Dear Dave: My wife and I are both in our early 20s, we’re debt-free, and we’re just a couple of months away from having a fully loaded emergency fund of six months of expenses. We both also have 401(k) plans at work, and we’re looking forward to starting additional investments later this year. Right now, we’re trying to decide on which life insurance policies to buy. I know you always recommend term insurance, but how long should the coverage last? Would you suggest 15-, 20- or 30-year policies?
Dear Anonymous: Wow, it sounds like you two are starting your lives together on the right foot. Congratulations on being super smart with your money!
I recommend 15- or 20-year level term policies, unless you have children. I’m assuming kids are not in the picture, since you didn’t mention any. Then, if you decide to grow your family at some point down the road, I’d advise converting those to 30-year term policies. The idea behind this is you want the insurance to be there to protect everyone in the family until the kids are out on their own and established.
In the meantime and in the years after, your continued saving and wealth building will lead you to a place where you and your wife are self-insured.
Way to go, guys. I’m proud of you!
Dear Dave: Based on your annual income, how do you determine how much house you can afford?
Dear Ryan: I always tell folks never get a home loan where the monthly payment is more than a fourth of your take home pay. I’m talking about basing this on a 15-year, fixed-rate mortgage. Twenty-five percent of your monthly take home pay is the absolute most you should have going out the door toward a mortgage payment.
I realize that’s a pretty conservative number in most people’s minds. You can actually, technically qualify for almost twice that figure. But I think having that much of your paycheck going toward house payments is pretty dumb. Your shortest, quickest path to wealth is being debt-free. And when most of your money isn’t flying out the door to make payments on stuff, it’s easy to build wealth and increase your level of generosity!
Dave Ramsey is America’s trusted voice on money and business, and CEO of Ramsey Solutions. He has authored seven best-selling books. The Dave Ramsey Show is heard by more than 11 million listeners each week on more than 550 radio stations and digital outlets. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.