Friend and freelance writer Les O’Dell shares this diary entry from the 1oth session of Financial Peace University, a 13-week course from national talk-show host Dave Ramsey.

A Sore Subject

Tonight’s Financial Peace lesson, “From Fruition to Tuition,” was somewhat painful for me. Designed to go with some of the later Baby Steps (after debt is eliminated), this lesson deals with funding your own retirement and college for your children. Baby Step 4 is investing 15 percent of your household income into Roth IRAs and other pre-tax retirement plans. If needed, Baby Step 5 is to be done at the same time. It is save for your children’s college using tax-favored plans.

Despite the fact that we have a student in college and another in high school, we’re still working on Baby Step 3 – the debt snowball – and probably won’t need to work on step 5 at all; by the time we get there, we won’t need it! Regardless, the lessons provided in this part of FPU are very good ones.

Good News

Please allow me to insert a side note of good news here: since attending this lesson, my son, who just completed his first year at a state university (mostly with dreaded student loans) just accepted a full scholarship (tuition, fees and books) to be the goalkeeper at an area community college. Funding his education just got easier!

Saving for Retirement

The first part of the lesson dealt with saving for retirement. The teaching was much too involved and complex to package in just a few paragraphs. Enroll in FPU, read Ramsey’s book Financial Peace or talk with your financial planner for details. Some highlights of the material include a discussion of qualified retirement plans including 401(k), 403(b), 457, Individual Retirement Accounts (including Roth IRAs) and Individual Retirement Accounts.

Ramsey stressed the importance of saving for retirement with tax-favored accounts, meaning that the plans may grow tax free if meeting certain requirements. Taxes may apply upon withdrawal. He went into great detail on the benefits and characteristics of Roth IRAs and other retirement plans. He even gave suggestions of how to fund Baby Step 4 using employer matches and several retirement savings vehicles to our advantage.

Graduating to College Savings

Following the discussion of saving for retirement, Ramsey moved into the importance of saving for children’s college educations. Sharing facts about the current cost of a university education and the average student debt load of college graduates, he stressed how important saving early for college really is.

What came next was a presentation on specific ways to save for college including the use of an Education Savings Account, also known as an Education IRA. The ESA provides some tax free savings. Contributions are not tax deductible. Earnings are tax deferred and withdrawals are tax free for qualified educational expenses.

Additionally, Ramsey outlined 529 savings plans as well as UTMA and UGMA (Uniform Transfer/Gift to Minors Act).

The Impact on Us

I said earlier that this lesson on saving for college probably would not be pertinent to us, but I’ve been rethinking that. My youngest is a high school sophomore. If we really work Dave’s plan and roll through the other Baby Steps, we just may be in a position to save some for her education – or at least pay for school with good ol’ cash.

Les O’Dell is a freelance writer living in Carbondale, IL. His work can be seen in a number of newspapers, magazines, publications, and websites. He is co-author of the popular “He Said, She Said” newspaper column. He can be found on the web at www.lesodell.net. Les is not affiliated with or endorsed by LPL Financial.

Friend and freelance writer Les O’Dell shares this diary entry from the second session of Financial Peace University, a 13-week course from national talk-show host Dave Ramsey.

Welcome to reality

Our second session of Financial Peace University was humbling. The course coordinator asked each family to write on a nameless index card the best guess of our total level of indebtedness. He would add all of the figures together for a class total and then we could use that as a benchmark for measuring success when a total is calculated at the end of the course in May. Writing down that number was a sort of reality check. I wondered how our number (which I felt was way too large) would compare to everyone else’s figure.

Battle of the sexes

The second FPU lesson was relating with money. In it, Ramsey discusses the different approaches men and women take toward money and savings and how finances are often the top issue in marriages. He tells how money is tied to men’s self-esteem and to women’s sense of security. While admitting it was an over-generalization, Ramsey says that—according to women—having an emergency fund is the most important part of a financial plan.

Nerd? Free Spirit? Spender? Saver?

photo credit: SteffanyF!

Ramsey also introduces several personality types, sharing that his experience is that most marriages have one of each. These are the nerd and the free spirit. Free spirits can be lackadaisical in their approach to money, sort of in a carefree way. On the other hand, nerds like to feel in control: they love doing budgets and (gasp!) may even enjoy filing tax forms. He also says people are usually either spenders or savers. Again, most marriages have one of each. It’s hard for me to imagine how someone could be a nerd/spender, but I guess it’s possible.

My wife and I had already discussed this concept years before, and we’re easy to classify. I am the typical nerd/saver. On the other hand, I like to call her a recovering free-spirit/spender. I say recovering because we’re both totally on board with following the baby steps Ramsey outlines and improving both our finances and our relationship. As FPU teaches, we know we must get it together together and make financial decisions together.

Singles and Money

Through the lesson, Ramsey gives pointers on working together as a couple, how single people should approach their financial decisions (get an accountability partner and beware of impulse buying) and how to teach kids about money.

Relating to Others

Following the DVD lesson, our class split into smaller groups to discuss our own circumstances. Since none of the people in our group knew one another, no one was really willing to open up about their own situation or to share their circumstances. We all introduced ourselves and shared pleasantries, but that was about it. It looked like we had some work to do if we were all going to relate to one another.

Les O’Dell is a freelance writer living in Carbondale, Ill. His work can be seen in a number of newspapers, magazines, publications and websites. He is co-author of the popular “He Said, She Said” newspaper column. He can be found on the web at www.lesodell.net.  Les is not affiliated or endorsed by LPL Financial.

Whereas Dave Ramsey’s Baby Steps have often been dissected one at a time, my goal in this post is to give an overview of the steps as a unit and explain why the order is essential. Hopefully, these steps can help you create a focused life plan for your finances, regardless of your age or financial well being.

photo credit: schm1t

First, the Baby Steps:

• Step 1: $1,000 in an emergency fund.
• Step 2: Pay off all debt except the house utilizing the debt snowball.
• Step 3: Three to six months of savings in a fully funded emergency fund.
• Step 4: Invest 15% of your household income into Roth IRAs and pre-tax retirement plans.
• Step 5: College Funding
• Step 6: Pay off your home early.
• Step 7: Build wealth and give.

The Power of Focus

Dave’s premise with the Baby Steps is that people can accomplish great things IF they can just be focused. When you read over these seven steps, you think, “Yes. I need to be saving. But I also need to be investing for retirement. I should get my house paid off early. But I also need to be getting out of debt and saving for my kid’s college. You would readily agree that all of these goals are important for successful financial planning. The problem is that your stress level kicks into overdrive with the prospect of doing them all. You clench your jaw and do what you are capable of doing while feeling anxious about the goals you place on the back burner.

The Baby Steps plan works because when you stay focused on one step at a time, you can knowingly put some important goals on hold without the nagging feeling that you are leaving something undone. Why? Because accomplishing each step puts you in a great position to accomplish the next one. You begin to feel an empowerment and a sense of control as you get one step behind you and start the next one. You are making progress instead of treading water.

Why Are the Baby Steps in the Order They Are In?

Steps 1 and 2: $1,000 Emergency Fund and Debt Snowball

Dave Ramsey Debt Snowball

Notice that Steps 3 through 7 are all about using your money to do something positive for you and your family. Of course this money comes from your income, but the problem with most of America is that we are using our income on debt payments. Because we are paying others instead of ourselves, we need to get rid of our debt (Step 2) in order to free up our income for Steps 3-7. Ask yourself, “What if I could use all the money I am currently paying to creditors to start “paying myself”? For many people this is $1,000 to $3,000 a month. Baby Step 2 debt snowball is designed to do just that. Step 1 is necessary before Step 2 because you don’t want to start paying off debt without having a small cushion to absorb the little unplanned expenses that will occur during Step 2.

Step 3: 3 to 6 months of Savings

Have Enough in Savings

After completing the first two steps, you are out of debt (except for your house) and now have that cash flow you dreamed about: all of the money you used to pay others is at your disposal. The temptation is to start investing for retirement or saving for your kids college or pay off your house early. NOT SO FAST! You will get to those, but doing so prematurely is way too risky. Stop, take a deep breath and use that cash flow to build up your emergency fund so you will indeed be ready for emergencies. This fund needs to be liquid (in a savings account or money market account). If you skipped the step and started any of the ensuing steps, how would you handle emergencies? Pull money from your retirement account? Rob the kid’s college savings? Borrow money against your house? All bad ideas. Step 3 is therefore always ahead of the following steps.

Steps 4, 5, and 6: College Funding, Pay Off Home, Build Wealth and Give

photo credit: monkeyc.net

You may be asking,

“Why is retirement ahead of college funding? Wouldn’t a good parent put his children ahead of himself?”

Good question. But what if you end up without sufficient retirement income because you made college funding a higher priority? Who will you be depending on in your later years? Your kids! The thing about retirement planning is that you only get one shot at it. The years go by and you will someday be retirement age. You don’t have a choice. On the other hand, college funding is full of choices: kids can get scholarship, they can work, they can attend community colleges, they can find work/co-op programs, etc, etc.

Step 4 is therefore ahead of step 5. But notice that Step 4 is 15% of your income. If you have cash flow greater than 15% you can apply that to college funding immediately, and if you have more than enough cash flow to accomplish both steps 4 and 5, you can use all of the extra to pay off your house early (step 6). Note that Step 6 comes behind retirement and college funding because reversing the order could possibly give you a paid for house at the expense of a dignified retirement or helping your kids through college. Most of us wouldn’t want that.

Here are some great investing tips for beginners.

Step 7: Build wealth and give.

Give Back

Life is now very good! You have no debt, a great emergency fund, and a paid for house. All of the cash flow that used to go toward debt reduction and house payments is now at your disposal. This, by the way, is the step Janice and I are on. Being semi-retired, we don’t have a huge income, but it is very sufficient because we also don’t have any debt. We continue to invest every month and we are able to give more than we have ever given before. Once we got our house paid off, we started to budget “bless” money, which we put into an envelope every month just to have available so we can bless others as we see the needs. We are also able to help our grown daughter and daughter-in-law cash flow their college.

As I said, life is good. Janice and I are experiencing great financial peace and we are very grateful for Dave Ramsey’s Baby Steps.

I wish the same for you.

This is another guest post from Joe Plemon who authors Personal Finance by the Book. Joe is also the Money Columnist for The Southern Illinoisan.