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Baby Step 5, 6, & 7: College Funds, Paying Off Your Home, Building Wealth, & GiveSubmitted by Rock House Financial on June 20th, 2018
Baby steps five, six, and seven are similar and all require some planning to do them as effectively as possible. People are often working on these steps at the same time. So developing a plan of how much money you’re putting into each area and how are you investing it is an important part of these steps.
Baby Step 5: Starting Your Children's College Fund
There are different accounts that you can use to take advantage of tax savings. Some of those accounts tie up the money because they require that it be used specifically for college, and if your child doesn’t go to college then what happens to the money? It’s important to have a discussion when saving up for your children’s college education about where to save the money, and a financial advisor can help guide that discussion and offer advice.
It begins by asking what you really want. What are your goals for college savings? Do you want to be able to pay for them to go to an Ivy League college or do you want to pay for them to go to Community College, or do you just want to be able to pay for books, or room and board? It’s also important to put your retirement goals ahead of your children's college savings goals because if you focus on college savings before retirement you do it at the risk of not having enough money saved for their own retirement. You can get student loans for college. You can’t get loans for retirement.
Dave Ramsey’s purpose with this step is to help you set up your children’s wealth so that they don’t come out of college with a lot of debt. This is admirable, but it can still work for your kids to get loans or find other ways to pay for college. Most of us probably paid for our own education so it’s something to consider. You shouldn’t be helping out your children at the cost of not having a retirement for yourself. They will appreciate you more if you’ve taken care of yourself and they don’t have to take care of you when you’re older.
Baby Step Six: Pay Off Your Home Early
Some people look at this step and wonder if they should stop saving and just get the house paid off. The thought of not having a house payment is tempting, but you should never take this step without consulting an experienced financial advisor who is looking at the big picture and considering all your goals.
I have a client who has some mutual funds they received and considered using them to pay off the last $50,000 on his mortgage. But doing that would involve a significant tax cost. So I’m helping him structure it so that we minimize the tax hit. We are actually encouraging him to wait a little bit on paying off the house so that the taxes are not as high. He could pay off that $50,000 payment but it might actually cost him a total of $80,000 to do it because of the taxes involved in that process.
Paying off your home could be the last of that rolling snowball effect. Imagine if that $1000 mortgage payment you now have is gone and you have that money available to use for whatever you like. Of course, that sounds great, but we want to make sure you do it in a way that’s beneficial to you.
Baby Step Seven: Build Wealth and Give
When baby step seven is your main focus it feels like you have arrived! And at this step there is little general advice that is going to be helpful. This is the time to rev the engine of your financial plan which also means more complexity is in the mix. Should you max out your retirement accounts? Where do you find the most tax-efficient options?
I’ve met a lot of people—especially the baby boomer generation—who are all about saving money and they don’t know how to spend their money. They start saving up money, they retire, and now they want the lifestyle their beans and rice diet has been promising them. What many fail to do is determine how much money they actually need to hit their lifestyle goal or how much money they will have to give to charities and grandchildren. The management of wealth is many times more difficult than the building of wealth.
The giving part can be really important to some people. Dave Ramsey talks about leaving a legacy and helping others. There are also tax benefits for giving to charity. Even with giving it’s important to consider tax implications as well as your goals and long-term giving strategies. You can set up some sort of fund that you could pass on to your children, such as a charitable family fund. A lot of parents like to do that and spend some time with their families, researching charities and participating in helping these charities in addition to giving them assets. There’s a whole family strategy you can do where you teach your kids about money while giving to charity. Or if you have a lot of stock you could be donating that stock to charity and really lighten your tax burden.
Your Next Action Item:
1. Meet with an experienced financial advisor. If you have yet to take the step to call us and set up an appointment with a certified financial advisor it is very likely you won't be hitting your goals as soon as you would like. There is so much to consider and no blog article or general advice online will be good enough to help you hit your goals. We look forward to your call!