Dave Says: Advice on insurance and car purchases.

Do I need mortgage disability insurance?

Dear Dave,

If someone is following your plan, is it a good idea to get mortgage disability insurance during Baby Step 2?

—Craig

Dear Craig,

No, it is not. Mortgage disability insurance is a gimmick, and I would never recommend it to anyone.

I think I know where you’re going with this. During Baby Step 1, I encourage people to save up and set aside a beginner emergency fund of $1,000. Baby Step 2 is where you start paying off all your debts, except for your home, using the debt snowball system. A thousand dollars may not seem like a lot in savings during that time, but in the beginning, it’s an attainable amount to save. Plus, it’s more than a lot of people have when they make the decision to get out of debt and gain control of their finances. Then, after finishing Baby Step 2, you move directly to Baby Step 3—fully funding your emergency fund with three to six months of expenses.

What I would recommend is having long-term disability insurance in place. It’s fairly inexpensive, especially if you get it through your employer.

—Dave

Fix the car or buy another?

Dear Dave,

I’m driving a 12-year-old car with 210,000 miles on it. The car needs close to $2,000 in repairs, and it’s worth $5,000. I have $40,000 in cash saved, $40,000 in investments, and I make $80,000 a year. I also have $15,000 in student loan debt, but the only other thing I owe on is my house. Should I pay to repair the car or buy something else in the $15,000 price range?

— Brett

Dear Brett,

Let’s see, if you wrote a $15,000 check for a newer car and wrote a $15,000 check for the student loans, it would leave you with $10,000. I wouldn’t buy a $15,000 car in your situation. I’d buy a $10,000 car. You could probably sell the old one for around $3,000 if it needs repairs, combine that with your money, and get a $13,000 car. Then, you could write a check and pay off the student loan debt.

With no car payment, no student loan payment, and a good car, you can really lean into your budget and save money. You’d have no debt except your home, and you could rebuild your savings in a hurry. You’d be in really good financial shape in about six months. Plus, you’d have $15,000 in the bank in the meantime!

—Dave