Monday, July 23, 2007

Retirement and College

I am coordinating a Financial Peace University class at my church. (If you are interested in taking FPU, please let me know. I'm planning our next class now).

Last night's lesson was on retirement and college saving. There were a couple of very important points from that class that I would like to reiterate here.

Save for yourself first

You probably feel a tinge of guilt thinking about putting off your children's college fund for your own savings. Believe it or not, your first priority should be your retirement savings. It is much more important that you have your nest egg built up for retirement.

There are too many ways to fund college other than college savings. Yes, if you are funding your retirement accounts and are debt free, then by all means throw some money in an Education Savings Account. But if you are still paying off your debt or are saving for college instead of saving for retirement, do not save for college.

First, there is no guarantee that your child will go to college. Some kids are natural mechanics and welders and can make a great living without college. Second, college can be paid for in other ways. Your child can work through college, you can apply for scholarships, and your child can go to a community college for their first two years. In Missouri, there is a program that pays for the first 2 years of college for eligible students. Look into programs like these to help with the cost of college. But, by all means, DO NOT TAKE STUDENT LOANS!

Too many students are starting life under a mountain of debt. Worse, they never learn the power of being debt free, and fall into a lifestyle of payments. How can you get your life started, or save for a house with that debt hanging over your head? Here's an idea: start life debt free, and work hard to keep it that way.

Take your employer's FREE MONEY

Does your employer offer a 401(k) plan? Do they offer a match? If so, TAKE THE MATCH. Your employer is offering to give you FREE MONEY for your retirement. That's great! Take it!

If you still have debt, you might want to either suspend or hold off on starting your retirement saving. Dave Ramsey's advice is to not save for retirement at all while you are paying down debt. That way, you will have more money available to work your debt snowball.

But if your company offers a match, you might consider saving just enough to take advantage of the match. For example, if you company matches the first 4%, then save 4%. Take that free money and sock it away into your 401(k) account. It's just too good a deal to ignore.

We love the name ROTH

If your company does not offer a match on their 401(k), then perhaps a better plan is to fund a Roth IRA instead. With a Roth, you invest after-tax dollars in your choice of investments (please choose growth stock mutual funds with a good track record). That money then grows TAX FREE. That's right, when you pull the money out at retirement, you pay no taxes! There are some restrictions on the Roth, so please check with your financial advisor, but if you can, invest in a Roth.

There are lots of different things to think about when planning for college or retirement. The most important thing is this: START EARLY. The power of compound interest will easily make you a millionaire by just investing a little each month. If you haven't started yet, get yourself out of debt and get your emergency fund built up quickly. Then start putting as much as you can (15% is recommended) away for your retirement.

The earlier you start, the wealthier you will be.

For more information on how you can retire wealthy, please see Dave Ramsey's web site.

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