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.

Featured Image courtesy of ddpavumba / FreeDigitalPhotos.net

Tracking Your Finances, the Easy Way

Mint.com Logo

If you’re anything like me, you’ve probably got a variety of checking, savings, retirement, and investment accounts, all at different institutions. On top of that you may have credit cards, a mortgage, or a car loan. It can be overwhelming to get a complete financial picture. That’s where Mint.com comes in.

I love using this service, even if it’s only to give me a rough idea of our net worth from time to time. After you create your account, you will add in all of your different financial accounts. They’ve already got integrations with tons of different financial places. I was surprised to find my local credit union available. For each place that you want to add, you provide the necessary credentials to allow them to read the information. I know at this point, a lot of people would probably freak out. For some reason, I haven’t been that concerned about it. They are well established and have been around for quite some time. If you’re concerned, do some research and judge for yourself.

So, you’ve added your bank accounts, retirement accounts, credit cards, and your mortgage. You can even add your car and that collectible Elvis painting in the attic. It factors it all into your net worth. Here are some of the things that I really like about Mint.com and I’ve found useful.

  • On the lefthand side when you log in, you get the running total of your accounts in one place. It updates when you log in and you get warnings if they couldn’t connect for some reason. If you scroll down to the bottom, you’ll see your net worth. Hopefully it doesn’t scare  you to death.
  • Each week Mint sends out a nice summary showing all of your accounts and how much they’ve increased or decreased. It also gives you your net worth and tells you how much it has increased or decreased. I’ve set it up to also send the same email to my wife so she is able to stay up to date with all of our finances as well.
  • It’s incredibly easy to set up goals. You simply pick what you want to accomplish, when you want to accomplish it by, and which accounts are linked to the goal. For example, if you wanted to save $4000 for a vacation, you enter that in, choose the account you’ll be using to save the money in and it will tell you how much you need to put away each month to reach your goal. If you want, you can put in how much you plan to save each month and it will tell you when you’ll reach your goal. Each month, you’ll get another email showing you the progress of your goals.
  • The Investments tab does a nice job showing you comparisons as to how your doing against each of the major indexes in a nice graph. You can also check performance, value, and allocation in graphs as well.

Mint.com Investments

  • The Trends tab is kind of like the Investments tab. Instead of being for just your investments, it covers all of your accounts. You can analyze your debt, net worth, income, and spending, all in nice looking graphs.
  • If you open up the Accounts window, you’ll see a button for Emails & Alerts. You can create alerts for large deposits, large withdrawals, low balances, bank fees, interest rate changes, going over budget, and a ton of other things. These alerts don’t usually go out right away since they only update information about your accounts on an occasional basis.

There are a few features that are available that I don’t use. One of them is the Transactions tab. On this tab, you can see all of your transactions and categorize them. This helps with some of the other graphs that  tell you where you’re spending money. Honestly, I don’t have the time to go through and categorize them all. Another tab I don’t use much is the Budgets tab. Here you can say how much you want to allocate to different categories and it will tell you how close you’re getting to hitting that amount. Green is good, yellow is a warning, and red is overspending. Of course, this requires that all of your transactions are categorized correctly.

Finally, you’ve got the Ways to Save tab. I have to imagine this is how Mint.com makes their money. From here, they try to connect you up with different financial products like credit cards (stay away), checking, savings, investments, and more. Do some additional research before jumping into something because they suggest it.

I’m sure by now you may be skeptical, or you may not have gotten this far because you were so eager to check it out for yourself. If it’s not for you or after using it you’re concerned about security, you can always delete your entire account. Did I mention that they’ve got a mobile app for your smart phone too?