TOP IT OFF

      This step is a big one, but you should know that it is equally rewarding as it is challenging. Do you remember reading “Without a Paddle”? This was where we needed to save our first $1,000 into a savings account for problems we would have while we were attacking our debt. Well, now it’s time to Top it off.

But first, let’s recap what we should have completed at this point.

1. Current on all bills
2. We have a budget 
3. $1,000 for a rainy day
4. Paid off all consumer debt (excluding mortgage)
5. Have life insurance policy
6. Contributing to retirement 
7. College funds (optional)

          We naturally associate saving, and budgeting with sacrifice or giving something up. I want you to think about this, instead of seeing it as a negative, view it as a positive. I will tell you that the small things you sacrifice now (latest cell phone, your 7th pair of new shoes or maybe a new fridge, just because the old one doesn’t match the kitchen) are so temporary compared to the benefits of completing this step. I am going to list just 3 benefits that this step can provide, review them and really think about them because they’re going to make those “things” we gave up seem very unimportant.

What are those 3 benefits that this step can provide?

1. Increase (family) stability
2. Reduced pressure at work
3. Improved marriage (relationship)
   1.     

     Weird... none of these benefits have anything to do with money, or buying things but instead reducing stress and improving relationships. So, after reading just those 3 things, maybe we can start skipping the wants so we can start meeting the needs. Stop buying stuff you want at the moment to change your day, and start taking steps to change your life. This won’t make life more predictable, but it will make it more manageable.

What do we do?

     We need to get 3-6 months of expenses into a savings account. This can easily be combined with the initial $1,000 fund to create a good start. Remember, this account works just the same as our $1,000 fund because it is for emergencies ONLY. The purpose is to be able to sustain our household in the event of a major unexpected expense or a substantial loss of income. I would recommend a set-it and forget-it system. Determine your amount (simply look at your budget and multiply the “total expenses” by 3, or 6), establish reoccurring deposits to that account and top it off! When you determine your number, that 6-month amount is going to seem like a lot at first. But, what you will find is that as you approach the 3-month amount, 6 months won’t seem like a big deal.

Steps:
1. Determine the number (3-6 months of expenses)
2. Set-it and forget-it (reoccurring deposits)
3. Top It Off… change your life

How would you feel with $6,000 or $12,000 in an account just in case something goes wrong? It will give you peace and freedom to live and enjoy life. The reason many of us are stressed in our day-to-day is that everyone else has control over our security.

Make it or break it mentality:
“If I lose my job, we will lose the house and have nothing… how are we going to tell the kids?”

Fat & Broke mentality:
“If I lose my job, nothing changes… We keep our home, we can pay all our bills, our children will be secure and I will find another job”

So let’s Top it off, and take back the power of our own lives.

Scholarship of Mom & Dad

          When I started attending my local community college to continue my education, my parent didn’t have much money to help. I can remember working a part-time at Autozone to make some money to pay for my books each semester and borrowing student loans to cover my tuition. It was tough, but it taught me how to work hard and pay my own way. I do have a desire now that I have children of my own to help pay for their education. I don’t think we will have enough to fully fund everything they need, but it will be a decent amount to help. I’m actually thinking that maybe a balance between the parents and the child paying for college may be the best way. I know that most of us want to be able to give our kids some money for school. Well, if they were starting today would you be able to give them $30,000 to get started? Do you think you will have that money lying around in 10, 15, or 18 years to give to them when they start school? It’s not likely that we will if we keep doing things as we usually do.

At this point, if you have been following the previous posts, you are working on getting rid of debt, starting retirement etc. I want you to know that before starting this step, you need to make sure that you have completed all the steps before this one. We absolutely need to be financially stable before we start setting up college funds for our kids. We want to set them up for success so they can enjoy life, not to pay for our lives because we are broke during retirement. Let’s make sure we establish our financial future so our college graduates can enjoy theirs.

So, what options do we have for funding our children’s college? Well, there are several, I personally use the college advantage 529 plan for my boys.

So I have compiled a very simple list of a few options we have, and their key points.

The college fund operates much like a 401k or Roth in regards to opening an account, selecting investments an allowing time to make us some money. Investing as little as $25 per week, earning 8% annually until they reach 18 can become $48,000 towards college.

529 Plan (Recommended)

• All contributions & earnings can be used tax-free (if used towards education)
• Contributions are tax deductible (up to a certain amount per your state)
• What if my kid doesn’t go to college, what happens to all that money??
• Can be moved to another sibling, or parent continuing their education
• Unqualified withdraw - earnings will be subject to taxes, incur a 10% penalty and account holder must return tax deductions
• Limited investment options (preset funds only, NO individual stocks, bonds etc.)
• Fund election changes must wait 12 months 

Prepaid Plans

• Pay for schooling in advance
• Similar advantages of the 529 Plan
• Because you are paying ahead, the tuition is more expensive than it would be if you were attending at the time you set up the account. 
• Must be purchased several years prior to enrollment
• Can be transferred or refunded if child elects to attend a different school

Coverdells

• All contributions & earnings can be used tax-free (if used towards education)
• Unqualified withdraw - earnings will be subject to taxes and incur a 10% penalty 
• Limited contributions (Max contribution $2,000 per child, per year)
• Beneficiary must be under 18 years of age

Roth IRA

• $5,500 per year max (under 50 years old)
• Earnings grow tax-free (post-tax contributions)
• Doubles as a retirement asset, if the child does not use for college
• No penalty for withdraws for qualified educational expenses
• Not treated as income for dependent (more financial aid)

Custodial Account

• Money is in a trust for minor
• Manage account until the child is 18, or 21 years old
• Child receives money for anything (not just educational expenses)
• Earnings are taxed annually 
• Can’t be transferred to another beneficiary 

Life Insurance 

• (cash value as college savings) I have heard this mentioned before…NO.
• I don’t think this one is even worth considering

           I have had several people ask about college savings, so I wanted to compile a simple list of account types. I hope this helps provide a brief overview of what is available. I did not cover every detail about all the options, but this should help point you in the direction of the option that best meets your needs. Now let’s get proactive and start saving a little now, to help give our kids a big head start towards their education.

Butterfly Effect

          What would you like to do when you retire? Travel, own a vacation home, or maybe spending your new found free time volunteering for a cause you’re passionate about. Most of us don’t have a desire to work until we are 75 years old just so we can afford to keep paying our bills. I have always felt that the priority of retirement becomes important at the worst time. In a perfect world, everyone would be starting an employer retirement plan at 21 years old and not stop contributing to it until they are ready to retire. The reality is, at 21 most of us are not making much money, spending what we have on going out on the weekends, paying our rent, or maybe going back to school. We typically have little to no savings, and because retirement is 45 years away our mentality is “we don’t need to worry about it right now”.

The truth is that starting as soon as possible is the best money making strategy for retirement. Saving for retirement doesn’t have to be this intimidating task that we don’t have money for. You have to change your thinking from “I can’t afford to do that right now”, to the truth… “I can’t afford NOT to do this Right Now!” This won’t be as hard as it seems, just takes a little discipline. Saving for retirement is a perfect example of less now, more later.

The butterfly effect is defined as the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state.

Starting with a small change can make a huge impact over time. There is no get-rich-quick system for the average person. For the majority of us, there probably isn’t some major inheritance that we’re going to receive. So, that leaves us with one option. We have to start saving money now and allow time to create wealth. There are several different options for starting a retirement account, I will be just covering the employer offered 401k retirement account. It’s like a magic trick, we can turn $15/day into $1,000,000 in 35 years with 8% annual interest.

401K

The 401K is simply an option to defer a percentage of your income into an investment account. The amount of money you choose to elect for contribution is removed prior to taxation. This is a good thing because if the employee chooses to contribute 5%, then it’s a true 5% of the income. This allows for the principle to grow faster and sooner than if we were contributing that same 5% with taxes taken out. Typical 401K accounts have a limited selection of mutual funds (an investment with a variety of stocks in its portfolio).

WHATS MY NUMBER?

Many of us have seen the commercials for the investment companies talking about “your number”. I want to bring up the most important thing to decide your number. That thing is expenses and debts that you may have at retirement. The plan is for most of us to be debt free by that point. There are several different suggestions out there about 70%, 80% of your income for retirement. These are great for those of us that will have minimal expenses, or be debt-free, but not so much if we are still carrying as many expenses or more at retirement. So using those 70-80% ranges will be fine, but maintain that debt-free mentality.

ELECTIONS

The first step is setting the percentage of pay that you want to defer to your 401K. I recommend that the absolute minimum is no less than the employer match. The end game for percentage saved towards retirement in total is 15% but for now no less than the percentage you employer matches, this is FREE MONEY. Most employers will match retirement contributions up to a certain amount. Once you have set up a 401K you will need to select the investments that you want your contributions to purchase. The simplest one to choose as a set-it and forget-it option is a target date fund. The fund typically is listed as “2040-Fund, 2045-Fund, 2050-Fund” etc. These are great for someone with no investing experience because they are self-adjusting. The target date fund will start with more aggressive investments when you are farther from the date, and as you approach retirement then the fund will begin shifting towards more conservative options to protect your principle.

FOCUS

 

Don’t think too much about savings hundreds of dollars out of each check, this isn’t a race, it’s a marathon. All you’re focused on is getting started. Get in contact with your Human resources department to get the paperwork and contribute what you can. This is a small adjustment now that will take a couple pay-cycles to get used to. The impact on your future is so much bigger than the few percent a week that you sacrifice now. The amazing thing about investing is the difference

between the amount we actually contribute and the amount, we have in the end. Compound interest is the secret because over the years we are earning interest, then that interest begins earning interest. In the example shown, the actual contributions we make only add up to $190,000. Notice the interest earned is actually 4 times that of the contributed amount at $800,000. This is why it’s so important to start now because each day we wait is costing us money. 

You don’t need all the answers, you just need to start investing towards a stable financial future.

Paycheck Insurance

         Okay, so you are paying off your debt or maybe you’re done. This next step doesn’t apply to everyone and it’s not a fun one to think about, but it’s critical if you have people that depend on you. Most of us either have a spouse, children or others that are counting on us to be a provider. It’s likely that you have insurance on your home, car, and sometimes people will even purchase that 2-year plan of additional coverage for a new cell phone. That’s great to have, but how about your paycheck? If you crash your car, replace it. House burns down, replace it, but if you are gone… so is the income that your family needs and depends on. We need to have life insurance to protect those that we care about most. It doesn’t change the difficulty in losing a loved one for them, but it means that even though we are gone we can still provide as if we’re still around.
          Life insurance is as simple as it sounds. It is an insurance policy that pays out a benefit in the event that the policyholder has passed away. There are several types of life insurance including term, whole, and universal. Below I will explain each one, and provide my recommendation.

Whole Life

This is a “permanent” life insurance policy that offers protection for life with no expiration. Because whole life has no expiration, the payout is guaranteed to the beneficiary of the Policy Holder. Whole life also builds cash value that can be borrowed against, as long as all Premiums are paid on time. Premiums are typically the same amount for the duration of the policy. This is an expensive option because each policy pays its Benefit amount, and has the “cash value” option.

Universal Life

Universal operates very similarly to whole life as a “permanent” life insurance option. This policy also builds cash value, the payout is guaranteed, and has no expiration. The main difference is that universal life offers flexibility in premiums, and coverage as the policyholder's circumstances change.

Term Life (Recommended)

This policy type is typically the most affordable, and simplest to understand. Term life insurance works by selecting a preset amount of coverage time (term). These are often offered in 10, 20, and 30-year terms and the policy terminates at maturity. The premiums are affordable because these are designed to protect an unexpected early death.

          Everyone's circumstances are different so choose the policy that best fits your individual needs. My recommendation for most of us is a lower cost term life policy. The reason I suggest term life is because we are on a better financial path, making good decisions that position us to save money. We are not going to carry debt, we will have money in savings, and investments that will build as the years go by. Our children will grow and eventually have jobs of their own, and their own income. So I don’t think that we need to pay an expensive premium until we are 80 years old. Depending on your situation, get a term policy that will cover things for 20, 30 years. The premium will be affordable, and if you die after the policy expires you will have enough money in savings and retirement by that point to help your loved ones. This is more than a policy for a car or boat, so make sure you have the most important insurance policy you will ever buy, Life insurance.