Dave Says: Income based choices
By Dave Ramsey
CBN.com – These days it pays to be smart about money. That's why it's important to take this wise counsel from financial expert Dave Ramsey.
Having Fun on a Budget
My husband and I are debt-free except for our house. I've been having a discussion with a coworker over how much money to allow for fun in your budget. I think $100 for a bottle of wine is okay, but she says something like that is unreasonable. What do you think?
It depends entirely on your financial situation. Paying $100 for a bottle of wine is pretty dumb if you make only $20,000 a year. But what if you make $200,000 a year? Quit worrying and buy the wine! When you have a great income-to-asset ratio—and you're living debt-free, have control of your money, and are saving and investing for the future—that's the time to relax and enjoy a few things.
You've got to take the whole picture into account. Otherwise, you'll get caught up in the whole envy and jealousy thing. I know a guy who makes $15 million a year, and recently he bought a $400,000 car. Now, I grew up in a small town in Tennessee. I can't wrap my head around the idea of a $400,000 automobile. But as a ratio, that's a very small part of his income. It would be like someone who makes $150,000 a year buying a $4,000 car.
That's a good rule of thumb for determining if something constitutes an outrageous purchase. If it's a big-enough percentage of your income to rock your world and mess with your finances, then you're spending too much. But to say that a certain item is too expensive or an irresponsible purchase based on price alone, that's kind of silly.
How much term do I need?
Should term life insurance be purchased based on your current earnings or future, projected earnings?
I usually recommend people have 10 to 12 times their current annual income in a good, level term life insurance policy. However, if you have a solid reason to project your income jumping significantly in the near future, there's nothing wrong with basing your amount of life insurance coverage on that figure—as long as you can afford it.
Now, when I say a solid reason, I'm not talking about having an attitude of, "I'm smart. So, I'm going to make tons more money soon." That's ego, not reason. But if you're in a residency finishing your medical degree, you can realistically look at making $40,000 to $50,000 for another year or two then making the jump to $200,000. That's the kind of logical thinking and planning I'm talking about. In that scenario, a huge jump in income is almost assured. There's nothing wrong with going ahead and getting more coverage.
The purpose of life insurance is to take care of your family if something unexpected should happen to you. You don't want to go nuts and buy too much unnecessarily, but you should have enough to ensure that they're well taken care of when you're not around.
* Dave Ramsey is America’s trusted voice on money and business. He’s authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. The Dave Ramsey Show is heard by more than 5 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.
Log in or create an account to post a comment.
CBN IS HERE FOR YOU!
Are you seeking answers in life? Are you hurting?
Are you facing a difficult situation?
A caring friend will be there to pray with you in your time of need.