My Journey Out of Debt Step #6: Invest for Retirement and Save for Kids’ College

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Step #6: Invest

When you reach this step, you’ll have no payments—except the house—and a fully-funded emergency fund. Now it’s time to get serious about building wealth!

One of my favorite financial advisors, Dave Ramsey, suggests “investing 15% of your household income into Roth IRAs and pre-tax retirement plans.” He cautions that you shouldn’t invest more than that because the extra money will help to complete the next two steps: college savings and paying off your home early.

There are many ways you can split up your fifteen percent. Take advantage of your company-sponsored Roth 401 (k) and any matching first. For example, if my employer matched $1.00 for the first 3%, I’d contribute 3%, which actually equates to 6% due to the match. Then I may put the remaining 9% in to a personal Roth IRA or traditional 401(k), or invest in my ESPP (Employee Stock Purchase Program) for diversification. (One thing I did to complete this step was to get some free advice from my banking institution.) Troll around on LinkedIn, too, to see if there are any financial planners in your area who wouldn’t mind answering a few of your money questions.

If you need to save for college, be sure to have a goal in mind. Determine how much per month you should be saving at 12% interest in order to have enough for college. Why 12%? Because if you save at 12% and inflation is at 4%, then you are moving ahead of inflation at a net of 8% per year.

Remember: Never save for college using:

• Insurance
• Savings bonds (only 5-6% growth)
• Zero-coupon bonds. (only 6-8% growth)
• Pre-paid college tuition (only 7% inflation rate)
The best way to save for college is with Education Savings Accounts (ESAs) and 529 plans—which I opened for my 10-year-old son. Hard to believe, but college is possible without loans!

TODAY’S BITE-SIZED TO-DO:

Take stock of your retirement savings options at work. If you have a limited array, look into opening up a Roth IRA on your own. Then connect with a financial advisor to walk you through next steps based on your long-term financial goals. If you need to save for college, calculate how much money you’ll need for your local state university. Then inquire at your local bank about opening up an ESA or 529 plan for your child/children. Re-evaluate your budget, because now your disposable income will be reduced by about 15-18% as you save for retirement and college.

Next time we’ll talk about tackling your last big debt: paying off your home early! Yes . . . it can be done. ☺

Feel free to review the first five posts in the series…

Step 1: How I paid off $93,000 in less than 3 years

Step 2: Budgeting

Step 3: Save $1000

Step 4: Debt Snowball

Step 5: Your Emergency Fund

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