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CNN Live At Daybreak

Dave Ramsey's Advice on your Finances

Aired July 25, 2001 - 07:35   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CAROL LIN, CNN ANCHOR: Well, millions of you have already gotten your tax rebate checks and some have already spent it. Others are wondering what they're going to buy and still others are weighing whether to spend it at all. Maybe you should invest it. Who knows?

COLLEEN MCEDWARDS, CNN ANCHOR: Well, we're going to have some answers for you right now.

Joining us, Dave Ramsey, he is an author and a syndicated radio show host. He's got lots of experience on giving you advice.

So should we get right to it, Dave?

DAVE RAMSEY, AUTHOR: Absolutely. Good morning.

LIN: Good morning, Dave, good to see you.

RAMSEY: You too.

LIN: All right. We've got an e-mail here from Darrell Butler of Turlock, California. And he writes: I'm trying to determine if I might be in the first batch of mailed out tax refunds. What is the determining factor in how they are printed?

RAMSEY: Last two digits of your Social Security number. And I was just reading a thing on that a few minutes ago. Let me see where I got this if I can -- WashingtonPost.com. I'm probably not supposed to say that but that's where I found it a while ago. So you can go there. The last two digits dictate it all the way out starting July 30 through September 24. Now that's assuming the IRS gets it out on time.

LIN: Yes, there you go.

MCEDWARDS: Another question about how this works, Dave. A listener points out -- a viewer points out, Cesar R. from New York, New York, says that a taxpayer would have to -- have to have reported a gross income of at least $21,150 to $24,950 in order to get that maximum refund that we keep talking about, that $300 to $600. I think that people will be surprised to know that they might get less than the full amount. In some cases, quite a bit less, correct, Dave?

RAMSEY: Well, they can get quite a bit less, all the way down to nothing. For instance, my daughters, who are teenagers, work, but they are dependents on my tax return so they got zip -- zero. We got the little letter the other day saying -- well, the government spent money to send us a letter saying we're not going to send you anything for them. So you don't know what you're going to get.

Besides that, is it going to change your life? I mean it's $300, come on. If we spent half this much time planing our 401(k) or building an emergency fund or getting rid of the credit cards, we'd actually have some money. But everybody's all wired up. It's 300 bucks, 600 bucks, come on.

LIN: Dave, this next one is really more an editorial but maybe you could expand on this point for people who might be concerned about this. R. Scheibner of Reading, Pennsylvania, writes -- Reading, Pennsylvania, rather, we will have to use the refund to pay ahead for 2001 taxes. The IRS gets it right back -- thank you very much.

RAMSEY: Well, he's like me, he doesn't like taxes. They're too high.

LIN: Yes. Any way of getting out of that? I mean...

RAMSEY: Well, technically speaking, the brackets are going down in 2001 so technically speaking you don't have to pay ahead because your taxes are not going up in 2001 or 2002, they're going down. So, you know, it's not technically correct. But editorially -- philosophically speaking, yes, get ready, you're always going to have taxes.

MCEDWARDS: Someone else here, Dave, who doesn't like the fact that some people aren't getting that $300 to $600. Karen Thomas of Medford, Massachusetts, writes, the receptionist in my office is a single mother of two. Her letter stated she would not be receiving a tax refund for a number of possible reasons -- didn't have a taxable income in 2000 perhaps. Is this how President Bush's tax rebate plan is helping those who need it most?

RAMSEY: Well, the point is that that single mom, mother of two with earned income credit, she probably didn't pay any taxes. This is a tax refund. Now I'm all for helping single moms with -- you know making 20 grand as a receptionist. We do it all the time at our counseling center here and it's people that we need to reach out to. Fifty-two percent of them live below the poverty level. But the point of this is, it's a refund, and if you didn't pay anything in like, you know, then you're not going to get anything back. And most likely at that income bracket with those kids, she probably didn't pay any taxes.

MCEDWARDS: And you just made the point, Dave, that, come on, it's only $300, only $600 for a family. How far can that go? I mean what do you want people to know about real life steps that they can take to become financially secure with or without a tax refund?

RAMSEY: Well, I think you've got -- I think it's a -- it's a neat opportunity because it makes us all stop and think what we're doing with our money. You know if you took this much effort on $300 of your paycheck and thought about it, then you'd actually start to win.

And we've developed a thing we called the baby steps -- you know, "What About Bob?" baby stepping on the elevator. You remember the good movie? And baby step one is get $1,000 cash in the bank as fast as you can before you do anything else. A little miniature rainy day fund. Then begin to get out of debt, working smallest to largest on your debts, paying off everything but the house.

And then move on and finish up the emergency fund, three to six months of expenses. Now that's grandma's rainy day fund, and a lot of people don't do that one because they think it's not going to rain. Well, I'm sure it's going to rain. Dave, you've got to be positive. I'm positive, it's going to rain. You need an umbrella. You need to be ready and you need to kind of -- the neat thing about this discussion is it does wake us up. It makes us think about what we're going to do.

And then we call baby step four moving on into retirement. About 15 percent of your income should be going into retirement, at least at that stage. Then go on to the kid's college fund, the ESAs, the Educational Savings Account. Hopefully some of you are there and that's a great place to put your $300 or your $600 for your child because it grows tax free in a good growth stock mutual fund.

Once you hit there, the next step is payoff the house. No payments at all. Oh, would this be the happy days or it would be great. You know I mean no payments. How free would that be?

And then the last step, baby step seven, is build a bunch of wealth, give a bunch of it away and change your family tree.

But you've got to develop -- and that's a bunch of stuff we talked about there. That's like five years worth of work. That's hard work and it's tough. Building wealth is tough, but it's worth it.

LIN: Well, Dave, here's somebody who's trying to build some wealth and trying to take some of your advice by paying off some debts -- some credit card debt. Candy Mayes writes, I have contacted a debt management company about consolidating my credit cards into one monthly payment. Should I go with a company like this or try to pay them on my own? And will this hurt my credit report?

RAMSEY: Great question. Two reason to do it on your own. In almost every single case -- well, three. One is some of these debt management companies that have popped up aren't real financially stable, and I predict we're going to have some problems with the consumer on them. We're already seeing some of them. There's some good ones -- some long-term ones that have been out there.

Two is you need to learn to fish. You need to learn to fish. Don't go to a place where they're handing you fish. See what causes debt is a lack of savings and overspending and that means I've got to control the guy in the mirror. He's my problem. And when someone else takes over your deal and runs it for you, you don't change and you've got to change, that's when you win. And so that's the biggest with it.

The third problem is, yes, it does damage your credit. It doesn't damage your credit bureau as much. But Fannie Mae guidelines for underwriting for a mortgage will state that if you go through one of these debt management things where someone else takes your money and handles it for you, they treat you as if you've been through a Chapter 13 bankruptcy. So it's a big damage for a mortgage credit situation.

LIN: Interesting. All right. Thanks, Dave.

MCEDWARDS: Good to know.

Another question here from Scott. What is the best and the safest type of investment to make with $5,000 that I would invest for one to five years?

RAMSEY: OK, one to five years I don't call investing, I call that saving because investing implies you're going to leave it alone a long time. So five and more I start heading towards good growth stock-type mutual funds.

Short term, I don't get fancy. I just want it where I can get a hold of it and earn a little bit. I've got money parked short term for taxes, I've got money parked short term for emergencies or for Christmas, that kind of a thing. And I use a simple money market account with a mutual fund company. It'll pay about 5 1/2, 6 percent, somewhere in there, and you've got check writing privileges as long as you write checks over $250. It's not something you use a lot, but it's totally liquid, no penalties for pulling it out of a CD -- a certificate of depression.

(LAUGHTER)

MCEDWARDS: So keep -- so keep it safe in the short term, as we said.

LIN: Yes.

RAMSEY: Absolutely.

LIN: Certificate of depression...

MCEDWARDS: Certificate of depression.

LIN: ... for the low interest that you're going to get and the taxes you'll pay on it.

MCEDWARDS: But it's safe.

LIN: But it's safe -- nice and safe.

All right. Dave, we've got -- we've got you for two more Wednesdays, I think, to answer some e-mail questions, right?

RAMSEY: Absolutely, we're having fun. LIN: Excellent, Dave.

MCEDWARDS: Yes, we'll look forward to it.

LIN: We'll look forward to it.

Thanks, Dave.

RAMSEY: Thank you.

MCEDWARDS: And...

LIN: Ramsey.

MCEDWARDS: ... thanks a lot.

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