Reawakening Manners and Morality in Men

Get Out of Debt Step 5 – College Funding

Debt

This is the fifth installment of our Get Out of Debt series based on Dave Ramsey’s bestselling book, “The Total Money Makeover Workbook.”  If you’ve followed the first 4 steps then you are currently debt free except for your house, have three to six months living expenses in savings, and are investing fifteen percent of your income into various retirement accounts.  You are becoming financially fit and are on the right path toward building wealth.  You have your finances under control and you have a growing sense of security.  This next step is not for everyone.  If you’re children are already out of school, or you have no children and are sure that you won’t have children, then college savings are not a worthwhile goal for you.  If, however, you have children who are younger than college age, or the possibility exists that you might have children in the future, then you will need to implement baby step number five in your financial plans.

Every parent wants their child to have better opportunities than they did growing up, but according to a CBS MarketWatch report, 68% of parents have saved less than $10,000 for their children’s college education, which is not much in terms of standard college costs.  Assuming you have successfully completed steps one through four, then now is the time to begin saving for your children’s college educations.  I’ll stress again, you need to take care of steps one through four first.  When flying on an airplane, the stewardess always tells you to put the air mask on yourself first, in the event of an emergency, before helping your traveling companions, including children.  The reason behind this is simple, if you pass out, your no help to anybody, so take care of yourself before you help others.  This principle holds true to finances as well.  You are no good to anybody if you fund your child’s college prior to paying off your debt or saving for retirement.  Your kid will go to college debt free, but at the expense of you being a wall mart greeter at 75, working to pay for your medicine.  Take care of your own obligations first, then begin putting money aside for college.

So, now that you’re convinced you need to start saving for college, where do you put the money?  College tuition has been averaging about 7% increase a year.  This means savings bonds (5% growth), zero-coupon bonds (6% growth), savings accounts (3% growth), are all bad ideas.  Pre-paid tuition grows at 7%, but most of these are state based and will only pay for in-state schools, though to do break even with the investment.  In today’s economy, it is hardly a guarantee that you can fund 18 years of college investment in a single state without moving, and then convince your child to go to a school in that state.  Face it, you just aren’t that lucky.  So where should it go?

Dave’s number one recommendation is an ESA, or Educational Savings Account, which is sometimes refereed to as an Educational IRA because it grows tax-free when used for higher education.  An ESA allows you to invest $2,000 per child per year.  This works out to $166.67 a month.  You can invest your ESA funds into any mix of funds and change your mix at will, making it a very flexible plan.  If you invest $2000 into an ESA from birth to 18, with a modest 12% growth you will have $126,000 saved for college, tax-free.  That same investment would net $72,000 in one of the pre-paid state tuition plans.  If your child is over 8 when you begin saving, or you have aspirations to send them to a more expensive school, or grad school, then you will need to set aside more money than what an ESA allows.

The second college saving vehicle of choice is the 529 plan.  The are state plans, but most allow you to use the money at any institution of higher learning, across state lines.  There are several kinds of 529, so be sure to get the right kind.  The “life phase” plan allows the administrator control of the money to move it to more conservative investments as the child ages.  These perform poorly (8% growth) because they are extremely conservative.  The “fixed portfolio” plan locks you into your investment until you need the money.  The problem is, if you get into some bad funds, your stuck with them.  The “flexible plan” allows you to move your investments around within certain brands of funds, providing both good growth and flexibility.  You can choose from virtually any mutual fund in the American Funds Group, Vanguard, or Fidelity.  This type of 529 is the only one that Dave Ramsey recommends.

If you don’t have time save for college, then being creative and making concessions are in your future.  Your child does not HAVE to go to a brand name ivy-league school.  Your child does not HAVE to have their own apartment and eat pizza hut every night for diner.  Living on campus and eating at the cafeteria saves around $5,000 per year.  Some employers offer work study programs that include generous tuition assistance.  The various branches of the military and the National Guard will trade a college education for several years of service.  If your child is getting into law, medicine, nursing, or education, the government has a program where they pay for the students education.  In return the student agrees to serve some amount of time in an “under-served area” typically in a rural or inner-city area.  Apply for scholarships, lots of them.  There are over $4 BILLION a year in unclaimed scholarships.  Make finding and applying for scholarships a part time job between your child’s junior and senior year of high school.  One student applied for over a thousand scholarships.  She was turned down for 970 of them, but the 30 that accepted her provided $38,000 toward her education.  Working a high-rejection, high-paying sales job in the summers leading up to college can make a huge difference, if the student is willing to work hard.

The point is, even if you don’t have time to put down a good foundation of savings, if you are motivated, and creative, then sending a child to college debt free is still attainable.  The earlier you start, the easier it is, but it’s never too late.  Think about your student loans and how long it took you to pay them off.  If you want your child to have a different fate, then start saving as soon as you are financially fit enough to do so. Get a copy of Dave’s fantastic book from Amazon with the link below.

Get Out of Debt Step 4 – Invest 15% Into Retirement

Invest

This is the fourth installment of our Get Out of Debt series based on Dave Ramsey’s bestselling book “The Total Money Makeover Workbook.” If you’ve followed the first three steps, then at this point you are debt free except for your house and you have three to six months of expenses stashed away in an emergency fund. You attacked your debt and built up your emergency fund. The money you budgeted toward those two goals is now yours to invest.

You should now begin investing 15 percent of your before tax gross income into retirement accounts. Why 15% you ask? Because Dave and numerous other financial gurus say so. You want money investing early because of the way retirement accounts work. The longer you leave the money in them, the better they do. $100 per month invested at 12% for 25 years nets you $187,885, which is nice, but that same $100 per month invested at 12% for 40 years nets you $1,176,477. Longer is better, got it?

So why only 15% when 20% or higher would plainly be better? Because you aren’t ready to do that yet. There are other goals still, which will be discussed in the next few articles, that need to be accomplished first. Remember, Dave Ramsey calls these baby steps.

You are becoming financially fit, but your not ready for marathons or iron mans just yet. Over-investing before finishing steps 5 & 6 will actually slow down your wealth building potential. So for now, 15% or as close to it as you can manage. If you can only do 5%, start there and build up to 15% over time. Also, company matching does NOT count toward your percentage, that’s bonus money.

So, what do you invest in? Look at your company’s 401k program and find out if they have a matching program. If they do match, say 4%, then you should definitely invest 4%. This is essentially doubling your investing power instantly and is basically free money, so take advantage of it. Don’t invest your full 15% here though, because there are other financial vehicles that need to be invested in first.

Over time tax laws change, but you need to be on the lookout for programs with tax advantages. Right now the best place to invest is in Roth IRA’s because money invested here grows tax-free. Not everybody can use a Roth IRA due to income and situation restrictions, but if you can, you should. If you invest $3000 a year in an IRA from ages 35 to 65 and it averages 12% growth over the long haul, you will have $873,000 tax-free at age 65. You will have put in $90,000 of that money, the other $783,000 is tax-free growth. Tax-free, as in all yours, do not pay the government, you actually get to keep it all, tax-free.

With Roth IRA’s you put the money where you want, so look for a good growth-stock mutual fund. When deciding, look at the long haul (10 year or more) track records, to see how it has preformed over longer periods of time. Short 1-5 year fluctuations don’t matter much, your looking to invest for 30 years for steady gains. Every financial analyst has their own ideas on how to spread out your investments. Dave Ramsey’s strategy is a 4 part division of equal percentages. Invest 25% in Growth and Income (large-cap, blue chip), 25% in Growth (mid-cap, equity, S&P index), 25% in International (foreign, overseas) and you guessed it, 25% in Aggressive-Growth (small-cap, emerging market).

OK, that’s a lot of numbers and percent signs. Lets go through an example to help this make more sense.

Husband Earns: $47,000/year
Wife Earns: $38,000/year

Sorry ladies, I’m not sexist, those are adjusted national average salaries for each sex. That’s an annual total income of $85,000. Take that $85,000 and multiply it by .15 (15%) to get a total investment goal of $12,750.

The husband’s company matches 3.5% in his 401k, which is $1,645, that gets invested in the 401k. $12,750 – $1,645 leaves $11,105 to invest. The current (2010) Roth IRA limit is $5000 per person, so $10,000 gets invested in a Roth IRA, leaving $1,105 to invest. If the husband then turns his 401k up from 3.5% to 6% he will be investing a total of $2,820 in the 401k. This takes their total investment up to $12,820. That’s just over 15%.

This is your goal. Figure out what your 15% is, and then work towards investing it.

Assuming you’ve completed baby steps 1-3, then when is the right time to start investing? Now. When it comes to investing, time really is money. The longer you have to invest before retiring, the more money you will have when you retire. It really is that simple.

For a more detailed analysis, more examples, and some fantastic retirement worksheets like the retirement investment calculator, the retirement kitty calculator, and the investment breakdown calculator, pick up a copy of Dave Ramsey’s excellent book, “The Total Money Makeover Workbook” from the link below.

Get Out of Debt Step 2 – Payoff Your Debts

1 dollar

This is the second installment in our Get Out Of Debt series.
In step one of Dave Ramsey’s debt removal plan, he had you save up $1000 for unexpected emergencies. Now we come to the heart of the 7 step process, paying off the debts. No investing, no building up your saving accounts. That comes later. Before you can successfully begin to build wealth, you must first stop hemorrhaging money with huge debts. If a man walks up to you with a gaping chest wound, do you first stop the bleeding or patch up his clothes so that he looks nice? Stop the bleeding! Building wealth on top of debt is like building a mansion on top of a leaking dam. If you want your house to survive, you must first fix the dam. So, 3 metaphors later, have I convinced you to stop building wealth and investing prior to paying off your debt? Listen to what Dave has to say about this.

“The most powerful wealth-building tool is your INCOME. Ideas, strategies, goals, vision, focus, and creative thinking all have their place, but it is when you get full control and use of your income that you build wealth – and not only build it, but keep it. A very small percentage of people may inherit money or win a jackpot, but these two avenues to wealth are the result of dumb luck. They are not a proven plan to financial fitness. To build wealth, you have to CONTROL your income.
The bottom line for becoming wealthy is this: Don’t have any payments. Debt is the enemy of your income. It keeps you from becoming wealthy. It keeps you from enjoying the feelings of security and flexibility associated with wealth. One of the reasons I am so passionate about a person’s getting rid of debt is because I’ve seen thousands of individuals make HUGE strides toward becoming millionaires in a relatively short time AFTER they get rid of their ‘payments.’ Just think how much you could do with your income if you did NOT have a car payment, student load, credit-card balance, medical debt, or even a mortgage.” ~Dave Ramsey – The Total Money Makeover Workbook pg.145

So, how does one go about paying off debt? Dave recommends the snowball technique.

List all of your debts excluding the house payment. We’ll take care of that later.

Seriously, go get a sheet of paper and do it now. I’ll wait. Write down the name of the debt, the balance, and the minimum payment. List them all, everything from your student loan to your clothing store credit cards. Now, sort them from smallest balance to largest balance. This is the order that we you will pay them off. Interest rates don’t matter unless you have two debts that have similar payoffs. In this case, pay the higher interest one first.

Now to get started, payoff the smallest one. Pay the minimum to your other debts, and focus all your attention on the smallest one until it’s done and gone. Now take the minimum from that smallest one, and apply that and the minimum from your second highest until it’s gone. Repeat this process until you are out of debt. It’ll make more sense in a chart.

Debt Balance Minimum New Payment
Penny’s $150 $15 $0
Sears $250 $10 $25
Visa $500 $75 $100
M.C. $1500 $90 $190
Car $4000 $210 $400
Student Loan $4000 $65 $465

Once you paid off your Penny’s card, you took the minimum payment of $15 and added it to your Sears minimum of $10 to get a new payment of $25. Upon paying off your sears debt, you add that $25 to the minimum of $75 from your visa debt and begin paying $100. Doing this, along with applying any extra money toward this debt creates a snowball effect. With each debt you pay off, you have more income with which to pay off the next one. Using this method, the debt above could be paid off in 26 months.

In my own experience we had a larger debt than the example, and we paid it off faster because in addition to the snowball, we applied everything we had into paying it off. No new clothes, no Starbucks, no eating out, no movies. We lived cheaply for a year and reduced our debt to only a house in less than two years. I highly recommend this method because it works both mathematically and emotionally. If you look at the debt snowball only in terms of mathematics, there are other ways that claim higher efficiency, but they miss the psychological component of the debt snowball. This method allows you to make early ‘wins’ in the debt payoff race and it feels good. Every debt that falls by the wayside releases a burden and really causes you to refocus and stay the course.

So, step two the getting out of debt is to pay off your debt. It really is that simple. No magic, no get rich quick scheme. Just use your income and your head. Stop hemorrhaging money and start paying off your debt. For more details on the debt snowball method, check out Dave’s book. I think every man who isn’t already independently wealthy should read his book and apply its principles to his life. You can be a gentleman regardless of your means, but it’s more fun to be a gentleman of means.

Get Out of Debt Step 1 – Save $1000

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I’ve been a fan of Dave Ramsey ever since he helped me dig myself out of a debt and set me on the path to financial independence.  He has a 7 step process he calls the “Baby Steps” required for getting out of debt.  This series of articles is to highlight his 7 step process.  I recommend them highly because I have personally experienced their effectiveness.

The first baby step is to save $1000.  Sounds simple right?  If you are deeply in debt, you are mostly likely living paycheck to paycheck and don’t have an extra $1000 lying around.  If you did you would be using that to pay down your debts. Right?  Saving $1000 can be tricky, but it is doable, regardless of your current financial situation.  Anyone can scrounge up $1000 in relatively short order.

Before you begin to pay down your debt you MUST have $1000 stashed away in a bank as an emergency fund.  Money locked up in investments, CD’s, precious metals, or anything that is not instantly available to you is not a good emergency fund.  Having $5000 in gold coins in a safe deposit box does very little to help fix your refrigerator before all the food spoils, or fix your car in time to get to work in the morning.  Emergency money must be easily accessible.  It does not have to be in your sock drawer.  Most banks will let you start a savings account with $1000 and you can gain access to that money from any atm.  As an added bonus; it’s earning a little interest every month that you don’t have an emergency.

So, how do you make $1000.  My favorite way to easily make some quick money is to have a garage sale.  The average American has several thousand dollars worth of stuff stashed away in garages, crawl spaces, and otherwise hidden in their homes.  If you haven’t seen something in the last two years, you don’t need to keep it in your house.  De-clutter your life a little bit, and make some extra money.  Everybody is guilty of holding on to things they don’t need.  Right now there are skis living in my garage.  I use this as an example because 1) I live in the desert, 2) my wife hates skiing, and 3) I bought them after we moved to the desert and have never worn them.  I got them at a garage sale because they were a great deal.  The next time I have a yard sale, I’m going to pass them on to some other ‘great deal’ shopper that hopes he will get to ski someday.

Another tried and true method for making money is to reduce your spending.  Reducing spending isn’t as hard as it sounds.  Find one or two things that you don’t ‘need’ like cable television or Starbucks coffee and stop spending money on them.  Let’s say your cable bill is $65 a month and you buy two bags of Starbucks a month at $12 each.  If the ONLY lifestyle change you made was giving them up, you would save $1068 in a year.  Realistically you can save $1000 in a few months if you reduce your spending, save hard, and have a yard sale.

Yet another way to save up $1000 is to do a little side work.  Are you good at arts and crafts?  Sell stuff at local craft fairs.  Good at house cleaning?  You can do some weekend work.  There are numerous odd jobs that need done in every community.  Most places have employment offices that can find ‘days work for days pay’ type jobs.  Working weekends at a minimum wage of $7.25/hour  will get you an extra $1000 in as little as 2 months.

OK, so you saved up $1000 and it’s resting comfortably in a bank somewhere.  What next?  Leave it alone.  You may not dip into this money for anything that doesn’t qualify as an emergency.  But what if…NO, just leave it be.  Emergencies are things that will cause extreme hardship in your life.  This money is a small financial safety net for situations like the loss of a job, an unexpected illness, a faulty car transmission, and other real emergencies.  You worked hard to save that money, don’t blow it on a late night pizza run for your buddies.

This little bit of padding with keep you from having to make more debt while you’re paying off the old debt.  You need to break the borrowing cycle, and this is the first little step to doing so.

Stay tuned here for Dave Ramsey’s “baby step” number 2, the debt snowball.  If you want more information on getting out of debt, I highly recommend you check out Dave’s book and website.  He has several books, but my favorite is “The Total Money Makeover Workbook” because it is very hands on, forcing you to fill in your own data into the charts and forms.  I found it to be very effective in forcing me to face my financial reality and changing it.