Dave Says — Dave Ramsey column sig

Dear Dave, I’m beginning to think we got in over our heads with our house. My wife and I make about $125,000 a year combined, but we’ve never been able to put anything aside for an emergency fund. Our mortgage payment is 35% of our take-home pay each month. We have two young children, so we eat out a lot, but we have no debt other than our house. Do you think we should refinance our home? — Jeff

You two are making good money, and you’re debt-free except for your home. You can’t tighten up your budget enough to save up an emergency fund? Stay out of restaurants, dude! There’s no law stating you have to eat out a lot just because there are kids in the house. I mean, you’ve got no emergency fund. That’s a pretty basic thing.

You guys need to get on a written, detailed plan, and start hitting your goals. I’m talking about a strict, monthly budget. Now, I’ll admit your mortgage payment isn’t exactly what I would’ve signed you up for. Your house payments, or rent, should be no more than 25% of your monthly take-home pay. But your house payment isn’t what’s holding you two back. What’s holding you back is the fact that you haven’t been willing to tighten up the finances in other areas of your life to offset biting off more than you could chew in terms of a home.

No, I wouldn’t refinance. You’re fairly close where the mortgage payments are concerned, so I think you can make it through this by looking at ways to increase your income and selling stuff you don’t need to build an emergency fund. You two have been smarter than some, but you’re really going to have to buckle down and rearrange your priorities to make this happen!

Dear Dave, I have around $15,000 in a Roth IRA. I just recently started studying your advice, and I was wondering if it would be a good idea to cash it out and put the money toward debt. — Sarah

I teach people to stop investing temporarily while they attack their debt. So, I wouldn’t add anything to it at this point, but the worst thing you could do is cash it out. If you do, taxes and penalties will steal a huge chunk of that cash. The only time I take money out of a retirement account to pay off debt is to avoid bankruptcy or foreclosure.

Start working the “Baby Steps” from the beginning. Baby Step 1 is saving up $1,000 for a starter emergency fund. Baby Step 2 is paying off all debts from smallest to largest, except for your home, using the debt-snowball method. This will free up a ton of money! Then you’re ready for Baby Step 3, which is increasing your beginner emergency fund to a fully loaded emergency fund of three to six months of expenses.

Now you’re ready for Baby Step 4, which is 15% of your income going into retirement!

Dave Ramsey is a personal money-management expert, a bestselling author and host of the nationally syndicated radio program “The Dave Ramsey Show,” which is heard locally on KROC-AM. For more financial advice, visit daveramsey.com.

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