Managing Money God’s Way

Last time we looked at Baby Step 4, investing 15% of your gross income into Roth IRAs and other pre-tax retirement accounts.  Before we dive head first into step 5, here is a review of the Baby Steps we have covered so far:

Dave Ramsey’s 7 Baby Steps

• Step 1:  Emergency Fund – When It Rains It Pours
• Step 2:  Pay Off All Debt Using The Debt Snowball Method
• Step 3:  3-6 Months Of Expenses In Savings
• Step 4:  Invest 15% of household income into Roth IRAs and pre-tax retirement

Baby Step 5:  College Fund For Your Children

Now that you have your debt paid off, and saving 15% towards your retirement, it is time to start thinking about saving some money for your children’s education.  You should only start this step AFTER completing steps 1-4.  Here are some options for saving for that college education.

• Education Savings Account (ESA):  With this you can save $2,000 (after tax) per year, per child that will grow tax free!  Money must be used for education purposes only, otherwise a 10% penalty and taxes will apply.  Money must be used or rolled over to a qualifying family member by age 30 or a 10% penalty and taxes will apply.
• 529 Plan:  If you do not meet income limits for an ESA, or if you want to put additional money aside, you can use a 529 plan.  With this plan you can save up to $12,000 per year, per child.  The money must be used for higher education only, otherwise a 10% penalty and taxes will apply to the gains.  Many states offer a 529 plan, and you do not necessarily need to live in that state to use their 529 plan.
• UTMA/UGMA Plans:  This stands for Uniform Transfer (Gift) to Minors Act.  According to Dave, this one is not as good as the ESA or 529 plans.

Dave also notes several ways he would NEVER use to fund a college education.  These include:

• Insurance
• Savings Bonds
• Pre-paid college tuition
• Zero-coupon bonds.

Why Complete Steps 1-4 Before Funding College For My Children

Many people will disagree with this being step 5, and that you should only start this step after completing steps 1-4, but listen to the logic behind this.

Your kids can always help pay for their own college education or get scholarships, grants or loans.  But if you don’t pay off your debt and start saving for retirement, you might not be able to catch back up.  It is better to get your own financial house in order first.

Personally, I think that even if you are able to pay for your child(s) education, it is still a good idea to have them participate in paying for their own schooling.

What is your opinion of paying for your kid’s college?  Are you saving for their college funds now?  Should they even go to college?