Smart Money Smart Kids: Raising the Next Generation to Win With Money

by Dave Ramsey

  CARS

  The answer to almost every radio call I get from people struggling with debt is, “Sell the car.” I can’t tell you how many calls I’ve answered that start with someone saying, “Dave, we’ve got a $50,000 household income, and we owe $52,000 on two cars. What should we do?” Um, hello? Sell the cars! This isn’t rocket science; it’s simple math. You will never get out of debt or build wealth if you have a car payment. And, whether you want to believe it or not, a $500 paid-for car will get you to work and back home again.

  When we lost everything, I was driving a beautiful Jaguar. I loved that car, but I had to let it go, and I refused to go into debt again for a car. So a friend graciously offered to let me borrow a car—an old Cadillac that’s primary color was Bond-O. The Bond-O Buggy was so ugly that calling it “hillbilly” would have been a compliment. But I drove that car until I could pay cash for a nicer one. Hopefully you won’t have to drive something quite as ugly, but you may have to lower your standards a bit until you can afford to pay cash.

  Let your kids see you make sacrifices on cars to keep from borrowing money. And if you are currently making payments on a car, for Pete’s sake, pay the thing off or sell it! I’m not just interested in your kids winning; I want you to win too!

  The New Car Smells . . . Like Depreciation

  If you have established that your teen will save up and pay cash for his first car, then he won’t have to worry about considering a brand-new car because he simply won’t have the money. Remember, though, that we never miss a teachable moment. While looking at used cars, make sure you swing by the new car lot and show your teen what the new version of that car costs. When he sees a $23,000 price tag on the new car and a $7,000 price tag on the used version, the lesson is immediate—the value of new cars drops like a rock in just a few years. This gives you the opportunity to teach your child that cars are not investments. They are the largest purchase “normal” people make, and they drop in value the second you drive them off the lot. Cars do more financial damage to middle-class Americans than almost any other financial decision. Paying cash for a car and buying a used one is the shortest path to building wealth.

  “I’ll Always Have a Car Payment”

  RACHEL: I often hear adults say, “I’ll always have a car payment.” What they don’t realize is that this is not only affecting their lives, but also the lives of their children. I cannot stress enough how important it is not to have your children believe this lie. One of the best ways you can show your kids that they can live life without a car payment is to involve them in buying their first car. Mom and Dad used 401DAVE, which was great because it showed us that we could save up and drive a car we actually paid for. If you don’t have this conversation with your kids, there’s a good chance they will grow up to believe that they’ll “always have a car payment.” That’s a scary situation, and I’ll tell you why.

  The average car payment in America today is right around $492. This is a lifetime plan for many people, and they never stop to think about what those car payments cost them in the long run. When you run the numbers out over an adult’s working lifetime, you really see how this whole mindset is costing the average American literally millions of dollars.

  Let’s say your child has bought into the lie of, “I’ll always have a car payment.” He makes it out of college and gets his first real job. Now, since he’s bought into the great American myth about cars, he probably also feels like he deserves a new car. That’s what many people do when they get a new job, right? That’s true at twenty-five or fifty-five. They celebrate a $400-a-month raise with a $500-a-month car payment. So at twenty-five, your child goes to the car lot, signs up for a ridiculous car loan, and starts a long forty-year journey into car payment purgatory. He drives away with the average car payment of $492 a month for sixty-three months.

  What do you think forty years of car payments will cost him? Let’s do the math. In this example, your child at age twenty-five just signed up for a car loan with a $492 monthly payment. If he learned early on to save up and pay cash for cars, and if he learned about budgeting, debt, contentment, and the other things we’re talking about in this book, he wouldn’t have that payment. That means he’d have $492 extra in his monthly budget to save and invest. If he were to invest that $492 into a good growth stock mutual fund his entire working lifetime—age twenty-five to sixty-five—he would retire with $5,846,153! He’d be a millionaire by age fifty-one and have almost $6 million at retirement simply because he paid himself a car payment all those years. That’s incredible! I don’t think you should let your kids out of the house until they fully understand this. This one decision can literally change their entire lives.

  Don’t Tell Them—Show Them

  Okay, I need to do a little tough love here. You have to talk to your child about this. More than that, you need to show him that you’re serious about it by avoiding car debt yourself. If Mom and Dad had made me work and save for my own car at sixteen, but then they ran out a week later and bought a new luxury car on payments, the only thing I’d remember is that my parents put me through a worthless exercise that they didn’t really believe in. More is caught than taught, remember?

  BUY A HOUSE, NOT A MORTGAGE

  A reasonable mortgage is the only type of debt that Dad and I won’t get too frustrated with you about. But that doesn’t mean you must have a mortgage to have a house. What if you taught your child to have a crazy, extreme goal when it comes to buying a house? And by crazy and extreme, I mean what if you showed him how he can pay cash for a house someday? You may think I’m nuts, but I’ve seen this happen over and over, and it’s always amazing.

  The House That Cash Built

  My friend Christy grew up in a loving family, but they always struggled with money. At their lowest point, they actually had to skip dinner because they couldn’t afford to eat. Even as a little kid, Christy was determined to never face those kinds of struggles as an adult. That meant debt would never be an option for her. No credit cards, no car loans, and . . . drumroll, please . . . no mortgage. Ever. But with big plans for a family and a nice house, that meant she had to do things differently than the rest of the world.

  In her teens, she started saving money—lots of money. She took care of her Five Foundations, but she always kept the dream of a debt-free house in front of her. She was blessed with an awesome husband who felt exactly the same way about debt, so they combined their resources and kept plugging away at the goal. When they finally started looking for a house, their real estate agent tried to get them to use their savings as a down payment on a bigger house, but they wouldn’t have that. They just answered, “No, let’s start this conversation over. This is how much money we have to spend, and this is all we’re going to spend. We don’t ‘deserve’ a bigger house just because we can get a loan. We have this much, so this is how much house we ‘deserve.’”

  So, at twenty-eight years old, this amazing couple sat down at the closing table with a cashier’s check and bought their beautiful four-bedroom home outright, with no lender anywhere in sight. Can you even imagine what kind of wealth this couple can build throughout their lives just because of their commitment to live totally, completely debt free? It’s incredible! I want your kids to have that kind of life too.

  Start the Conversation

  Christy and her husband prove my point: It is possible to live a completely debt-free life. Don’t let anyone tell you or your child that you “need” a mortgage to own a home. You don’t. Sure, it’s hard and it takes a long time, but your child has all the time in the world. You just need to point him in the right direction. So I recommend starting the debt-free-house conversation with your child when he’s a teenager. This doesn’t mean he needs to start a house fund at fourteen; remember, the big savings goals for teens are paying cash for a car and college. While he works on those goals, though, you can talk to him often about how to save long term and how amazing it would be to write a check for a whole house someday. And
if he gets out of college and has a lot of money left over in his college account because of scholarships, then he’ll already have a head start on a house fund. Sure, this is a big goal, but it’s not impossible. It just takes time and focus.

  Renting (for a While) Isn’t a Waste

  Some people think that you have to buy a house the minute you get married or graduate from college. That’s crazy! There is absolutely nothing wrong with renting for a few years. It’s a terrible long-term plan; you don’t want to rent forever. But renting for a little while when you’re just starting out—or while you’re saving up a lot of cash to buy later—is a great idea. Talk to your teen about this, because as soon as she gets married or gets her first real job, people will crawl out of the woodwork saying, “When are you going to buy a house? You need a house! You’re throwing your money away with rent!” No, she’s not.

  Renting for a season shows patience and wisdom. Too many people wreck their lives with ridiculous mortgages simply because they rushed into buying a house way before they were ready. And by “ready,” I mean they are completely out of debt, have a full emergency fund of three to six months of expenses in the bank, and have a down payment of at least 10 percent (but 20 percent is better). Until your child is at that point, buying a house shouldn’t even be on her radar. Buying a house is a privilege still in her future, so show her how she can one day do it with cash.

  But if They MUST Take Out a Mortgage . . .

  DAVE: Have I mentioned I hate debt? If you call my radio show asking my advice on borrowing money, I guarantee I will mess with you. Debt is the biggest thief of your financial future. I don’t even like mortgages. Nevertheless, the one debt I don’t yell at people about (but would still rather they not have it) is a home mortgage. I don’t borrow money, but if you are going to take out a mortgage, buy super conservatively so you can pay it off quickly, and teach your kids to do the same. Our rule of thumb is never take a mortgage where the payment is more than 25 percent of your take-home pay with a fixed-rate, fifteen-year mortgage.

  CHANGING GENERATIONS TO COME

  RACHEL: Cars, credit cards, and looming mortgage mistakes can be scary, but I’m afraid there’s something even more frightening that is creeping up on this generation: student loans. The student loan debt in this country is completely out of control. Total student loan debt has even overtaken total American credit card debt. It’s definitely crippling an entire generation of young adults before they even get their first real job. It’s a big deal, and we’ll talk about how to avoid that trap in the next chapter.

  But before we leave the debt topic, I want to give you some encouragement. If you as the parent have these conversations with your kids and show them how to live a debt-free life, you have given them a tremendous gift. Most parents today don’t think to talk to their kids about debt, and some have even bought into the debt lie so much that they teach their kids to believe it too. That’s how families stay in debt generation after generation. But you can choose a different path, one that your children will thank you for for the rest of their lives. That’s my story, remember? I am so grateful for parents who showed me how to live debt free, and now I get to reap the benefits of that knowledge by putting it into practice in my own adult life.

  DAVE: What if you took pride in your family name and what it meant as a financial legacy? After we went broke, Sharon and I decided there were certain things a Ramsey does not do (at least our little branch of the tree). A Ramsey does not borrow money. Really. If you are starting with small children and you have time to become debt free, let me propose a truly family tree–changing idea. Declare early and often to your family that “The (insert your last name here) Family” does not borrow money. You may think this is simply a nice sentiment, but it is much more than mere sentiment; it is a mathematical possibility, even a probability. If you are debt-free, live with savings, and do a zero-based budget each month, could you not save for your child’s wedding and college? Of course you could and would. But let’s get radical. Let’s say your home is paid for in our plan, so you have tons of cash flow. What if you not only saved to pay for a wedding and college, but you also decided to pay cash for your child’s first house?

  “Well, Dave, wouldn’t that give them a mentality of entitlement?” I hear you asking.

  No. You have raised them with the principles Rachel and I have discussed in this book. They have a heart of gratitude, they have a work ethic, and they are on autopilot for saving and budgeting. If that is the child you have raised, give them a paid-for house. A friend of mine has done that for two grateful, productive children, and he only asked that they sign a one-page letter of agreement. That little letter says that in return for a paid-for house, they agree to never borrow money for anything ever, and they agree to save and give paid-for homes to their children. Generation after generation of this man’s family will live in financial peace. His kids, grandkids, and hopefully everyone else in his family tree will never make payments again. This great gift took two things: money—the intentional building of wealth—and the intentional training of money-smart kids. The payoff is an incredible legacy.

  CHAPTER EIGHT

  College

  Don’t Graduate from I.O.U.

  RACHEL: “That’s really what we want to do with our lives, Rachel. But we just can’t do it. Our student loan payments won’t allow it.”

  That was the end of one of the saddest discussions I’ve ever had after an event. I’d just spoken to a group of about 3,000 college students at a private university, and a senior from the audience came up afterward to talk. He was engaged and planned to marry his fiancée that summer. He and his future wife had a heart for serving other people, and they both felt called to mission work overseas. As he told me about his fiancée and their passion for missions, I could tell he was really excited—for a minute.

  He then sadly told me he had used student loans to pay his tuition all through school, and he’d be graduating with $80,000 in debt. Leaving college with a four-year degree and $80,000 in the hole seems like a nightmare for anyone, but especially for someone with aspirations for a less-than-lucrative career like foreign missions. And it got worse. He said that his fiancée also owed $80,000 in student loans. I could hardly believe it. That meant this amazing young couple with a heart for serving other people was about to start their married life together with $160,000 in debt—just in student loans. As you can guess, the math didn’t work for them to give their lives away serving others. They couldn’t give their lives away because someone else already owned them: Sallie Mae.

  This may seem like an extreme example, but I’ve seen the same thing happen over and over again to lesser degrees, like with a friend of mine who was recently offered her dream job. She was so excited to actually get a job doing what she loved, until she started crunching the numbers and looking at her budget. The starting salary the company offered wasn’t enough to cover all her bills—which included tens of thousands of dollars in student loans. In the end, she had to turn down the job and take a slightly higher-paying job that she wasn’t nearly as happy about just to make her payments. That’s a really sad situation, and it’s something I want your child to avoid.

  STUDENT LOANS: A ROADBLOCK TO THIS GENERATION

  Student loans are a roadblock to this generation. Current college graduates are leaving school with an average student loan debt of $27,000—and obviously more for private, prestigious, or graduate schools.1 Altogether, there is roughly $1 trillion in total outstanding student loan debt in the United States today, and student loans have recently surpassed credit cards in total debt owed.2 Graduates will carry those loans around with them for years or even decades; they can’t even escape them through bankruptcy because federally backed student loans are not eliminated in a bankruptcy. The short-term gain of student loans doesn’t even compare to the long-term pain your student could end up with. There’s no doubt: This is a generational crisis, and, as a parent, you need to be ready.

  Studen
t Loans Limit Options

  In Chapter 7, we talked about Proverbs 22:7, which says, “The borrower is slave to the lender.” I thought about that verse after meeting the graduating senior who had a passion for missions. He and his future wife will start their lives together with $160,000 in student loan debt. Before they do anything else—before they even get jobs, pay for the wedding, and find a place to live—they will start $160,000 in the hole. If you want to know what their lives will probably look like, all you have to do is look at the math.

  Let’s say that when this couple graduates, they each get a job paying $31,000 a year. After taxes, that’s a take-home pay of around $2,000 a month each. Want to guess what the payment on $160,000 in student loans is? It’s right at $1,800 a month—a little less than one spouse’s total take-home pay. That means this guy and his wife will both have to work full time, forgetting their dream to serve as missionaries—and one of them will work forty hours a week just to make the student loan payments. That’s it. They won’t be able to save that money for a house. They won’t be able to use it for vacation. They can’t use it for new clothes or a night at the movies. One of them will basically work all day every day only to send almost their entire paycheck directly to the lender.

  That means the other spouse will have to cover all the household expenses solo on a take-home pay of $2,000 a month. If you figure $900 rent on a one-bedroom apartment, $250 for utilities, and $550 for food, that leaves this couple with $300 a month for anything else they want or need to do like buying gas, maintaining a car, replacing old clothes, or even getting a haircut, not to mention things like saving, giving, or having a little fun now and then. This couple will be stuck for years and years of their lives, and it is all because of student loans that not only didn’t help them achieve their dreams and passions but also actively prevented them from doing so.

  Even though $160,000 in combined student loans is a lot higher than average (but $80,000 isn’t that uncommon), the problem isn’t much better for graduates with less debt. In a survey of recent graduates with school debt, 47 percent say they are putting off buying a house or car, 76 percent are putting off saving for the future, and 35 percent are putting off starting a family.3 They are finally ready to graduate, but all the financial mistakes of the past four years have snuck up on them and robbed them of the joy of getting out of school and starting their lives as working adults. This situation breaks my heart.