Saving for your kids: Now or later?

College

This question came in through the survey I created recently, proof that I’m listening. The question was: Should you save when kids are first-born or postpone until other financial goals met?

Great question. I’m going to start by saying that this is just my take on the question and everyone’s situation is different.

Now that that’s out-of-the-way, let’s dig into this question. My short answer is that you should wait to start saving for your kids until your other financial goals are met, depending on what those goals are:

  • Pay off debt: Wait to start saving
  • Buy a bigger house: Start saving now
  • Saving for a down payment on your first house: Wait
  • Buy a newer car: Start
  • Save up an emergency fund: Wait
  • Save up for vacation: Start

Obviously the sooner you can start saving, the greater your funds will build up over time. However, you have to look at your other financial goals and whether finishing them will set you up to be able to save more later and help your family.

Paying off debt, saving up an emergency fund, and saving for a down payment for your first house are all things that will set you up to win later and removes risk from your family. The others things won’t.

Many of the goals that will cause you to postpone saving for your kids are short-term goals. They are ones that you can concentrate on for a period of time and then put them behind you.

For example, after you’ve saved up an emergency fund you shouldn’t need to ever go back and do that again unless an emergency comes along. However, newer cars and vacations will come around every so often and you need to be able to budget for those while accomplishing other long-term goals (such as retirement or saving for your kids).

What type of financial goals are you trying to tackle? Do you have a question about what order to tackle them in? Leave them in the comments below. If you have something else you’d like to add, leave that below as well. If you’d like to ask a question specific to your situation, use the contact form to send me something directly.

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What are you going to do with your tax refund?

Taxes

According to the IRS, the average tax refund last year was about $2800. That’s a lot of money. Let’s look at that a couple different ways.

$2800 is the same as:

  • $233 a month
  • $116 if you’re paid twice a month
  • $107 if you’re paid bi-weekly
  • $53 if you’re paid weekly

That would be a pretty nice raise if you got that money in each of your paychecks. We’ll talk more about that in a future post. For now, let’s look at some ideas on how to use this year’s tax refund.

It’s always nice to get a big pile of money unexpectedly. It’s sad to find out after a while that it disappeared and you’ve got nothing to show for it. Below are some ideas on how you might use your tax refund this year.

  • Pay off some debt. Since you’re probably paying interest on any debt that you have, paying it off makes your tax refund that much more valuable by saving you interest every month.
  • Start or build an emergency fund. Emergency funds are far from exciting, but on the bright side, once you’ve got one, unexpected events aren’t such a crisis.
  • Put it in an IRA for retirement. You can start the year by cutting your tax bill for the next year by putting your refund right into an IRA. Whatever you contribute to a traditional IRA can be a deduction if you itemize your taxes.
  • Start a 529 college fund for your kids. Depending on where you live and in which state you start a 529 college savings plan, you can get a lot of great benefits that a savings account won’t provide.
  • Buy something big you’ve been looking at. If you’ve been planning to buy something like a new computer, furniture, or something else that isn’t exactly “cheap”, using your tax refund can get you that item that much faster. Plus, if you’ve saved money for that special item you can use it for something else now!
  • Plan a vacation. It may not sound like the most responsible thing to do, but paying cash for a vacation is better than putting it on a credit card.
  • Start a business. I’m sure you didn’t expect to see that on the list. If you’ve ever thought about starting a business but have always used not having the money as an excuse, now’s your chance. It may be the catalyst to make a dream come true.

Don’t let your tax refund (or any unexpected dollars) slip away. Make a plan for it, even if the plan is to spend it frivolously. At least you’ll know where it went.

How do you plan on spending your tax refund? Post your ideas in the comments below.

Featured Image courtesy of Arvind Balaraman / FreeDigitalPhotos.net

Dave Ramsey’s Financial Peace University – Week 7

Investing

Week 7, only two more weeks left in class! Everything that has been taught in the classes so far leads up to this one. Some students may not be ready for it, while others may have been waiting for it a while. This lesson is the Retirement and College Planning lesson.

There can be a lot of fear around investing, but Dave makes it incredibly simple and breaks it all down. He starts off with a simple example of a 30 year old couple who invests $600 a month for 40 years. At 12% interest, they would have over $7 million! If they could manage to invest $833/month they would have $9.8 million.

If that doesn’t motivate you to start saving, I’m not sure what will. Even if you don’t get 12% on your investments, you’d still have a huge pile of money!

After the $1000 emergency fund, paying off all your debts but your mortgage, and building up a 3-6 month emergency fund, baby step 4 is to invest 15% of your income for retirement. Dave recommends the use of mutual funds since it helps take some of the risk out of investing by spreading your money across several different companies. He recommends splitting up your investments equally among growth and income funds (sometimes called large cap), growth funds (sometimes called mid cap), international funds, and aggressive growth (sometimes called small cap).

When you purchase mutual funds, you can purchase them through several tax favored accounts such as 401k’s and Roth IRAs. A 401k or Roth IRA holds mutual funds and other investments, it is not the investment itself. The type of account tells the government how to treat it when it comes to taxes. For example, with a 401k, you put all of the money in pretax, but when you withdrawal from it in retirement, you will pay taxes on everything you withdrawal. With a Roth IRA, money is put in after taxes have been paid, so all of the money grows tax free and you don’t pay any taxes on it when you withdrawal from it in retirement. You can read more about it here.

To maximize your investments, Dave recommends funding your company’s 401k (or Roth 401k if they offer it) to get all of the match that they offer. You don’t want to leave free money on the table. After that, you should put money into your Roth IRAs until you reach 15% of your income. If you still haven’t reached 15% but have maxed out the Roth IRA, then go back and fund your 401k until you reach 15% of your income.

After covering investing for a while, Dave’s daughter Rachel Cruze comes out to talk about saving for college (Baby Step 5). They recommend saving in an Education Savings Account first, and then using a 529 after the ESA is maxed out. Personally, I’m not sure why Dave hasn’t completely adopted the 529 as the primary choice. The only thing I can think of is that there are so many 529s out there and they are different in each state. For example, in Ohio where I live, any money we put in up to $2000 per child is tax deductible from our state income taxes. I wouldn’t get that benefit from an ESA. Look at your 529 options closely. You don’t have to invest in the 529 for your state if you like another state’s options better.

Rachel warns against using insurance, savings bonds, or prepaid tuition to save for college. They don’t get the same returns as using mutual funds. Always look for something that allows you to control what you’re invested in and doesn’t change with age. Finally, they stress the importance of graduating from college debt-free. Some of their money saving tips are to go to an in-state school or community college, look at all your living options (including living at home), get tutoring for the ACT/SAT to improve your scores and get more scholarships, and finally WORK while you’re in school!

I agree with graduating without student loan debt. Personally, my wife and I were able to do it because of the work we put in while in high school and the scholarships we got. When a student graduates with debt, they don’t have the freedom to find the job they really want and instead are sometimes forced into a less than ideal position so they can pay their student loan payments. This makes no sense to me really. Parents and students spend all of this money on college so that they can have the “experience”. If they do it right, a person will be spending a lot more time in the working world than in college and the last thing they need to do is start off in a position that they despise and have student loans hanging off their back.

Next week’s lesson will be covering real estate and mortgages.

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