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 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 🙂




3 thoughts on “Total Money Makeover, Week 10

  1. Caitlin, I have strong views on investments. First there is so much going on in the financial markets that I have warned my sons to consider what they can afford to lose and keep their money spread around and not just in the markets. What is happening in Greece and other countries may very well happen here.

    Secondly, on the subject of educational savings. I think it is a good idea but I have always suggested to those who ask me that young people should leave high school and go into the work force for a couple of years to see if they would be happy in the field they were considering. Often times they fall into a completely different field and are happier there than they would have been, or their employer will help pay for their education if it is needed to advance. Right now I see high school graduates doing better in the job market than those with a degree. Just some food for thought. 🙂

    1. I think I’ll plan on saving/investing for the kids and allowing them to use the money for something to benefit their adult life, whether it’s a down payment on a house, or college tuition, or a car, etc. I agree that college isn’t always necessary, but I’d rather be prepared!

      1. That’s a good idea, Caitlin. One piece of advice, check out the penalties of each investment option for education as I know there are stiff fees and can be taxed quite heavily if they are not used for education.

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