Dear Dave: I have a savings account for my 2-year old that has $5,000 in it, and about half of that is in gold. I’m going to save for his college separately, and give this to him to help start his life after school. Is there a better place to put this other than a traditional savings account?
Dear Laura: First of all, you should not invest in gold. Gold is a very volatile, very dangerous investment. I don’t have a dime invested in gold, and I would strongly suggest that you not invest in it, either. If you take a look at the life-long track record on gold it will scare you to death.
For the time being, you can leave it all in a traditional savings account. But if he’s not going to use it for many, many years you could move it into a conservative mutual fund. In fact, you started when he was at such young age, a nice, conservative mutual fund might be a really good idea.
When he gets a little older, he can start adding to it himself from the money he makes from odd jobs and chores and such. After 15 years or so, thanks to your foresight and his contributions, he’ll probably wind up with a pretty nice chunk of cash.
Dear Dave: Why do you recommend paying off debts from smallest to largest when doing the debt snowball?
Dear Michael: Lots of people think paying off the debt with highest interest rate first is the best approach. This seems to make sense mathematically, but I realized a long time ago if those people could do math they wouldn’t be drowning in debt.
Debt is not a mathematical problem, it’s a behavior problem. Personal finance is 80 percent behavior, and only 20 percent head knowledge. The reason the debt snowball pays off debt from smallest to largest — even though it may be mathematically incorrect — is that modifying your behavior and inspiring you to get out of debt is more important than the math. Your probability of becoming wealthy has a lot more to do with your behavior than any sort of financial sophistication or academic degree.
When you pay off a small debt you experience success, and that gives you hope. Then, you move on the next largest debt. When you pay that one off — and you’ve wiped out two debts — it energizes you. At that point, you really start to believe in yourself and the fact that you’re on the road to becoming debt-free.
Dave Ramsey is CEO of Ramsey Solutions. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.