Dear Dave,
Myhusbandrecentlyopened his own commercial painting company.Weknowhewillhave three months or so every year when he’s making very little, if any, income. We also started following your plan recently, too, and have $1,000 set aside for our starter emergency fund. We were ready to begin paying off all our debt except our home in Baby Step 2, but now he wants to skip that, and move to Baby Step 3 to build a fully funded emergency fund of threetosixmonthsofexpenses. I think I know why he feels this way, but would you give me your thoughts?
Crystal
Dear Crystal,
Your husband’s excited about the new business. I get that. And in his own way, it sounds like he’s trying to make sure there’s extra money on hand for the down months he may experience as a commercial painter. But I wouldn’t advise this approach, not for his business, and not for your family’s finances.
Baby Step 3 is an emergency fund of three to six months of expenses. The scenario he wants to plan for, however, isn’t an emergency. He knows it’s coming. It’s the same with things like Christmas, birthdays and stuff like that. You know they’re coming, and you even know which months and days. Things like that aren’t emergencies, and they don’t catch anyone by surprise. They’re things you plan for— and budget for—ahead of time.
But the first thing your husband needs to do is rework his business model. He needs something to do during the down months, so that his income doesn’t dry up completely. Setting money aside in a business for an expected down time is smart, but it’s not a Baby Step 3 issue. It would be a line in the budget where you set money aside because you know something’s coming.
Again, if it’s something predictable, something that happens at the same time every year, it is not an emergency. If you want to budget some household money for the down time, that’s fine. But do you know what would be even smarter? Figuring out a plan for this time, based on his skill set, which will allow him to keep earning money!
— Dave
Dave,
I am the managing partner of a family business. We would like to add to our team, but I’m worried we can’t try to hold millennialsandGenZerstothe same standards as other generations without losing them. How do you feel about this?
Sarah
Sarah,
Listen, I’ve got a building full of Gen Zers and millennials — and I love them. If you hire the rights ones, you’re getting people who love calluses on their hands and on their brains. They make the interview process easy too, because there are just two types from these generations: the ones whoareunbelievablyawesome and the ones who aren’t. But the great ones are not afraid of hard work. They’re passionate, intelligent and mission driven. I mean, they’ll charge the gates of hell with water pistols for something they believe in.
But that means you have to provide meaning in the work they do. They want to see that their work connects to something that matters. They want to be treated with dignity, not like units of production. And they have inquiring minds. Mostofthemwanttoknowwhy you do things the way you do them. All that is perfectly okay with me and always has been.
Now, they’re the worst two generations to work for someone who’s just a boss. That’s because bosses push while leaders pull. If you’re going to pull, you have to inform, communicate and share a vision that draws people into your mission. Bosses, for the most part, have a “do it this way because I said so” attitude. That’s not going to last long with Gen Zers and millennials.
I get where you’re coming from though, Sarah. I’ve still got friends and business associates who tell me we’re going to lose everyone from these generations if we don’t cave in and give them things like “the flexibility to work from home” — which really means, “I don’t want to work much” or “I want to work all the time.” Listen, I understand not everyone who works from home falls into one of those two categories, but some of them do. There are folks who put in 80 hours a week because they can’t put their screens down and live a life. Or they work three hours a day and call it “working from home.” That’s not working from home — that’s working part-time hours for full-time pay. And that’s called stealing.
But millennials and Gen Zers? I’m a huge fan of these generations. I truly, personally like them. They are, for the most part, genuine, real people and hard workers. If you give them what you should as a leader, they’ll blow you away with their smarts and what they’re capable of achieving!
— Dave
Dear Dave,
I’m an anesthesiologist, and I make between $260,000 and $270,000 a year. My wife is a stay-at-home mom who takes care of our preschool-age kids. We have about $50,000 in a retirement fund, $50,000 in consumer debt, $220,000 in student loan debt, and we owe $280,000 on our house, which is worth around $500,000. We’re thinking about using our retirement fund to pay off credit cards and such, then selling the house and using the money to pay off the student loans. After that, we’d live in an apartment for a while, save up 20% or more for a down payment on the next home, and do things right financially moving forward. What do you think about this game plan?
Jake
Dear Jake, Wow, I really appreciate your motivation, man. You’re willing to do whatever it takes, and that’s pretty cool. Not many people have the determination to do the kinds of things you’re talking about.
I almost never tell people to sell their homes. If you actually can’t afford it, that’s one thing—and in that case, we’d sell the house. If it’s the only way to avoid bankruptcy, we’d get rid of it in a heartbeat. But in your case, things are a little different. You’re in a pretty deep hole, but your income as an anesthesiologist gives you a really big shovel you can use to carve out some steps, get up out of that hole, and fill it in so you never fall in again.
Now, this is going to mean some real lifestyle changes for a few years. I’m talking about beans and rice, and no vacations. There’s no more living like a rich doctor, because you’re not a rich doctor—you’re a broke doctor. We’re going to temporarily stop adding to your retirement fund, not cash it out, and we’re going to start living on a written, monthly budget where every single dollar is given a name and a purpose.
Cleaning up $270,000 of debt sounds scary. But with a $260,000 income and the other changes we talked about, you could put $90,000 a year toward all this and have it completely cleaned up in just three years. That’s what I’d do if I woke up in your shoes. It will set you free for the rest of your lives to invest and save.
Get on it, doc. You can do this!
— Dave
Dear Dave, The other day, my wife and I discovered a Thrift Savings Plan (TSP) we’d forgotten about for over 10 years from my time in the Army. There’s a little over $3,200 in there. We’re both in our thirties, and we’re trying to save up our starter emergency fund in Baby Step 1 of your plan. We were wondering if we should withdraw the money and use it toward Baby Steps 1 and 2, or just leave it in there.
Todd
Dear Todd,
The best thing to do is roll the money over into an IRA. Otherwise you’re going to be hit with a 10% penalty—plus your tax rate—and end up paying 30% to 40% of it to the government. That’s kind of like asking, “Would it be a good idea to borrow $3,200 at 30% interest to pay off debt?” Of course not! That would be a really dumb idea. And in a sense, that’s what you’d be doing by just taking the money out of the TSP.
It’s not a ton of money, but conceptually, I hate the idea of giving the government 30% to 40% of my money just to get my money out. So yeah, do some research, find a good investment professional near you—one with the heart of a teacher—and roll it into an IRA.
Congratulations to you and your wife for deciding to take control of your money. And thank you for your service to our country, Todd. I hope this helped.
— Dave