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Financial Peace University Lesson 10 – From Fruition to Tuition

December 18, 2009 · Filed Under Financial Peace University · 4 Comments 

Planning for Retirement and College

This week Ramsey introduced Baby Step 4 (and #5 but more on that later) to us

Baby Step 4:  Invest 15% of your household income into Roth IRAs and pre-tax retirement plans.

After you have paid off all your debt, except maybe your mortgage, and fully funded a 3-6 month emergency fund, it is not time to start thinking about and planning for your future.

Always save for long-term goals in tax-advantaged plans

Ramsey recommends that you should do all of your retirement savings using tax-favored money.  Such tax-favored plans include the IRA, 401(k), 403(b), 457, and SEPP.

Dave really likes Roth IRAs which are funded with after-tax money but grow completely tax-free.  There are many choices of investments in Roth IRAs, you can effectively invest more money than a standard IRA because you are using after-tax money, and if you do everything that Ramsey teaches (or at least most of it) you will probably end up in a higher tax bracket in retirement so having a Roth IRA is great at that point in time.  Furthermore, you can use your Roth IRA as a last resort fall-back if you are in a very dire situation as you can make tax-free and penalty-free withdrawals at any time up to the amount of your contributions.

Remember that there are income limits to using Roth IRAs so check with the IRS or your tax adviser for the current limits. For those that don’t qualify for a standard Roth IRA, you might want to check with your employer to see if they provide a Roth 401k option.  It works generally the same as a Roth IRA but there are no income limits and is subject to the higher yearly 401k contribution limits instead of the Roth IRA limits.

Ramsey’s suggestions for funding your retirement

  1. Fund your 401k (or similar) up to the maximum employer match amount (if applicable)
  2. Above that amount, fund Roth IRAs.
  3. After maxing out your Roth IRA contribution, complete the 15% of your income by funding your 401k again.

One big no-no

I know it sounds like a great idea, but Dave recommends that you should never borrow money from your retirement plan.  Sure, you will be paying yourself back the interest, but that rate will be much lower than you might earn over time in a diversified, long-term portfolio.  The most important consideration, however, is if you happen to lose your job, you must pay all the money back in a short period of time or else the IRS treats it as an early withdrawal and you will pay taxes and penalties on the money you borrowed.  And how are you going to pay that money back within the time limit when you no longer have a job?

Baby Step 5: Save for your children’s college using tax-favored plans

Once you get baby step 4 setup, you are ready to start saving for your children’s college education (of course, if you don’t have kids or they are grown and finished with college, you can skip this step).

Start with the ESA

Ramsey recommends using the Education Savings Account (sometimes referred to as the “Education IRA”).  You can save $2,000 per year, per child into an ESA and this money grows and can be used for education expenses tax-free.  Similarly to the Roth IRA, there are income limits for using the ESA that you should check into.

Next step is the 529

If you want to do more saving that the ESA allows or you don’t meet the income requirements, he recommends using a 529 plan.  He recommends, however, that you use the type of 529 that leaves you in control of the mutual funds in which you are invested.  He warns to never invest into a plan that freezes your options or automatically changes the investments as your child ages.


Dave wrapped up this week’s lesson by laying out a few “nevers” to follow (or avoid, as it were) while saving for college:

  1. Never save for college using insurance products
  2. Never save for college using savings bonds – the rates of return are too low.
  3. Never save for college using prepaid college tuition plans – the college tuition rate of inflation is 7%, so you will effectively earn that rate on your investment when you could be earning more in a diversified portfolio of mutual funds.


This lesson was very interesting to my wife and me – this is where we’re at right now.  We are trying to ratchet up our retirement savings such that we can retire one day and also trying to save up to fund at least some of our kids’ college education.  For retirement, we are actually pretty close to investing 15% (14.8%) if you include my company match…interestingly Dave didn’t really mention in the lesson whether he includes the company match in that 15% figure.

If you only do one of these steps, opt for retirement savings

One final thing to remember – while both steps are important, saving for retirement is more important.  If you can only do one, do the retirement saving.  Think about it – you can get a scholarship or work-study or, as a last resort, a student loan to go to college.  There are no scholarships for retirement, however.  It is certainly a noble pursuit to scrimp and save to put your children through college.  I just hope that they get a good job so they can afford to take care of you because you were lax in your retirement planning.  At the very least, you want to be able to invest your time and energy in your grandkids; you don’t want to be forced to divert that time because you have to work full-time at Wal-Mart when you are 75 years old!

Check out my previous FPU posts:

It’s Been a Remarkable Week for BFN

August 29, 2008 · Filed Under Blog Links · 5 Comments 

I wrote a post last week titled 45 Ways to Earn Some Extra Money. Later that evening I happened to be playing around with my new sitemeter account and noticed that it said that BFN had 515 visitors that day. Since the previous days I had 11 and then 30 visitors I thought this must be some kind of mistake. As it turned out, the post was Stumbled by a few people and all of the sudden a bunch of people were checking it out.

My first Stumbled post!

I had heard of this phenomenon but honestly had not expected anything like this to happen so I thought it was awesome! I expected the traffic to die down by the next evening but it has kept going strong. In fact, I had two days of greater than 2500 visitors and cumulatively I have now had over 16,000 visits and 27,600 page views! I know that’s nothing for some blogs out that but it is positively astounding for my little blog. It is finally starting to die down now but it is still no where near my previous levels.

It has been fun to see so many people come to my site to check out a post. Some people seem to be clicking on some of the links in the post, as well. Hopefully they are making a little extra money or, better yet, maybe some of the ideas spurred them to think of some even better ones for themselves.

Not many are sticking around though

My RSS subscriptions have gone up from 13 to almost 50 – so that is pretty sweet (except for the fact that  only a minuscule percentage of all the visitors are finding the site "sticky.")

Here’s the 46th way to earn some extra money

I’ve already found the 46th way: Jury duty. I was finally called to my first jury duty appearance on Monday. I was somewhat dreading it at first, but by the time I got to the courthouse, I was actually looking forward to experiencing the process. I never got to find out if I’d be selected for the jury though. Just before we were to be taken down to the courtroom, the judge came in to the jury assembly room and told us the case had been settled at the last moment. Honestly, I admit that I was a little disappointed. Oh well, I still get my $30 for showing up. $30 for about 1.5 hours isn’t going to send me into retirement, but it’s not too shabby!

On to this week’s links

I’m finally getting my head above water and getting back to reading blogs like I used to before starting BFN. I have two new projects in the works, though, so we’ll see how well I can keep up with it.

Enough about me and my little blog, lets go to the good stuff…

Have a great weekend and God bless…

Back to School Tips For Starting the School Year – College Edition

August 15, 2008 · Filed Under Random · 3 Comments 

It’s that time of the year again! Everyone is gearing up to go back to school. It’s a very exciting year for most people – kids starting kindergarten, high school, college (and especially parents of teenagers, I think).

In honor of this special time, I’ve tried to collect some tips – especially for you students going back to college. Let’s start it off with some of my personal tips: Click here to continue reading…

Personal Finance Basics Part 2 – Enhancing Your Basic Plan

August 12, 2008 · Filed Under PF Basics · 5 Comments 
Personal Finance Basics

In this series, I’m discussing the main ingredients of a personal financial plan – this will be a high level introduction to the topics that most people should consider when they first get started thinking about personal finances. This is the second post in the series.

The previous post discussed the very basic necessities for a financial plan. Today I am discussing the next steps to consider. To review, here are the basics:

  1. Earn some money
  2. Give some of it away
  3. Spend less than you earn
  4. Protect yourself
  5. Create an Emergency Fund

After taking care of the first 5 steps, I would recommend the following:

Click here to continue reading…

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