The Ramsey Show - App - Insight on How Much to Invest in a 529 Account (Hour 2)

Episode Date: June 19, 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, 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. Thank you for joining us. Open phones at 888-825-5225. That's 888-825-5225. Lee's with us in Indianapolis. Hi, Lee. Welcome to the Dave Ramsey Show. Hi, Dave. Thank you for taking my call.

Sure. How can I help? Um, so, uh, most of my life I struggled with crippling anxiety and depression, but on May 3rd of this year, God healed me. Wow. Yeah. Um, I am now taking a look at my situation and I'm absolutely not happy with it. Uh, where my husband and I are making about 35,000 a year and that's with me now working more. Um, and we're in a bunch of debt and I, I hardly even know where to start or even like if we can do much with where we are right now. Okay. How much debt do you guys have? 67,000 at least, probably more.

We're going to go over the numbers exactly this Friday. Okay. And what's the $67,000 on? Well, I know $60,000 for sure of student loans. We'll start paying on them next year. And just off the top of my head, I know $7,000 more that we owe, but there's probably several more. Okay.

Do you have car payments? One car right now, yeah. What do you owe on it? I think that's down to about $5,000. Okay, that's good. And what do you do for a living? I am a barista, and my husband is a junior programmer soon to actually have a degree behind his name. Okay, so he's getting ready to finish a degree in technology?

Yes. Next March he'll have his degree. Okay. Is this a four-year degree or a two-year certification program or what? Four-year degree. Okay. And information systems or information technology or what? He's doing database management, I believe, yeah yeah and is he going to school full-time

now uh part-time he is working in the in the field right now full-time so he's only been able to do a few classes a semester yeah so what does he make i'm sorry what does he make? He makes, right now, about $30,000 a year before taxes. My job right now doesn't pay much. I'm planning on getting as many hours as possible. But also with where I'm at, they will pay for schooling for me. So I don't want to leave there if they're going to buck up that much. Okay. I'm a little confused as to why a junior programmer that's about to graduate with a four-year degree is only making $30,000.

Right now, he's working for a small company. But soon, he's going to start talking to recruiters and find out what he's worth. He's worth double what he's making today before he graduates. Wow, I had no idea. Yeah. He needs to be looking at his career right now and be looking for what it'll look like after he graduates as well if he is if he's um you know getting ready to be mid-level with very little experience data management i mean yeah you got to be making 60 uh anyway wow so um yeah you need to be looking at that um so so one

of the things you've got to do is you guys have to sit down and really focus on the income side of your equation as well as the outgo side right and you have to think about okay what is it that you want to be doing 10 years from now how old are you i'm 28 okay so you're gonna are you going to be a 38 year old person working in a coffee shop i hope not okay so no. So, no, no, no, no. It's not about hope. It's about laying out a plan and executing the plan. If you just hope, you will be. Okay?

So, what do you want to be doing 10 years from now that's going to make you $50,000 to $150,000 a year? I want to be doing something with environmental science, preferably freshwater. Environmental what? Science. Plants? Yeah, going through essentially helping mostly probably residential ponds and everything, giving them what they need to actually be good thriving ponds. I'm hoping that I can get into some more of the nonprofit stuff with larger rivers and lakes and things.

And that pays $50,000 or $100,000 a year. And there's more than two jobs in the U.S. that do that. I've never even heard of that. I'm hoping. I haven't looked into it too much yeah i think you probably need to broaden your your game plan here obviously you have a heart for that but what i'm asking is not only about your heart but also what you're actually going to do with your hours in the day that are going to create wealth for your family and that's not just heart and that's not a non-profit and it's not that kind of stuff that is what am i going to be doing as my career field

um so i make so much money that i can donate to things that i am worried about in the environment or things like that um that may be your better route i don't know you may be able to work in that field as a biologist and make $200,000 a year. I don't know. I've just never heard of it. I just can't think that there's a ton of residential pond and environmental plant people out there. That sounds very narrow to me. And so I want you to have a clear path of what you're going to be doing and how you're going to get there and how much you're going to make.

Then that gives you hope because you're not going to be doing this on $35,000 a year yeah that's really not your future your future is brighter than that on the income side and then that starts changing the simple division if you sit down you say okay we have $80,000 in debt when you add it all up this weekend with your husband. Yeah, but he's making $60,000 and now I'm making $70,000. Oh, that changes the whole equation, doesn't it? That gets a lot easier. Yeah, but making $30,000 with I hope, that's going to get you in trouble, isn't it?

You can do that, but it's just going to be a lot harder. And so, I mean, if you just simply doubled his income and put it all on your debt, you're debt-free in three years. If that's all you do. I mean, $30,000 a year for three years is $90,000, right? If we just double his income. And I think his income is going to more than double in the next three years. And I want you to have a game plan with your career that allows you to do that as well. So, good question.

Thank you for joining us. Very well done. Hold on, I'm going to send you a copy of Ken Coleman's number one best-selling book on careers called The Proximity Principle. It's a proven plan to get you into the career you love. The proximity principle. Hold on, I'll give you a copy. No matter what time of year it is, focusing on your family's financial plan is always a smart move.

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This is the Dave Ramsey Show. The phone number is 888-825-5225. Our Facebook community, the Ramsey Baby Steps community, now 200,000 strong, is the official Facebook community for Ramsey Baby Steps people. Now, the tribe will encourage you. The tribe will even answer your questions. They know the answers. A lot of them do. Not always, but they often do.

And it's pretty cool. Dolly is on there. She says, Dave, do you have to pay taxes on life insurance policies? I'm wondering if I need to factor that in when decided on a coverage amount that our family would need if anything would happen to either parents or both. No, life insurance proceeds in the event of death are not taxable. So if you die and the life insurance policy on you is given to your beneficiary, there's zero income tax on that. So you don't have to worry about that. Now you can screw that up by monkeying around with the beneficiaries, but if you simply put a person on there or, you know,

properly do the beneficiaries, you don't have any taxes 99.99% of the time. So we really don't have to worry about that. Coverage amount that our family would need if anything would happen to either parents or both. I guess you're talking about yourself as the parent, I hope. Don't buy life insurance on your parents, except in very rare, weird circumstances. But I wouldn't do that. If you're talking about yourself as the parent, then that's the thing. And, of course, you can get quick, easy quotes at zanderinsurance.com.

That's where I get my term life insurance. It's the best prices anywhere and the best service as well. Sarah is with us in Sacramento, California. Hi, Sarah. Welcome to the Dave Ramsey Show. Thank you. It's so great to talk to you. You too. What's up? So I'm looking to buy a house in California, and I know that math still works here. So I'm starting to follow your home buying guidelines, and I have a question about take-home pay. Okay. Kind of a two-part question. I'm not sure if take-home pay is calculated before or after 401K and health insurance deduction.

Neither one of those are included in that figure. Okay. And then how do you calculate the 25% when you have a variable income? Well, you would just take what you think your income is actually going to be. And just kind of go on the conservative side if i can have like a 40 000 swing i'm in sales year to year okay but what do you i mean what do you anticipate realistically i mean not not being weird or positive thinking or that kind of stuff but i mean if you were just going to do a budget on you guys i mean what do you think you're going

to make i understand it's some years it's been down 40 but i mean what do you think you're going to make i understand it's some years it's been down 40 but i mean what do you think the next three to five years it's reasonable to project that is that 40 the upper side of that 40 real if it is then include it okay because i usually for our budget i only do salary and i don't budget bonus until i know what it is yeah well you need to give your bonus a name on paper before you get it but um that's not what i'm talking about here this is trying to figure out can you pay this house payment and if um uh you know are you going to have the income over the scope of a year and this house doesn't make you house poor that's what we're after and so um you know what did you make the it's a forty thousand

dollar swing on the bonus is that what you're saying yes okay so if i made no bonus we'd be at a family of 160 yeah how many times does that happen that always happens that That's salary. No, that's not what I meant. The chances of you getting zero bonus are zero. Oh, zero. Okay. So what's the worst bonus you've gotten above that in the past three years? Maybe 15. That was your worst year in the last three years, bonus-wise? Mm-hmm.

Okay. And what was your best year, 40, it'd be 65 right yeah yeah i can say 55 i'm sorry yeah probably just shy of 40 was my best oh not a 40 000 not a 40 000 swing then i mean it could go higher than that but my my personal was 40 yeah but your swing is 15 to 40 that's been your reality so you don't you don't have a 40 000 delta here you've got a a 25 000 delta okay okay and so um you know i i would just drop there in the middle and say you know calculate the thing on 35 or 30 or something like that. How much control do you have over the bonus?

Is it based on your sales? Yes. Okay. Are you getting better? Yes. I would guess. Always, hopefully. Yeah, normally you would be.

And you can go beyond that 40, right? Yes. You just never have yet. Yes. Okay. So have yet. Yes. Okay. So what do you make as your base? My base is like 88, I believe. Okay.

And so you make between 88 so far and 128. Okay. So you're about 20%, 15% incentivized, okay, right now. What are the chances of you making an $80,000 bonus five years from now? I don't know if our gold would ever allow that. Okay, so you're logistically hampered from selling that many units. Probably 60 is probably the max. Okay, all right.

Approximately. I'd probably run it at 30. Okay. Because the difference in that and 40 is not going to be that much. It's not going to change the numbers that much. I'd probably run it with a 30, because I think you're realistically probably going to hit 30 most of these years is what it sounds to me like yeah yeah good good question and it's by the way it's not that huge a percentage of your overall household income so if it all went away one year it doesn't cause you to lose the house it just says that year

you're going to be house poor and Tighten up budget on a hard year. Yeah, you can make it, but it's not going to cause the foreclosure, right? It's just going to be, ouch, I can't do anything else this year. Okay, that makes sense. Yeah, and that's the point of me giving you a 25% guideline on a 15-year fixed, is so that you've got wiggle room, and a down year you would just lose most of your wiggle room that's all you know your ability to save and do other stuff i mean if you had a horrible down year you might have to just stop adding to 401k for a year or you might have to um not go on

vacation that year you might not be able to save towards kids college that year or you might uh not be saving towards a car that year or whatever something like that that's all your wiggle room stuff and that's what you want to leave room for above your normal mortgage payment in your normal household so it's fun to talk that through with you because it's a good example for all of our other listeners it's a good it's a good critical thinking skill to work this through and uh interesting to discuss so hey thank you for calling in with your question. I really appreciate it. Open phones at 888-825-5225.

Blinds.com gives us our question of the day. They have a 100% satisfaction guarantee. Even if you mismeasure, you pick the wrong color, you screw up, they will remake your window blinds for free. Free samples, free shipping, and with the new promos every month, you save even more. The promo code is RAMSEY. Caitlin's in Wisconsin with the question, when saving to move up in-house,

is it better to keep making large payments on the current mortgage, or should we make minimum payments on the current mortgage and put any extra cash into a savings account until we're ready to move? I would just make huge payments on your house until your house is paid off. It's simple. Because you're making a better rate of return by doing that, your mortgage interest is higher than your savings interest. So if you're saving 4% on your mortgage by paying down on the mortgage versus getting

1% on your savings account, you're getting ahead that way. The other thing that happens is you don't accidentally impulse a bass boat with your house money because it's all tied up in your house then. And you get it all back, obviously, when you sell it. So first goal is pay down the house. Just pay down the house aggressively. And then when you sell the house, obviously, they're going to give you a check at the closing.

So you'll have money. It'll all come right back to you. So, yeah, I'm just going to chunk on the house. Just chunk on the house until it's gone. Good question. Thank you for joining us. This is the Dave Ramsey Show. Thank you. If you hadn't heard of Ramsey Solutions, we are hiring. If you'd like to be part of this mission of giving hope to millions of people

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jobs that are available here at DaveRamsey.com you'll be part of a team that's really really rocking right now I mean we are in a zone click the Dave's hiring tab on the right-hand side of the homepage. Click Dave's Hiring on the right-hand side of the homepage. Amy's with us in Fargo, North Dakota. Hi, Amy. Welcome to the Dave Ramsey Show. Hi. Thanks for taking my call. Sure.

What's up? Well, I am curious how to best invest money that grandparents give our children for college. Right now we have a 529, but we have four kids, seven, six, three, and one years old. And my seven-year-old, he turns eight next week, actually. He almost has $50,000 in his 529 already. And so I'm wondering how far do we keep investing in the 529? What kind of 529? What's it invested in?

Well, I knew you were going to ask me that. It's with our SmartVestor Pro, and we chose things with him. So it's good mutual funds. It's good mutual funds like we suggest then. Okay. Right. That's good. Okay, great.

Well, you can run some calculations with your SmartVestor Pro. You may have enough in there. $50,000 may very well grow for enough, and you're probably done. And you don't want to overfund a $529,000 substantially. So if that $50,000 is going to grow to $150,000, and it looks like school is going to cost $120, $140, then you're probably done, right? But if the school you're thinking about sending them to is going to be $200 or you're saving up to pay for them to go to medical school or something like that, then you're not done.

You'd keep going. So it depends on what your goal is there and what you're going to do with it. Money that's in a 529 that is not used for education purposes can be transferred to a sibling, but otherwise it's going to be highly penalized if you take it out. That's what my concern was because, you know, grandparents are giving each individual child money like at birthday and Christmas, and so I don't want. How much are they giving them? They get like $2,000 on their birthday and $2,000 at Christmas.

I love it. How nice. That's wonderfully generous. It is. I just think you need to run some calculations and say, okay, what are we saving for? What is our savings goal for these kids? Are we saving for in-state tuition for an undergraduate degree. And then you say, okay, what does, you know, the University of North Dakota cost to go to 15 years from now? And, you know, and are we on pace to have that if we quit adding this money to this actual 529?

It sounds like you're pretty close. Yeah. Would an UTMA be the next yes step the next yeah you just start dropping it into there but i would make sure your 529 is topped out first i just wouldn't overfill it okay you don't want an extra 100 grand in the 529 you know right and it sounds like the way grandparents are chunking this i mean four grand a year when you're seven years old starts to turn into some serious money. Oh, I know. My 18-month-old has almost $6,000 already, so, you know.

Yay. Yay. That's wonderful. Yeah, we're really grateful for that. So, yeah, the UTMA can be used for anything. It's just simply opening a mutual fund and a child's name. It's a Uniform Transfer to Minors Act, UTMA. And that's how we did our kids' college because there weren't 529s or ESAs when our kids were little.

So that's all we did. But it grows. It doesn't grow tax-free like it does with a 529. The growth is taxed at the kid's rate. So it's a much lower tax rate that it's taxed at, but it's still taxed at that rate and so you'd employ a little bit of a different strategy on what you're buying and the type of mutual fund that you're buying probably use low turnover ratio mutual funds for that um and the beauty is if they decided to do grad school or something you could use that money for that right or they if they you know graduate with an undergrad and that's what they do and everything's great then uh they'd use that money for that, right? Or if they graduate with an undergrad and that's what they do and everything's great,

then they'd have that money for their down payment on their first house or whatever or pay cash for their first house. It keeps on going from there. You can do a lot of different things with it, and that puts you guys in a position to do that. But I would calculate with your SmartVestor Pro, first set your goal. What is it we want the child to be able to do? Then find out what that's going to cost. An example would be we're willing to pay for an undergraduate degree

in an in-state college and pay for books and dorm. And what's that going to be? And you can jump on that university's website. They probably have some estimates a few years out. And you can start to calculate what the target is, and then don't put more than that. And then what will your 529 grow to? And don't put more in the 529 than will grow to that target. Once you know what your goal is.

But your goal could be, I want to send them to Harvard. I don't care what your goal is. Just know what that is, and then back out the numbers with your SmartVestor Pro to see if you're overfunding or not. Gina is with us in Billings, Montana. Hi, Gina. How are you? I'm very well, thank you. Mr. Ramsey, your work is mighty in the kingdom.

Well, thank you, ma'am. How can I help? You bet. My husband and I have been retired for about 11 years. We've always lived very conservatively, taking very few vacations, et cetera. We have no debt. Our house is paid for. Way to go.

Thank you. Our assets equal approximately $5 million. Way to go. Thank you. My husband's philosophy is that we exist to take care of the fortune. My philosophy is that the fortune exists to take care of us, and never the twain shall meet. When we retired, we determined a budget which has not changed in 11 years. I recently approached him to ask for an increase in our budget because we're living

fairly meanly. He doesn't want to increase our budget. He calls it a downward spiral because he wants the entire principal left when we die. I wanted to hear your thoughts on that. So what is your annual budget? I'm sorry, I don't know. He does not let me know anything about the money. How long have you been married? 41 years. You've let him get away with that a long time, haven't you?

Well, sir, it is a lot, Michael. It really is. I'm terrible with money. He's great with money. It's kind of been a tacit agreement and a not-so-tacit agreement here toward the end of our lives. Do you have any idea what your income is off your investments? No, sir, I don't. You said you got $5 million in assets.

How do you know that? I just went to enough meetings with our financial planner to know that. Okay. And the money is invested primarily in what, the $5 million? What's it invested in? I'm sorry. I'm an idiot, and I don't know. Okay. So you went to the idiot, and I don't know. Okay.

So you went to the meetings, but you didn't. It's very conservatively. I didn't really understand it. I don't know anything about it. It's no risk, I can tell you that. So what is it you're wanting to do with money that he doesn't want to do? I am wanting to ease up the funds so that trips can be planned, work can be done on the home. If we want to go out to dinner, it's not a battle.

I'm not wanting anything extravagant. Okay. Well, I think the fortune does not exist to serve you, and I don't think you exist to serve the fortune. Okay. I think both of those ideas are wrong. I think the fortune exists that you manage it for the glory of God. There you go.

And it exists for that. Now, what does Scripture tell us? Because you mentioned God earlier in our conversation, so I'll cue in on that. Yes, sir, we're Christians. And so Scripture tells us to take care of our own household, or we're worse than a believer. And where we're having a disagreement here is what's taking care of your own household. You should have a $200,000 a year income. And it sounds like Tightwad Boys got you on about $50,000 a year.

So I think you need to go on some trips. And I think you guys probably need to sit down with a pastor, a good marriage counselor. And you need to find out what your income is and what the budget is, and the two of you need to be making these decisions more together. I'm not asking you to start spending like Congress, but I think you need to be enjoying some of this money more than you are. it's a good idea to talk about our last call for a minute five million dollars in assets in retirement i'd like to go on a few trips and fix up the house a little. Now, could she be understating that? Yeah, she could be.

She may be saying, I want to spend $200,000 a year on travel and $500,000 fixing up our house. If that's what she meant, but I didn't think that, and she didn't want you and I to think that the way she was presenting it. So I'm assuming, and I did assume, that the expenses to do a few minor repairs to the house and maybe go on a cruise or finally take that trip to Paris that they've always wanted to take was all she was talking about. And very, very doable on that asset base and the income it should be creating. So if you have $5 million invested and it makes 10%, that's $500,000 a year without touching the principal. Now, would I suggest you necessarily draw down that much?

No. But that's a pretty broad range from I can't afford to repair my home. So I don't know the history in their 41-year marriage. She said he was good with money, she's not, so she didn't know anything. By the way, I'll tell you, don't live your life that way. Number one. Work on yourself enough that you get competent enough and mature enough with your spending that the two of you can work together and you don't have to be protected from yourself by your spouse.

And spouses should not be operating where one of them doesn't know what's going on or is controlled by the other one. And that's how she feels now. Possibly she was overstating all of that. I don't know. But so here's the thing. From a scriptural standpoint, for those of us that are people of faith, people of the book, here's what the book says.

Take care of your own household first or you're worse than an unbeliever. It also says a good man leaves an inheritance to his children's children. It also says God loves a cheerful giver. So there's three things scripturally that you should always be doing with money, and it is your purpose. It is managing God's money for his glory when you do these three things properly. You enjoy money and provide for necessities. That's taking care of your own household. If you have $5 million in assets creating $200,000 to $500,000 of growth every year, and you refuse to take your wife on a cruise that costs $5,000, that

is not taking care of your household. That is wrong. Now, if you're broke and you have two hundred thousand dollars in student loan debt crap no you're not going on a cruise you dumb butt no that's not what we're talking about but money has three possible uses as you build it now whether you're a person of faith or not it has three possible uses number one you have fun with it and that includes taking care of basic necessities but we're going to start with that i mean you take care of your house you enjoy some money you buy that classic car you've always wanted you go on that trip to australia you've always wanted to do, or Africa, or Paris. I don't know what it is. You build a barn out back because you've always wanted to raise a few head of cattle.

I don't know what your dream is at retirement, but enjoying the money, consuming some, not all, but some of the money is proper. It should be the smaller percentage of these three. The second thing you do is you do continue to invest it, but you have no obligation to leave it to the next generation 100% intact. Now, if you've got $5 million and you can't live off of $200,000 2 to 500,000, then there's probably something wrong and you should be able to leave that principle in place. But it's not the end of the world if you don't. If you left them 4 million instead of 5 million, so what?

It's not the end of the world. But leaving an inheritance to your children's children is biblical. An inheritance. And it's an inheritance of character, an inheritance of memories and legacy, and it's money. It's what that's referring to in Scripture. It's all of those things. It's not just, oh, well, it just means leave them a character. No, it doesn't.

It means leave them money. Solomon built the temple that the people of God worshipped in. And he did not build it with his money. He built it with his dad's money. David left him the money for an inheritance. It was David's money that was left. That's how it was built. Solomon did not acquire the wealth.

So something to consider. Biblical inheritance is a real thing. And you're not a sinner if you don't do it, but this idea that somehow you're supposed to leave the next generation broke because children are going to be ruined by money. No, children are just, the fact that they were ruined is revealed by money. It is not, the money didn't ruin them. They were already bad.

The money just revealed it. And so your job is to raise kids that can manage wealth because they can manage life. That's your job. So you spend some on you because you take care of your own household. You spend, you leave some as an inheritance. A godly man leaves an inheritance to his children's children. And you are outrageously generous.

Now, I will tell you that most spenders are generous and most tight wads are not by nature by nature if you are a saver giving is harder for you than it is if you're a spender most of the time not always but most of the time that's the case that's not a bad thing my wife is the saver and she is much more deliberate and careful and cynical about our generosity than i am i'm sloppier i have a tendency to be i have to work against it but i have a tendency to be sloppier in my generosity and more outrageous in my generosity than she does. But I'm the spender of the two of us by nature. Now, again, I've learned to control that I'm a grown-up now. I used to be a child in a grown-up body. And so I've worked through that, and that's why God makes me teach this every day.

You're my support group. My name is Dave, and I like stuff. So you enjoy spending some of it. You enjoy being outrageously generous with some of it. You leave an inheritance to your children's children, and that's the investing side. So you're always giving. You're always enjoying and spending. You're always investing all your life.

And that's a proper view of money. And if you want to have a high-quality marriage, both of you need to be trustworthy, worthy of trust to each other. In other words, one of you is not a spending child princess that's out of control and has to be protected from yourself. And one of you can't be the ogre control freak. child princess that's out of control and has to be protected from yourself. And one of you can't be the ogre control freak. I'm the only one of the two of us that has a brain.

I earned all the money. You have no rights. Well, that's not a healthy relationship. That's a bunch of garbage. I earned the money. It's my money. Well, then you shouldn't have been married. Because your marriage vows says, unto thee all my worldly goods I pledge. The old marriage vows from the Book of Common Prayer say that. For richer, for poorer, in sickness and in health, and unto thee all my worldly goods I pledge.

That's the way you operate a properly done marriage with a proper relationship that is high quality this mental health it's not toxic and and so if you have to hide money from each other you have a problem in your relationship if you have to protect one of you from the other one you have a problem in your relationship not in your money one of you from the other one. You have a problem in your relationship, not in your money. One of you is not worthy of trust. You're not trustworthy. You've got to work on that stuff. Don't get 50 years into a marriage and just be discovering that.

It's just not worth it. Then the money becomes a curse rather than a blessing. This is The Dave Ramsey Show. or service and didn't have a chance to write it down, don't worry. We list everything that is mentioned during this episode in the podcast show notes section. Thanks for listening.