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Column

Don’t put debt in the driver’s seat

Dear Dave,

We’re debt-free except for our home, and we’ll have our fully funded emergency fund of 3 to 6 months of expenses, we’ve agreed on 6 months’ worth, saved up by the end of February. We’re also setting aside a little each month to buy a newer car with cash later. We’re about $5,000 from our car fund goal, but my husband is getting impatient. He wants us to go ahead a finance the remainder, since it’s a relatively small amount. He has tried to justify this by mentioning that you don’t seem to have a problem with people borrowing money to buy a house. Could you explain the difference?

– Lana

Dear Lana,

Okay, first things first. I don’t like debt of any kind. I don’t really like borrowing for a house, but I’m not unreasonable. I tolerate mortgage loans, as long as people use a 15-year, fixed rate mortgage, with payments that are no more than a fourth of their monthly take-home pay. A house is often the largest purchase in a person’s life, and one most people can’t achieve based solely on saving.

I still recommend, however, setting aside as much as possible for a down payment before taking out a mortgage.

Here’s the thing. Cars go down in value, while traditional homes generally increase in value substantially over the years. Plus, you can get an absolutely great, pre-owned car for $10,000 to $15,000 dollars. This is an amount which, in my mind, is doable over the course of several months through determined saving and living on a budget. Depending on where you live, a good home can cost 10 to 20 times that much.

The best way to build wealth and have a secure financial life is to stay away from debt. This means getting out of mortgage debt as quickly as possible, too. You’re never going to win with money if you can’t learn to delay pleasure.

Everyone has that little kid inside them, and that little kid wants everything he or she wants right now. Your husband is asking a normal question, but he’s dangerously close to letting that immature little kid out. It happens to all of us once in a while, but we have to grow to a point as adults where we tell that little kid no!

—Dave

Follow Dave on Twitter (@DaveRamsey), or go to daveramsey.com.

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