Oregon. Hi, Jake. You did a great job, Charlotte. Very proud of you. Good job. All right, Jake is with us in Oregon. Hi, Jake. Welcome to the Dave Ramsey Show. Hey, Dave. Thanks for having me. How's it going?

Better than I deserve, sir. How can I help? Okay, well, so I will be starting school this fall, and I just had a child over the summer and will have to either pay out of pocket to go to school or take out loans. I'm extremely against loans, but my partner thinks that it's either that or we'll probably end up being behind on certain bills. So could you help me out and see how I could take care of the tuition cost? Also, I'll be graduating after this semester along with my partner, and our income will go up a significant amount.

Well, that's wonderful news. Okay. So you only have one semester to graduate, and then your degree will be in what? Mine's in business management and uh are you working now yes i am i work full-time okay and what do you make i make about 42 a year okay and uh what what does your partner make? She makes about $12,000 a year. Okay. So she's not working much?

No. You know, it might even be less than that. She's with her baby majority of the time. Okay. All right. Well, what I'm going to do if I'm in your shoes is I'm going to avoid student loan debt. I'm not going to tell you to borrow money to do this. Okay?

So I'm going to sit down and the two of you jump on EveryDollar.com, get the EveryDollar budget out, and begin to lay out a monthly budget. And what can I sell? What kind of extra work can I do before school starts? What can I go crazy and just earn some money right quick? You know, just going, I mean, just working 100 hours a week for a short period of time. I would pay a tremendous price of sacrifice of time and lifestyle to not go into student loan debt and to cash flow my way through this if I were

in your shoes. I have never told anyone in 30 years of being on the air to take out a student loan ever. And I really think you can do it, but I really think you're going to sacrifice like you have never sacrificed in your life. And I think it's going to be really good for you. You're going to pay a price to finish this degree, and then it's going to be sweetness when your incomes go up and the degrees in the rearview mirror. This is the Dave Ramsey Show. We'll be right back. Our question of the day comes from Blinds.com. Find out for yourself why Blinds.com is the number one online retailer of custom window coverings. You get free samples, free shipping, and with the new promos they run every month, you'll save even more.

Here's the promo code RAMSEY. Question is from Colby in Texas. I know you say to only put money into a 401k up to the match and then put the rest in a Roth. I have $60,000 in my 401k now. Would I not be better off putting more money in there because of the compounding interest? I feel like if I start putting money into a Roth, it would take a long time to grow. Cody, if you have $70,000 invested, $10,000 into a Roth and $60,000 into a 401k, or $70,000 into a 401k or $70,000 all in your 401k, if it is growing at the same rate of return, whether it's separate or together, it's going to grow at exactly the same rate.

$70,000 invested 10 and 60 or in one lump grows at exactly the same rate, assuming the growth rate's the same. So if you had the exact same mutual funds in your Roth that you had in your 401k, in other words, you do not lose compounding by having 10 accounts versus one account. All 10 of them are compounding, and together they are compounding at exactly to the penny the same rate of compounding as if they were in one pile. The only difference is you just have to add it all together to see it, but it's there. So you are not getting, you are not disadvantaged by having more than one investment account, unless one of them is underperforming.

But I'm saying that you don't lose compounding. That's not how compounding works. So here's the thing. Let me walk it through, okay? $70,000 at 10% would grow in one year by $700. No, $7,000. I'm sorry. $70,000 at 10% would grow in one year by $7,000 if it's all in your 401k.

Okay? If instead you had $60,000 in your 401k and $10,000 in your Roth, and they both grew at exactly the same rate, 10%, the $60,000 would grow by $6,000. The $10,000 would grow by $1,000. The $1,000 and the $6,000 added together are 7,000. It's exactly the same as if it was in one pile. The next year when it compounds and you get growth on the growth, interest on the interest,

the next year you get interest on the interest on the interest, growth on the growth on the growth, the exact same thing occurs again. So that's not how the math works. The idea that if you separate it, you lose the oomph of compounding interest. The total is still the same. The cumulative amount is still exactly the same. Ed is with us in New Jersey. Hey, Ed, welcome to the Dave Ramsey Show.

Hey, how you doing? Better than I deserve. What's up? All right. Well, my wife and I were talking about some home improvements, and we had a question. Right now, we have about 17 years left on our mortgage, $166,000 balance, and we're paying 4.75% interest. Mm-hmm. And we're looking to refinance into a 15-year mortgage,

and the current rate quoted to us from our local bank was 2.875. And we're looking to take about $30,000 to do some much-needed repairs to our roof and windows, some things that we needed in the house that definitely needed to be done. And we were just wanting to know if that was a wise way to do it, if all things considered they come out about equal, or what your thoughts were. What's your household income? My wife and I together, gross income is around $150,000. Okay.

I would do the refinance. I would not do the cash out for the repairs. I would cash flow the repairs out of your budget. Okay. I don't want you going further in debt to do household repairs. Okay. And if it takes you two years, 15 one year, 15 another year, you'll still get it done. And you probably could do 30 in one year if you rolled up your sleeves and cut your dadgum lifestyle.

You make $140,000. But, no, I'm not going to. That's a lazy man's way out it sounds easy problem is you just added forty thousand dollars thirty thousand dollars to your loan balance on your house we're trying to get your house paid off okay but i would do it if you're gonna stay in the home i would pay it off sooner i'm sorry even though it would pay it off sooner you misunderstand it's gonna pay it off sooner? I'm sorry? Even though it would pay it off sooner? You misunderstand. It's going to pay it off even sooner because I'm not borrowing money for these repairs. Okay. I'm going to put it on 15-year at 287, the current balance. That's going to pay off sooner.

Okay. $30,000 sooner, right? That is correct. Okay. Okay. All right. all right so yeah it is sooner it's a lot sooner so yeah cash flow your repairs dude you got the money you need to just watch what you're doing there and you make enough money to do that no i do not borrow money. So why? Because being debt-free is the shortest path to wealth. That simple.

Thanks for the call. Marcus is with us. Marcus is in Tennessee. Hi, Marcus. Welcome to the Dave Ramsey Show. Hi, Dave. Thanks for having me on. Certainly. How can I help, sir?

Well, I've got a question. Currently, my fiance and I are both on our own individual step two. Good. I make a good bit more than she does, and I've got a lot less debt. So I make about $55,000 a year salary, and I've got about $6,000 in debt left. So I'm going to have that knocked out here in a couple months. Good. When are you getting married? We'd like to get married in September. Good. Next year.

Oh, a year? Why are you waiting a year? Mainly because we want to be able to cash flow the wedding. We don't have anybody that really can help us out. Okay. So I was figuring that I obviously pay off my debt and then I'd probably have to cashflow the wedding myself. Okay. That makes sense. We're going to try to keep that reasonable. Okay. Um, my question is in the period after I've saved up money until the wedding and after the wedding, um wedding typically I would move into step three

but being that she'll still be in step two should I just save my money and then apply that to her student debt well I mean you're going to go ahead and do your baby step three but when you get married you're no longer in baby step three you're back to baby step two so you'll clean out that emergency fund and apply it to her dad after the marriage okay so what are you going to spend on this wedding yeah that's really that was my next question is is how much how much is reasonable spend um i i'm in favor of keeping it affordable and and I think she is too. What does that mean to you? What does that mean to you? I think both of us will want to do it for less than $5,000.

Okay. Why don't you get married by Christmas then? Okay. Even if you put your debt on hold, just save up $5,000 right fast and get married. So you think getting married before even paying off debt would be important? I'm fine with that. I'm fine with that. Okay.

And, I mean, have you guys been through good pre-marriage counseling? Not yet. How long have you been engaged? We've been engaged for about two months. Good. Okay. Yeah. Usually, you know, what I do is I just, I kind of take all the romance out of it

because I'm a nerd. And so I look at the statistical evidence of what causes a successful marriage on average. A six-month engagement with pre-marriage counseling increases your likelihood of marriage success dramatically. A much longer engagement does not accomplish much statistically, and that's where I'm doing this, okay? And pre-marriage counseling increases good, in-depth pre-marriage counseling, where you dig out all the problems with all the families and all the potential disagreements,

and you look at all the money stuff, and you and all the potential disagreements and you look at all the money stuff and you look at the religion stuff and you really dig in, that increases the probability considerably of a successful marriage. thank you for joining us america brandy is is next up. And Brandy's in California. How are you, Brandy? I'm good, and yourself? Better than I deserve. What's up? Can you hear me? Yes, I can.

What's up? Okay, perfect. All right, so I'm 37 years old. I'm about to go through a divorce. I have two children. One is 11 and three. Um, so they're young. Um, I am relocating to a different state, um, in January due to more family and, you know, the strong family unit. Um, and I'm calling because I received my bachelor's degree in 2014 and now I'm about $81,000 in debt.

I didn't follow my true path and I'm kicking myself in the butt for it, but I want to be a nurse. It's my passion. I just felt like I was scared to fail. So I basically got a degree that I'm not using. And now it's just this debt is hanging over my head. So my question with you was, should I just tackle this $81,000, which is accumulation of student loan, credit card, and medical, before I go into nursing? Yes. I would clean it up, and then I would save up the money for nursing school.

It's going to take you a couple of years to course correct, but you've got a lot of other healing and a lot of other things going on anyway right now. Yes. And so when you relocate to the other state, what will your career be? What will your projected income be? I'm looking i'm actually i've actually talked to my mom and i'm willing to work two jobs um so i'm trying to go into if i can do one for 45 000 another one for about 20 000 i've sat with my whole family and that's my focus and i just wanted to get that confirmation from you.

Yeah, just clean up the mess. Clean up the mess and save up the money for the nursing school. So are there any assets coming out of the divorce? Are you getting any money out of the divorce? No. Child support? Possibly. Okay.

Not dependable. Yeah. possibly okay not dependable yeah it's it's we're we're really cordial between each other so i want to keep it calm but i don't know how you know this is gonna go i'm super nervous about this because you know we've been together for like over 14 years so it's kind of nerve-wracking. But one good thing about it with my schooling, since I already have my bachelor's, I get to go through the accelerated program, so I only have to do two years in nursing instead of the whole four. That's wonderful. So it's cheaper. Yeah.

Cheaper, and you can get it done faster. So it probably takes you, if you live very conservatively and support a family and get good child support, it probably takes you two years to be debt-free and two years to go to nursing school. And so how old are you? 37. Okay. And so you're a 41-year-old nurse. You've got a 15-year-old year old and a seven year old at that point

and uh you got the rest of your life for this encore career the second career that you line up you're going to be just fine let's just do this wisely um and and steadily rather than while all this other okay you're divorcing're moving, and you're talking about changing careers, all in one fell swoop. So not the time to do it. It's not the time to do it. You're better off to go ahead and get the finances cleaned up and be working from a more solid emotional and a more solid financial platform to do your nursing degree.

And then when you make this move, you know, you're going to be able to do it in a way that has just, it's kind of automatic then because you're doing it from strength rather than in the midst of tremendous upheaval. And so that's definitely what I would do. Good question. Thank you for the call. All right, Madison is in Texas. Hi, Madison. Welcome to the Dave Ramsey Show. Hi, Dave. I own a small business and I am looking to sell it.

And I am having trouble figuring out what is a fair price to sell it at. There's a lot of conflicting stuff on the internet and I'm pretty young and new to this still so I just like a little bit of advice. Okay you view it financially mathematically as if an investor was going to buy it and someone had to operate it okay how many employees do you have? I have nine contractors. Okay. And what is the net profit of the business annually? The net profit last year was $92,000 annually. Okay. And was that after you paid yourself or was that what you paid yourself? No, that was included in what I paid myself. Okay. So you didn't make anything out of the business other than the $92,000? Correct.

Okay, if I were going to buy your business in Texas, I live in Tennessee, as an absentee investor, I would hire a manager to run these nine contractors, wouldn't I? Yes. What would I have to pay that person? Oh, probably a pretty decent salary well yeah i mean really i'm not being what would you think i would pay them you know your business i mean 50 to run them a manager to run them at least 40 000 a year let's call it 42 okay which means now my net profit is the owner of your business after I've paid all the staff is $50,000. Because 42 is what you were worth to run the thing.

Your business, after you got paid your manager's fee, made 50. Does that make sense? That does make sense. So that's how you value it. We value it based on the 50,000. Now, if I want to make a 25% rate of return on my money buying a small business, that would not be unusual. Then I would simply take your 50 and multiply it by four. So your business would be worth 200. If wanted to make only 20 on my money i would multiply it by five your business would be worth 250 okay that makes sense i have um a teacher for

me that um i'm really interested in her taking it from me is that fair to ask that up front sure that's what the worth of the business is of course it's fair okay the business is worth you know if you invest two hundred thousand dollars and you got 50 off of it you would have made 25 percent rate of return on your money you would have gotten all your money back in four years right that's a very reasonable price, okay? Or five years if we did 20%, it's $250. So somewhere in there is what it's worth. Now, that's the most it's worth unless it owns a bunch of assets. And that's the other way you can value a business is what's called book value.

And if you add up all of your inventory and your receivable, your equipment, your assets that the business owns, if they're more than that, then the stuff that the business owns is worth more than the business is. That's what book value is. Okay. We don't have a ton of assets, so I think probably the best way. Yeah, your cash flow is what your value is. Okay, that makes total sense. Thank you so much. And if I had a cash buyer on the line versus someone that wanted me to finance it,

I would take less to get my money up front and be done with this. Okay, that's good advice. Cut bait. Move on. Take a little less. Make it clean. Okay, perfect. Great discussion. Thank you. Move on. Take a little less. Make it clean. Okay. Perfect. Great discussion.

Thank you for calling in. Open phones at 888-825- 5225. You jump in. We'll talk about your life and your money. Dave, what are your thoughts on pulling from your IRA as a qualified first-time home buyer? Never.

You're not ready to buy a home if you're that broke. You should be out of debt, have your emergency fund, plus save up your down payment beyond that before you even talk about buying a house. Slow down, house fever. Slow down. I want you to buy a house, but let's not be quite so desperate, Brooke.

Just calm your butt down. Get out of control here. That puts us out of the Dave Ramsey Show and the books. Our thanks to James Childs, our producer. Kelly Daniels, our associate producer. I am Dave Ramsey, your host. And we'll be back. This is James Childs, producer of The Dave Ramsey Show. Did you know you can now listen to The Dave Ramsey Show on Pandora and Spotify?

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