Finish Baby Step 3 first!

Dear Dave,When is it okay to buy toys for the lake—things like boats and jet skis—when following your plan?Anonymous

Dear Anonymous,I’m a lake guy, too. So, you’ve hit a soft spot with me on this question. Still, you have to be an adult about these things, and here are a few rules.

First, you should be completely debt free except for your house. Second, you need to have your fully funded emergency fund—that’s three to six months of living expenses—in place. In other words, I want you to have completed the first three Baby Steps. And remember, no matter how shiny and cool it may look, buying a Sea-Doo is not an emergency! Save up and pay cash for your toys.

Remember this rule of thumb when it comes to toys. With the rare exception of collectibles, anything with an engine goes down in value. You should never have more than half of your annual income tied up in the total of all your vehicles. It would be pretty stupid to make $60,000 a year and have $40,000 tied up in cars, boats and other toys. That’s way too much money tied up in things that go down in value the wrong way.

Always make sure your family is well taken care of before you go out buying toys!— Dave

Dear Dave,My wife and I are both active duty Marines. She’s planning to get out in a few months, but I’m staying in for the long haul. You recommend saving 15 percent for retirement, but how does that apply in my case when I’ll be getting a good pension after 20 years?James

Dear James,I’d like to see you do both. Just imagine the money you guys would have for retirement with your military pension and a big pile of cash from having saved 15 percent of your income over the years!

Having options is a great thing. Think about all the things you could do down the road if you save for retirement and have your pension in place. You could pay cash for a home, or even open a business when you retire from the military. And these are things you probably wouldn’t be able to do working with just your service pension.

You’ve got a great future if you’ll just keep plugging along and saving, James. Let the military do its thing, and you guys keep pumping 15 percent of your income into Roth IRAs and other pre-tax retirement plans. It’s going to be pretty cool!— Dave

Dear Dave,What’s the best way to finance a business I want to buy?Anonymous

Dear Anonymous,When you borrow money to start a business you’re introducing a huge risk factor into the equation. I don’t borrow money, so I really can’t recommend that you go into debt. Saving up and paying cash is the best way to go.

The only other thing I would consider doing that would lower your risk would be an owner-financed deal. The current owner finances the transaction, and your pay to them is based on the profitability of the business. That way, if there’s no profitability you’re not bankrupt!

Some people will go out and borrow $500,000 or more to start a business. Then, if the business doesn’t do well and you can’t make the payments, you’re bankrupt. There’s really no in-between, and that’s a bad deal!

It’s just a dumb idea to do these “all or nothing” business deals. Even if owning a business is your wildest dream, there’s no point in taking risks like that. It’s just not necessary!—Dave