Dear Dave: I have a rental property that I still owe some money on, and I’ve just begun Baby Step 2 of your plan. Should rental property debt be included in the debt snowball?
Dear Matt: No, it shouldn’t. Baby Step 2 of my plan is where you use the debt snowball to pay off all debt — from smallest to largest — except for your home. This, of course, comes after Baby Step 1, in which you save up $1,000 for a beginner emergency fund. I would include rental properties in the “home” category, and I urge people to get serious about paying off their homes a little further down the road in Baby Step 6.
To fill in the gaps, Baby Step 3 is going back and fully funding your emergency fund with three to six months of expenses. Baby Step 4 is investing 15 percent of your household income in Roth IRAs and other pre-tax retirement plans, and Baby Step 5 means setting aside college money for the kids. Baby Step 6 is where you pay off your home, including any rental properties that weren’t already paid for in cash, and Baby Step 7 is when you relax, build wealth and give.
If it were me, I would pay off my primary home before taking care of the rental properties. That’s simply a risk management perspective. However, if you owe just $20,000 on your rental property but still have a $3 million mortgage on your residence, you might go ahead and quickly knock out the rental property first.
Hope this helps!
Dear Dave: I recently started my own business, and I know I’m supposed to pay taxes quarterly. How do I budget for those, and how much do I save?
Dear McKenzie: You should always establish a separate checking account when you open a business. All your business income, and nothing else, should go directly into that account. Nothing else goes in or out of that account except for business expenses. What you have left, by definition, is profit.
When you take that home, set aside 25 percent for your federal, quarterly estimates. In most cases — especially with a small, start-up business — that will put you pretty close to what you’ll need. If you make more than $60,000 to $70,000 in profits, however, you may want to kick that percentage up a little bit. It’s always better to save too much than too little.
Best of luck, McKenzie!
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