Total Money Makeover, Week 10

Week 10 of my Total Money Makeover process included the 7th lesson in Financial Peace University on retirement and college planning.

Confession: I have a matching 401(k) available to me through my job and I have never saved a penny for retirement.  Oops.  However, the Total Money Makeover is designed to be done in a prescribed order, and saving for retirement isn’t until Baby Step 4.  I’m still on Baby Step 2, so I don’t need to be worrying about retirement savings just yet.  Investing comes later.

To recap, the Baby Steps are:

  1. Save up $1,000 as your starter emergency fund
  2. Pay off all debt (except the mortgage) in a debt snowball
  3. Save a full emergency fund of 3-6 months of expenses
  4. Invest 15% of your income for retirement
  5. Save for the kids’ college
  6. Pay off the house early
  7. Build wealth and give

This week in FPU we cover baby steps 4 and 5, which usually happen at the same time.  My future children are lucky that I have all this time to save up for their college… they don’t even exist yet!  If we review my five year plan, I hope to be debt free and a mom within five years, so I will still have plenty of time to get a head start on college.  I never had college savings, so I had to take out loans.  My children will never have to go into debt for their education.

Baby Step 4: Invest for Retirement

Once you are debt free except the house and your emergency fund is in place, it’s time to start investing for retirement.  Dave recommends that you invest 15%, no more, no less, of your income.  If your employer matches a certain percentage of your 401(k), that’s great, but it’s not part of your 15%.

Dave’s standard diversification plan for retirement investments is to put 25% in growth and income funds, 25% in growth funds, 25%in international funds, and 25% in aggressive growth funds.  These are all types of mutual funds. A mutual fund is a group of investments made of several investors’ pooled money and managed by a professional portfolio manager.  Mutual funds are excellent long-term investments – you should plan to keep your money in a mutual fund for at least 5-10 years. When selecting mutual funds, check their track records to see growth over a long period of time.  And don’t panic if the fund’s value goes down – if you select funds based on long-term performance, you should be confident that they will go back up, like they have in the past.

Always save long term with tax-favored dollars.  That means that the investment  is in a qualified plan or has a special tax treatment. Qualified plans include IRA, 401(k), 403(b), 457, and Simplified Employee Pension (SEP) plans. A Roth IRA is an after-tax IRA (meaning you do not put pre-tax dollars into it, only after-tax take-home pay) that grows tax free!

I plan to fund a Roth IRA for retirement and also spread out the rest of my 15% across diversified mutual plans.

For more (LOTS MORE) information about investing for retirement, visit daveramsey.com where you can learn more and find an endorsed local provider in your area to help you decide how to invest for your retirement.  When I have put more time into researching retirement investments I will probably write more, but being on Baby Step 2, I haven’t put a lot of thought into it yet.

Baby Step 5: Saving for College

Baby Step 5 is to “save for your children’s college using tax-favored plans.”  Dave suggests saving in an Education Savings Account (ESA), also known as an “education IRA.”  You can save $2,000 per year per child, tax free, in an ESA.  Above that amount, you can save in a 529 plan, but only save in a 529 that allows YOU to be in control of the investment mutual fund.  There are some 529 plans that freeze your options or change your investments based on your child’s age (higher risk when your child is younger, lower risk as your child gets older) – these are plans to avoid.

Dave advises against saving for college using insurance, savings bonds, and prepaid tuition.

If you start saving late for your kids’ college, it’s still possible for them to go to school debt free.

  • Attend a community college or state school (or both! Kent State University, for example, has regional campuses with lower tuition rates, they have a similar feel as a community college)
  • Compare costs of living on- or off-campus
  • Get scholarships – merit based or otherwise
  • Get a J-O-B and work! The average college student at a state school could pay their own tuition working 20 hours a week.

Sorry I have been going long stints of not posting, lots going on in life! More soon 🙂

 

 

 

Total Money Makeover, Week 8

Week 5 in Financial Peace University was called “Buyer Beware” and discussed the power of marketing and advertising, which are common saboteurs of a healthy budget! Companies want you to buy their product – and they go to great lengths to get your business!

Companies market via…

  • Personal selling
  • Financing and convenient payment methods (store loyalty cards, store credit cards, mobile payment, 90 days same as cash)
  • TV, radio, Internet, and other media outlets (did you know a 30 second TV commercial costs $300,000 to produce?)
  • Product positioning in stores (companies pay to have their product stocked in a particular area of a store)

An important note about the 90 days same as cash scheme – 88% of those are not paid off in 90 days and are slammed with 24% interest dating back to the date of purchase.  Don’t do it.  Save up your money and pay cash.  Nothing is so important that you have to buy it right now, brand new, on credit.

We go through physiological changes when we spend money.  That’s why Dave is such a proponent of using cash instead of cards – so you FEEL the money you are spending.  It’s the same even when we save up and buy significant purchases.  Significant purchases can mean different things depending on your budget, but Dave suggests $300 is considered a significant purchase.

When I was married, we did a budget. For one month. Because it didn’t work and I never wanted to try again. We decided that each of us could spend $100 without asking the other one, that was our fun money fund.  He financed a $1,000 laptop and justified it because “the payments were only $100 per month.”

I can’t even begin to wonder what that marriage would have been if I had discovered Dave Ramsey sooner in my life.  Just as well that I didn’t, though, because I now have happiness, self-esteem, and self-respect.  Can’t buy those.  Can’t finance them either.  #do-over
Dave’s suggestions for purchases include:
  • Sleep on it – wait overnight before making a purchase
  • Weigh your motives and intentions – do not purchase something to make you happy; no amount of “stuff” is going to fill a void
  • Know what you are buying – don’t buy things you don’t understand
  • Consider the “opportunity cost” of your money – you have to give every dollar a place to go; make sure it’s a good place
  • Seek the counsel of your spouse – when you are single, you only have to answer to yourself; when you’re married, every decision you make with money has the potential to impact your spouse.  Always talk about where every dollar will go.

My favorite part of the lesson was the discussion about negotiating.  I really can’t wait until the next time I need to buy something!  Some important tips:

  • Use cash
  • Walk away – they will follow you and make a deal
  • Learn to shut up – they will talk themselves into a lower price
  • Say, “That’s not good enough.”  Also see: Walk away
  • Identify the good guy/bad guy technique – a car salesman goes to “talk to the manager” and regrettably reports that the mean ol’ manager just won’t go for a deal.  Know when to walk away from this.
  • Master the “If I take away” technique – A salesman offers you a TV with a DVD player and surround speakers for $X.00.  Say, “Okay, but I don’t need the speakers or DVD player, if I take those away, what is the new price?” (also useful for car purchases where they want to sell you luxury options).

Confession time

I have a confession – I spent some money on a luxury this month.  I have a Facebook friend who is a coach for BeachBody, and I signed up for an exercise program and nutritional shakes.  There were three outcomes from this purchase:

  1. Best case: I love the DVDs and shakes, I get closer to achieving my fitness goals, and I like the purchase.
  2. Neutral: I don’t love the DVDs or shakes, I return them for a refund.
  3. Worst case: I don’t love them, but I forget to return them in time and I do not get a refund.  I learn a lesson to not buy things like this.

One week after the kit arrived, I’m going with case #1.  I only lost 1.4 pounds in the first week, but I did lose FOURTEEN INCHES over my entire body (measuring bust, chest, biceps, thighs, calves, waist, and hips).  It has definitely been a good purchase, in my case and in my opinion.  It’s easier for me to do the workout at home than to go to the gym.  This is not an endorsement that everyone should go sign up for BeachBody, but it’s my personal experience and I found that it was worth my money in this moment.  We’ll evaluate as time goes on.

Total Money Makeover, Week 4

It’s week four of my Total Money Makeover, and I had my first Financial Peace University class this week.  The class only has three people attending, myself and a newly engaged couple.  The instructors seem very nice!  The FPU class consists of watching a DVD of Dave Ramsey doing the lesson each week, followed by discussion.  We started late this week due to the instructors traveling and being delayed half an hour, so there wasn’t much discussion afterward.  I hope that changes in the future.  I am a little disappointed the class has so few people but I still think it will be a really good resource for me to help keep me accountable (you know, besides my Dave Ramsey friends on Facebook and posting weekly on the blog!).

Week 1 of FPU is all about saving.  DVD-Dave discussed baby steps 1 (save $1,000 for a starter emergency fund) and 3 (save 3-6 months expenses in a fully funded emergency fund).

Some important take aways from the first class:

  • To avoid “running out of money” for savings or giving in your budget, take them out first.  Give, save, and then pay bills.  I used to automatically take out 10% of each pay and move it to a savings account.  I am temporarily not saving so that I can focus all extra money on debt repayment.
  • Money is amoral.  It is not good or bad.  Being wealthy does not make you a good or bad person.  Money is like a brick; you can use it to smash a window or build a hospital.  The important thing is to use money in a good and moral way.
  • Saving money is about emotion and contentment. This is really important to understand and was something that really clicked for me in class.  We save money for things that are important to us.  Consider the analogy of a life-saving treatment that’s a non-negotiable need. If your kid is sick and you need $1000, $2000, $5000, whatever amount – you can save that up.  You might sell everything you own, you might cancel cable, you might get a second job.  GETTING OUT OF DEBT IS JUST AS IMPORTANT – RUN FOR YOUR LIFE.
  • Dave says over and over again… “If you live like no one else, later you can live like no one else.”  Basically, if you’re a 25 year old professional willing to take a weekend job and additional freelance work, cancel internet (haven’t committed to that but I still think about it), and sell your Star Trek autographs on ebay, then in a few years you’ll be able to do whatever. you. want.
  • We should save for three reasons: emergencies, purchases, and wealth building. The emergency fund is important because it’s insurance.  It is insurance that you won’t have to cash out your retirement or sell your home if hard times hit.  And, Dave reports, most people find that when they have a fully funded emergency fund, they stop having emergencies.
  • Always pay cash. Dave’s best example for saving up to pay cash is a car.  The average car payment is $492 per month for 63 months.  If you just put $492 into a cookie jar, in less than a year you can buy a $5,000 car with cash.  Boom.  Then you save up more, trade in your $5,000 car, and you can get an $8,000 car, and so on.  How great would life be with no car payments?  This method applies to every purchase – cars, furniture, appliances, etc., and you’ll be able to save money with cash too.  If you walk in with a handful of hundred dollar bills, you can bet a store or seller will come down on the price and you can get a deal.
  • Start saving NOW. Dave gives the example of “Ben and Arthur.”  Ben starts saving $2,000 a year from age 19 to 26, then he stops saving.  Arthur starts saving at age 27 and saves $2,000 a year until age 65.  Due to the miracle of compound interest, Ben comes out of this with almost $2.3 million while Arthur only has $1.5 million in the bank.  …clearly I need to get me to a bank and start saving ASAP.

Some of the discussion questions from the workbook include:

Talk about one or two things you are worried about having to deal with or something you are looking forward to achieving as you work through the program. I am honestly less worried now than I was a month ago… I have a plan, a real plan.  That does a lot to comfort my fears.  I am looking forward to being able to discuss with the group, and I am REALLY looking forward to week 4, the week of plastic surgery.  (More details later).

In what specific areas could you be more diligent about saving? I want to start saving for retirement and an emergency fund (I know the emergency fund comes first).  Seeing all this information about how small investments now can become millions by retirement really inspires me to start saving now.

Talk about a financial emergency you’ve had over the last few years. How would the situation have been different if you’d had an emergency fund? When I first separated from my ex-husband and lived with friends, I was putting everything on my credit card.  I only made $600 a month from my graduate assistantship, and my car payment was over half of that.  With gas and food to pay for, I had no money.  I put McMuffins on my credit card.  McMuffins.  I am so happy I paid interest on a $3 crappy breakfast sandwich.  Not.  If I’d had an emergency fund, I would have been fine.  I could have afforded food, gas, car payment, everything, without the use of credit cards.

Dave recommends building sinking funds into your budget to cover big purchases and future expenses.  Talk about some expenses you’ve had in the past that could have been less stressful with a sinking fund. Well, my car.  I had $1,000 down and we financed at 7.75% because were NEWLYWEDS and wanted ADULT STUFF because THAT’S WHAT PEOPLE DO.  At least we bought it used and a couple years old.  But I wish I had had Dave Ramsey in college to teach me these things before I went into into the world and promptly jumped off the plank into debt-infested waters.  I have always saved up for things (mom taught me that saving is important) but it just never translated into the big stuff like student loans and cars.  Probably because my mom also missed the memo that ALL DEBT IS BAD DEBT (except maybe a mortgage, if you do it right).

Imagine yourself debt free with a fully funded emergency fund in place, fully funding retirement and college investments, and writing the check to pay off the house.  What are some things you can’t wait to do with the money – and freedom – you’ve secured for yourself? Well, step one for me will be to afford being a stay at home mom, but that will happen before all of the baby steps are completed (hopefully).  But, say 5-8 years into the future, all debt is gone, there are no payments, retirement and college funds are going strong… I’d like to take a family vacation.  I want to go somewhere awesome and beautiful.  Beyond that, I want to go to restaurants and leave $100 tips, or throw $100 bills into musicians’ open guitar cases on street corners.  And I want a house with land so I can have chickens and a garden. 🙂

Homework for Week 1 includes making a quick-start budget (I already have a detailed budget I follow), complete the Financial Reality Check in the workbook (below), and read the chapter “Super Saving” in Dave Ramsey’s Complete Guide to Money (already read the book but I will do a refresher).

Financial Reality Check

What is your total non-mortgage debt? $62,232.51

How much liquid cash do you have available? $2,200 (ish)

How many open credit card accounts do you have? 5 ($0 balance)

Rate the following emotions in regard to your personal finances (scale of 1-10)

  • Fear: 4
  • Anxiety: 4
  • Confidence: 8
  • Hope: 10
  • Peace: 5