Ask Dave

We received thousands of questions from people all around the world, and Dave only had time to address a few of them. Here is a sampling of the most popular questions that Dave didn’t get to during the live broadcast.

Q: Dave, I have been through Financial Peace University and found some of the rates of return (10–13%) you suggest for "growth mutual funds" to be unattainable in today's marketplace. Have you revised your suggested rates of return, and where could I find those rates? —Melissa on Facebook

A: Those rates are what the stock market has averaged over the past 70 years. Some years it has averaged more and some less. The market may gain 15% one year, then 10% the next, then 3%, then 20%. The gain has varied year to year, but it has averaged 12%. Sometimes it may lose money, but the average is still 12%. Even in these down times, I would still project the same overall growth, based on the past. Remember, the market eventually recovered after the Great Depression, a president resigning, an energy crisis and cowards flying planes into buildings. We’ll survive this as well.

Q: Is there any hope for those of us in our mid-50s of getting back on our feet? —Emailed from Norma

A: Of course! The 50s are the decade where many people have their biggest income-earning years. You are by no means washed up if you are over 50. Colonel Sanders never fried any chicken until he was in his mid-60s, but now Kentucky Fried Chicken is a household name. George Burns won his first Oscar at the age of 80. Golda Meir was prime minister of Israel at 71. Michelangelo painted the Sistine Chapel lying on his back on scaffolding at age 71. You may have to work a few extra years in order to secure your retirement, but you are by no means finished. Find what you love to do, learn all you can about it, take an extra job in that field so you can get some experience, and become the best you can be at it. If you are in the top two percent of a field, that always pays well.

Q: Dave, what is your feeling on reverse mortgages that are available for senior citizens? —Vera on Facebook

A: A reverse mortgage is a horrible idea. It’s an especially bad idea for an elderly person to borrow against their paid-for house, which is basically what a reverse mortgage is. They have high interest rates, high fees, and you are going back into debt when you are older and should be enjoying life. Plus, the reverse mortgage industry is under more scrutiny for consumer complaints than almost any other area. With a conventional mortgage, you make payments and the balance goes down. With a reverse mortgage, you receive a monthly payment and the balance goes up. You’re borrowing more and more each month, and it’s a scary equation for the elderly. A paid-for house gives an older couple—and their family—a lot of peace.

Q: We have lots of debt, and I recently lost my job after 17 years with the company, so there is nothing extra to put into doing the debt snowball or savings. Is there a company out there that you trust that can consolidate our debt or cut the debt down and make the payments lower so that we have some extra money each month for savings? We just don’t know what else to do. There is no extra money in my husband’s checks. —Emailed from Lisa in Idaho

A: I don’t like debt consolidation companies because when you use them, you only treat the symptom and not the problem. A debt settlement company is even worse because they will charge you a fee and tell you to not pay your bills. Eventually, when you are months behind, they say you can settle for pennies on the dollar. But you’ll destroy your credit in the process and have to deal with the nasty collectors. In fact, in most cases, debt consolidation makes the same impact on your credit report that a bankruptcy does. I don’t know how much debt you have, but here are some very important things to do right away. Get some temporary work like delivering pizzas or working at UPS until you land another full-time job. Get on a written budget and cut your lifestyle to beans and rice. Prioritize your spending and take care of food, utilities, shelter, clothing and transportation. Go crazy with trying to find a new job, and once you have one, save a starter emergency fund of $1,000. Then list your debts smallest to largest, pay the minimum payments on all of them but the smallest, and knock that one out. Then move on to the next one, then the next, etc. You can do this.

Q: My husband and I have just lowered our 401(k) contribution from 5% to 1% so we can pay off a second mortgage and then concentrate on our first mortgage. Our company used to match us 100% up to 5%, but has now lowered that match to 50% up to 3% of our contribution. Is this what you would recommend we do to get out of debt? —Pauline on Facebook

A: As far as paying off debt, you shouldn’t invest any in retirement until you are out of debt with an emergency fund of three to six months of expenses in place. Don’t worry about company matches right now. Focus on getting out of debt. Once you are out of debt and have some money saved, you can invest with confidence. If your second mortgage is greater than half your annual income, you should consider putting it in Baby Step 6. If it is less, put it in Baby Step 2. Make sure you are on a written budget, and save up $1,000 as a starter emergency fund. Then list your debts smallest to largest. Pay minimum payments on everything but the smallest debt, and attack it with a vengeance. Once it’s gone, move to the next smallest debt and pay it off. Keep doing that and rolling your debt snowball; you’ll be debt-free before you know it. That’s how you pay off debt.

Q: Dave, thank you for hosting this event—we can't wait! My wife and I are on Baby Step 2, and the snowball is rolling! We are less than a year into a 30-year fixed mortgage at 6.5%, and we have about $112,000 in principal on the note. We recently got a letter in the mail offering to refinance at around 5.1% fixed for 30 years. I have not contacted them yet, but this seems like it would be a good idea. Is it too good to be true, or a good way to take advantage of the situation to pay less for our house? What should we watch out for, if we do decide to refinance? Thank you and God bless you for everything you do! —Emailed from Daniel and Brittany in Texas

A: Interest rates are low right now, so this doesn’t sound like a suspicious rate. But if you refinance, get a 15-year mortgage where the payments are no more than a fourth of your take-home pay. Don’t take a loan that is interest-only, an adjustable rate, or a balloon. Those are gimmick loans that work against you.

Q: Dave, what do you think about the proposed fair tax? It sounds like an economic stimulus that everyone but Congress can get behind. —Jason on Facebook

A: The premise of the fair tax is that it’s not moral to tax someone on their income. When you go out and earn an income, it should be yours. That’s a reasonable statement. It’s a sales tax, and only when you purchase something would you pay taxes. It would do away with the IRS and the need for 401(k) plans and Roth IRAs because the money you save would be yours unless you were to spend it. When you spend it, you would have taxes. The proposal is to not have it on food and basic clothing and that kind of thing. The argument against a sales tax in tax theory is that it’s regressive, which simply means it’s harder on poor people. The poorer you are, the larger percentage of your world you are paying in taxes. What I’ve discovered is that, the more money I make, the more I save and give and spend. Thus, I would pay more in taxes as someone who makes good money than someone who doesn’t because they are not buying as many cars or boats or houses.

Q: Why aren't we taking care of the most vulnerable in our society? Is it right for Christians to have fabulous homes, cars, and boats while tiny children are going without medical care, or the elderly die waiting for someone to help them? Why is socialism a dirty word in this conservative-bent world, but neglect is not? How can we not find a fix for one of the biggest crises in our country (medical care for all), while we put so much effort and time into the financial crisis our country faces? How can we call ourselves Christian and put money into death through war and not life through adequate medical coverage for all? I honestly don't get it. I honestly think it has made me question my faith and the validity of all I've believed my whole life. I really would like to understand. —Emailed from Cindy in Kansas City

A: Socialism doesn’t work because it forces people to give money, whether they want to or not. Whether you use a gun or a government, when you take something from people against their will, it’s stealing and it’s wrong. As Christians, we are called to help the weak. I’d much rather pay for a single mom to take her kids to the doctor because I choose to do so than have the government tell me that I have to. Get out of debt and save money so you can become extremely wealthy, and then you can help all sorts of people out of the goodness of your heart. And as far as Christians having nice things, it’s all right as long as the things account for a small percentage of your wealth. If you make $30,000 a year, you have no business owning a $30,000 car with payments. But if you have $3 million, then buying a $30,000 car is completely fine.

Q: What is a good plan for surviving unemployment? After food, shelter, transportation, etc. how should you handle debt? Ignore it? —Emailed from Norma

A: We do what is called the four walls. Those are food, clothing, shelter (and utilities) and transportation. Even if you lose your job, you can get jobs delivering pizzas or working for UPS and be able to afford the four walls. After that, it becomes a matter of prioritizing. Don’t ignore your debt; pay it when you can using the debt snowball. But when it comes to surviving, pay the important stuff first and get to the credit cards when you can.

Q: Dave, my wife and I are 56 years old. She is a teacher, and I am receiving Social Security disability payments. Our combined take-home income is $60,000. Our children are grown and on their own. We are debt free except for a car loan of $4,000, which will be paid off in about a year, and a home that we owe $114,000 on. We are paying an extra $500 a month on our 15-year mortgage. I have $125,000 in a 401(k) from when I was working. I have been wondering if I should cash it in and pay off our home. Thank you for all that you do. —Emailed from Brian and Linnea in Wyoming

A: Don’t cash out a retirement plan before you hit retirement age. You will be charged a 10% penalty plus your tax rate. That means the government will take about 40 cents from every dollar. So when you take out the $125,000 from your 401(k), you will only bring home about $75,000. You are doing great paying so much extra on your home per month. That will knock out your mortgage a lot quicker than 15 years. But for the moment, I would stop paying extra on the mortgage so that I could get a baby emergency fund of $1,000 saved up, then pay off the car, then build the emergency fund to three to six months of expenses. After that, contribute 15% of your income to your 401(k) and Roth IRAs, then attack the house. You guys are doing awesome and you’ll be just fine!

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