This week in Financial Peace University Dave talked about planning for retirement and your kids college funds. It’s amazing how you don’t think about these things when you’re young, but starting young can make such a huge impact! Basically, what I took away from this lesson is:
START SAVING NOW!!!
This lesson introduces baby step #4 and #5. Before I get too into what they are, I’ll explain the baby steps. I think he calls them Baby Steps because it makes you feel like it’s not a huge task. It’s an easy thing that you can accomplish. The Steps so far are:
- Start saving and get an Emergency Fund with $1,000 in it.
- Pay off all debts (besides your home) using the debt snowball. The debt snowball is a technique where you pay off the smallest debt first and move to the next smallest one until they’re all paid off.
- Save 3-6 months of expenses in your Emergency Fund.
Number 4 is to invest 15% of your household income into Roth IRAs and pre-tax retirement plans, such as a 401k. This may seem like a lot but with no debt, you should be able to easily free up 15%. But, he warns not to put away more than 15% in these categories, because there are still other things you need to be doing with your money.
His suggestion for funding your 15% is to first fund your 401k or other employer plans up to the match. It’s free money you are turning down if you don’t at least give to what your company will match. Ask your HR representative what the match is and make sure you’re contributing at least that much.If you don’t get a match from your company, then start with a Roth IRA. If you do get a match, fund the rest of your 15% (or as much as you can) to the Roth IRA. Then, if you still have some money left over, go back and fund your 401K (or 403b, or whatever you have).
Baby Step #5 is to save for your children’s college using tax-favored plans. Dave prefers using an ESA or Education IRA rather than the 529 savings plan. It works just like a Roth IRA, but for college tuition.
Now, I have to admit, so much of this can be really overwhelming and hard to understand, but I did get some encouragement from this lesson. He gave an example of a 30-year-old couple who puts away $500 per month into a Roth IRA at 12%. When they turn 70, they’ll have 5,882,386! That’s pretty amazing and seems to me like it’s worth the sacrifice. Even though 12% might be hard to come by, the point is starting young and being consistent pays off!
So, how about you? Are you saving for retirement? Are you planning to be a millionaire when you’re older? 
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Linda,
What an AWESOME resource you are building here for others! I just came across your site today, and I can’t wait to dig in and see more.
It looks like our FPU classes are on the same schedule, as From Fruition to Tuition was the last lesson we did as well. Was it a struggle for anyone in your class to save for themselves before they saved for their kid’s college?