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Budgeting Step Six: College Savings Plans and Retirement Accounts
What kind of progress are you making in your family’s budgeting? Step six looks at having a college savings plan and retirement accounts in place. I realize that you may be coming at this from more of a mid-life place than a young adult place, and for those of you who have decided to do something to change your family’s financial future, and you feel like you are getting on board late, let me just encourage you. It’s never too late. With passion and determination, you can make changes now that will give your family’s financial situation a complete do-over.
:: Learn more about Budgeting and Saving Money on Faithful Provisions!
A College Savings Plan
With the rising costs of tuition, most young parents would do well to begin a college savings plan immediately. Unfortunately, when my husband and I had to cut back on our finances, our college savings plan was one of the first things to go. As we looked at our personal situation, our number one priority was to get out of debt. We felt like it was more wise to get our initial, $1000 emergency fund in place, then fund our retirement, and then begin saving for the kids’ education.
Here’s the good news: Once you are out of debt, you can then save at a faster rate, stashing more money into your children’s college savings plans. The money that you were spending on credit card payments can now go directly into savings. So you can, in effect, make up for lost time pretty quickly.
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There are two main ways to pile up money in your child’s college savings fund:
- 529 College Savings Plan: The 529 college savings plan is the route we chose. I have a 529 for each child. With a 529, the money must be used for college. If need be, it does allow for the money to be transferred to another beneficiary within the family to use (for college). If your children were to be fortunate enough to get a full scholarship and not need the money, you can use it to further any type of education for ANYONE in your family!
- Education Savings Accounts (ESA): A Coverdell Education Savings Account (ESA) is an account created as an incentive to help parents and students save for education expenses.
:: Learn more about ESA’s HERE.
Did you know that the Bible tells us to save money for our children to have an inheritance? I have found that the Bible is full of sound financial principles that will help us through life.
“A good man leaves an inheritance for his children’s children…” (Proverbs 13:22)
Retirement Planning
Here are 3 things you can do in order to begin your retirement planning and get yourself on the road to retirement savings.
1. Pay off your debt: I consider debt to be everything but your mortgage. It is important to pay down your debt first, before you consider a retirement plant. You are paying more in interest on your unpaid debt than you will even earn on a 401K!
2. Have an Emergency Fund: Make sure you have an emergency fund in place, before you start contributing to your retirement accounts. If you have a retirement account, and have to dip into it, you will access more fees than if you just pulled it from a savings fund. Most financial advisors recommend setting aside at least $1000 into a savings account. A single person can probably do a savings account of $500 – $750.
3. Save 15% to put into a 401(k) or a Roth IRA: Most companies “match” up to a certain percentage, so be sure to at least hit that even if you can’t hit the 15%. Anything your company matches is free money for you. If you company doesn’t offer a 401(k), you should look into contributing into a Roth IRA. What makes a Roth IRA so great is that the interest and distributions on it are tax-free!
:: Go here to learn more about Roth IRA’s.
ACTION STEP: Do you know what your workplace offers in the way of retirement plans? Check with the human resources division at your place of business and don’t be shy about asking questions. If you are currently paying off debt, begin investigating different college savings plans so that you’ll know what you want to do when you are ready to begin funding one.
Ready to move on? Let’s take a look at Step Seven: Insurance and Living Wills.
Tell us a little bit about your tips and successes with your retirement and/or college planning. I look forward to hearing from you!