Dave Ramsey recently shared valuable advice with a caller whose husband recently received a $30,000 sign-on bonus on top of a $210,000 salary. The wife wanted to know the best way to use the money, and Ramsey was quick to provide valuable advice that can help people stay on top of their finances.
Always Start with Debt
Ramsey immediately asked the wife if the couple had any debt. She mentions that they have $150,000 in debt, prompting Ramsey to recommend using the bonus to trim the balance. Using the $30,000 bonus on the debt will cut it down to $120,000.
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A lower balance reduces how much interest accumulates on the debt. The debt is likely a mix of credit card debt and student loans since they are renting and don't own any cars. Paying off high-interest debt first will minimize how much interest grows, so it may make sense to start with credit card debt. However, the caller will have to look at their finances to gauge which debt to tackle first.
Continue to Live Below Your Means
The caller mentions that rent is about $1,400 per month, and Ramsey uses that number to estimate that the couple only needs to live on $3,000 per month. He suggests that the couple does not upgrade their lifestyle even though the husband is bringing in $210,000 per year at his new job.
Ramsey explains that if the couple keeps up with this approach, they will be debt-free in one year. A $210,000 annual salary comes to $17,500 per month before taxes. Assuming a 20% tax rate, the couple is left with $14,000 per month.
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If the couple only needs $3,000 per month to cover living expenses, they have $11,000 in post-tax money that's available. Looking at the numbers this way makes it easier to see how the couple can get out of debt in one year. This doesn't even include the wife's salary. We don't know if she works, but if she does, it can result in the couple getting out of debt even faster.
Don't Buy a House When You Are Broke
The caller briefly asked Ramsey if it was better to continue renting or buy a house. Ramsey suggested that the couple stay put with rent since they are "in debt up to [their] eyeballs." Buying a house with debt is risky, and you'll end up with a high interest rate. That's because a lot of debt will translate into a higher debt-to-income ratio.
Ramsey also suggested that the couple doesn't buy any cars or go on vacations while they are paying off debt. Short-term sacrifices can help the couple get out of debt sooner and build a strong foundation that serves them well by the time they are ready to retire.
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