baby steps

How Effective Are The Dave Ramsey Baby Steps?

October 9, 2018 By Amanda Stewart 1 Comment

Dave Ramsey has been someone people looked to for financial advice for years. In fact, more than 4.5 million people have participated in his Financial Peace University. This program outlines steps to becoming financially free, but how effective are the Dave Ramsey baby steps?

What Are The Dave Ramsey Baby Steps?

Before jumping into how effective they are, you should know there are seven baby steps. Each requires you to take a good look at your finances and helps you map out your way to financial freedom. Here they are …

1. Create a $1,000 Emergency Fund

As with most financial programs, you need to establish an emergency fund before doing anything else. This will keep you from going into more debt when something unexpected happens. Because of this, it is Dave Ramsey’s first baby step.

2. Pay Off All Debt Using the Snowball Method

Depending on how much debt you have, this may seem daunting. Any extra cash you have left over at the end of the month should go towards paying off your debt. Ramsey even goes as far as to say you shouldn’t eat out, don’t do anything entertainment wise that isn’t free, until your debt is paid in full.

3. Get 3 to 6 Months of Expenses in Savings

After you’ve paid off all your debt, you’ll be surprised at how quickly you’re able to save even more cash. Then you can pad your emergency savings with a bit of extra cash. Ramsey generally recommends up to six months of expenses in a savings account. This will help in the event that you or someone in your household find themselves out of work for an extended period of time.

4. Invest 15% of Household Income Into Roth IRAs and Pre-Tax Retirement

Once your savings are up to par, it is time to invest in yourself and your retirement. As a general rule of thumb, Ramsey recommends putting 15% of your household income towards your retirement accounts.

5. Start a College Fund for Your Children

If you have kids, once you’ve started to invest in your retirement, you can begin saving for their future. There is no recommended monthly or annual amount you should put towards this. It is up to your own discretion. However, you do want to keep in mind, if you can prevent your children from holding a ton of student loan debt, you should.

6. Pay Your Home Off Early

Now that your child’s college fund has been padded, you can look to paying off your mortgage early. And, if you don’t have children, this would be the next thing to tackle. You could save yourself thousands of dollars by paying your home off early. Not to mention, it will get rid of the last bit of debt you owe.

7. Build Wealth and Give

So, now you’ve paid off all your debt, accrued savings, paid off your mortgage, and invested in yourself. What do you do now? Ramsey recommends continuing step number four and max out your contributions to retirement accounts each year. You can also look for new things to invest in and build wealth.

Lastly, Ramsey is a huge believer in donating money if you are well off. Find a good organization you’d like to donate to or give to your church. Not only are these donations tax-deductible but they will make you feel great. In fact, Ramsey says it is one of the most rewarding things about being debt free.

How Effective is the Program?

The program has proven to be extremely effective for many people. In fact, there are numerous testimonials on Dave Ramsey’s website about how many families this has helped. One family gave credit to Ramsey’s Baby Steps for helping them paying off $162,000 of debt in just seven years.

Those who have followed the program closely have seen great success, proving Dave Ramsey’s Baby Steps. So, how do you get access to the program and become financially successful like these folks?

Getting Access to the Baby Steps

As previously mentioned, these baby steps are part of Ramsey’s Financial Peace University course. The program is nine weeks long. It walks you through each baby step and how to put them to work in your own life. It generally costs about $129. Occasionally, you can find it on sale. So, if you are interested in starting the program, check Ramsey’s site regularly.

If you’re looking for a cheaper way to get access to Ramsey’s baby steps, you can also look into purchasing his best-selling book The Total Money Makeover. The book shares inspiring stories of others who have become financially free by following the Dave Ramsey Baby Steps.

Lastly, you can also sign up on Dave’s site for a seven-day email series that provides tips on how to work the Baby Steps faster. The email series is 100% free.

All in all, Dave Ramsey has been able to help millions of people climb out of debt and get back on top of their lives financially.

Have you taken the nine-week Financial Peace University course or otherwise followed Ramsey’s Baby Steps? Did you have success with the program?

The 52 Week Mini Money Challenge

January 7, 2014 By Jeffrey Strain 4 Comments

For those who are on a tight budget, or who are learning to save money for the very first time, you may want to skip the standard 52 week money challenge and instead opt for the mini half version (You may also want to check out the 365 day money challenge which saves a similar amount, but is done on a daily basis beginning with a penny.). The concept is exactly the same. Each week you save a designated amount that corresponds to that week, but instead of beginning week one with $1, the mini challenge cuts that amount in half so that the first week only $0.50 should be saved. Then an additional $0.50 is added for each week of the year. In week two, $1 needs to be saved, in week three, $1.50. This continues until week fifty-two when $26 needs to be saved. At the end of the year, you will have $689 in your account following the mini half challenge:

52 Week Mini Challenge (click on image to print)

While this challenge only saves half the amount of the original challenge, the amount isn’t the main point of the challenge. For those who are living paycheck to paycheck, the most important thing is to begin saving something. Even a small amount is better than nothing at all. It’s the process of getting in the habit of saving on a regular basis that’s important. Once that habit becomes established, you’re in a position to save as much as you want. You can move onto the regular challenge or even try a double challenge. The first step is establishing the habit so that any amount desired can be saved in the future.

The one drawback following the above steps is that the largest amounts need to be saved at the end of the year when budgets are often at their tightest due to all the holiday activity. Even when doing a mini-challenge like this, the increased amounts at the end have the potential to be an obstacle that makes some people decide to quit. With that in mind, we have put together an alternate version which allows you to do the challenge with more flexibility during the year.

52 Week Mini Half Alternate (click on image to print)

52WeekMiniMoneyChallengeEditableWithBlueChart

With this version, you decide how much to deposit into your account each week. When things are good, you can knock off the higher amounts, and when things get tight, you can opt for a lower amount. While you should always shoot to put away the highest amount listed on the chart, if you aren’t able to reach it for some reason one week, you can still cross off the amount you did save and continue on with the challenge. In the end, you save the exact same $689, you just do it in a way that fits your lifestyle rather than trying to adjust your lifestyle to the chart.

As with all of the 52 week challenge variations and options, the most important aspect is choosing the one that best fits you and your lifestyle. By choosing the one you have the most confidence in completing, you have a much better chance of success. And as mentioned earlier, the first time doing this isn’t so much about the actual amount saved, but that you get the savings process started. Below you’ll find some more challenge options that are worth investigating and considering as well.

365 Days
52 Week Standard
52 Week Variation
52 Week Make Money
52 Week Kids
26 Bi-Weekly
24 Bi-Monthly
12 Monthly

Zero Effort Money Saving Hacks

Money challenges aren’t for everyone. You may be looking for a more hands-off approach to saving. For people that want saving to be effortless, there are smartphone apps like digit.co. Digit analyzes your account balances and automatically withdrawals small amounts of cash and places it into savings for you. Check it out at digit.co.

25 Ways to Discover and Reach Your Financial Goals

October 9, 2013 By Guest Writer 1 Comment

By Kimberly Foss, CFP, FCWA, and author of Wealthy by Design: A Five Step Plan for Financial Security.

A friend of mine recently shared the story of an unsettling trip to the supermarket. Her husband was out of town and their three kids were off in different directions for the summer evening. They’d just returned from vacation, so the kitchen was bare. She went to the neighborhood grocery store, figuring to pick up something to prepare for herself for dinner and leave the major fill-the-fridge shopping trip for the next day. She found herself wandering the aisles, unsure of what to buy. What she realized in the grocery store was that normally she’s so focused on buying what her husband and children like to eat, that it was initially difficult to shop for her own dinner.

I see that a lot when I meet with clients to discuss their financial goals. Folks get so locked into their day-to-day financial responsibilities and providing for their families that they fail to dream and set personal goals. In fact, the advice I would have offered to my friend to help her plan her meal is strikingly similar to how I counsel clients to help them set and achieve financial goals. You start by thinking about what you what you enjoy, factor in what’s healthy (watch out for market risk) and make sure that you put a well-balanced meal (a diversified portfolio) on the table. More specifically, I encourage my clients to:

List your goals

In our first meeting, I ask clients about their dreams and prefer that they not preface a goal with a disclaimer like, “I know I’ll never be able to afford this, but…” It’s important to dream – and to write those dreams down! In fact, studies show people make greater progress toward their goals when they take the time to record them. I can only imagine that actually discussing one’s goals increases the chances of success.

Pen an investment plan

It’s also beneficial to put your investment goals, asset allocation, and the risk you are comfortable shouldering in writing. That way, if the market takes a nose dive, you have a long-term plan that can provide the assurance you need to stay the course you’ve set for yourself.

Separate needs from wants

Prioritizing spending involves a give and take between needs and wants. It’s easy to attack a budget and eliminate the true fluff – magazines you just recycle or the gym membership you haven’t used in a year. When your budget cutting gets more difficult, it can help to consider the expense in question in terms of the cost of one of your fixed expenses. For example, let’s say college costs you $40,000 a year and you are debating spending $4,000 on a vacation. Viewing those potential vacation funds as 10% of your college expenses can help you make up your mind whether your trip is a true need or a mere want.

Check in with your spouse

Do you talk with your spouse about your long-term goals? Surprisingly, a May 2011 study by Fidelity Investments found Baby Boomers, caught up in the day-to-day pressures of work and family, tend to avoid talking with their spouse about the future. If you fail to connect with your spouse on a routine basis, you may find yourself at odds about when to retire. In fact, 62% of respondents in the Fidelity study disagreed on the timing of their retirements.

Carefully consider risk

How much risk are you are willing to take in exchange for the potential to earn higher returns? Given that the recent market downturn moved risk out of the theoretical realm, you might feel like it’s time to dial down the risk in your portfolio. Or you could feel like you weathered the storm well and are ready to take on additional risk.

Improve your decision-making

Job one in making more rational decisions? Harness your emotional reactions to the ebb and flow of the markets. That means not being gripped by fear in a bear market or driven by greed in a bull market, but maintaining the poise necessary to make rational choices.

Understand that big decisions benefit from the big picture

If you’re debating a big step like buying a second home or retiring early, it’s important that you have a complete picture of your assets and liabilities. Frankly, many clients have rollover IRAs, other investment accounts or property that they do not pay their advisor to manage. That’s fine. But when it comes to major financial moves, it greatly behooves you to put all your cards on the table because there may be risks or opportunities you have not considered.

Make changes slowly

Just as a doctor would advise an inactive person to begin an exercise program slowly, you don’t want to make sweeping financial changes – no matter how good they’ll be for you – immediately. In fact, University of Chicago’s Professor Richard Thaler finds that we are more likely to accept the need to change our behavior when we plan to implement the change in the future. So, open your calendar and schedule a few of these tips. And remember, a series of small steps can equal a giant beneficial leap.

Spend time with your family and loved ones

After all, that’s where you get the motivation to dream – and the strength to make good decisions. Many people focus on the inheritance they will leave their children, without realizing that children most cherish memories of the time they shared with their parents. So think about embarking on a multi-generation vacation or plan a family reunion.

Stay current with an annual review

Your life can change significantly over the course of a year. Maybe you got married or divorced, had a child or grandchild, changed jobs or health plans, finished paying for college or started your own business, bought a second home or retired. Some of these changes could require that you adjust your investment plan.

There’s no doubt that working hard and finally achieving your goals enhances your ability to set and meet future goals. For that reason, any discussion on how to discover your goals requires guidance on how to reach your goals. Here are some tips I share with clients to ensure they cultivate their power to dream and continually set and achieve new goals.

Determine your net-worth

List all your assets and liabilities. You should repeat this exercise every year. It’s important to see your wealth accumulate, but it’s also gratifying to achieve some of your short-term goals.

Try to save at least 10 percent of your annual income

It all begins with your workplace’s retirement plan. If you’re lucky enough to work for a company that offers a matching contribution, make sure to contribute enough to qualify. That free money can really give your savings a boost.

Maximize your pretax savings

Contributing to a pretax savings plan like a 401(k) or 403(b) reduces the current year’s taxable income and delivers tax-deferred growth. If you receive a raise, consider increasing your contribution to your retirement savings plan. If you change jobs, rollover your 401(k). Don’t cash it out.

Diversify your assets

It’s a cliche, but here’s the most valuable piece of investment advice I know: “Don’t put all your eggs in one basket.” Your risk tolerance and your investment goals will determine how many baskets carry your eggs and how many eggs you put in each basket. However, by investing in domestic and international stocks, a variety of bonds, and cash – asset classes that react differently to market events – you structure a portfolio where, if one investment declines, others will rise, hopefully enough to offset the loss.

Keep your eye on the long-term

Successful investing requires patience and the ability to stomach market volatility. If you are saving for a retirement that’s decades in the future, it doesn’t make sense to check your portfolio every day, provided you’ve built it to last with a sensible diversified allocation. Also, overtrading your portfolio based on short-term market movements can result in excessive trading costs that can really diminish returns.

Routinely rebalance

Periodic rebalancing forces you to do the counter-intuitive – sell your winners and buy more of your losers. Interestingly, numerous studies have shown that individual investors tend to earn less than market returns because they hang on too long or sell too early. Sticking to a rebalancing schedule takes your emotions out of the trades.

See how far you can stretch your money

After you’ve funded your fixed expenses such as the mortgage, see just how frugal you can be. For one week out of the month, try an experiment: walk by Starbucks, pack your lunch, and stay in for a weekend movie night or pot luck dinner. You’ll be surprised how much you’ll save. And the extra cash in your pocket may motivate you to save more!

Take your credit card out of circulation

That’s right, leave it at home so you won’t be tempted. It’s this simple: If you can’t pay cash for it, you can’t afford it — no ifs, ands, or buts about it. Importantly, if you create an emergency fund of three to six months of living expenses invested in liquid accounts, you won’t need to pull out your credit card for an unexpected expense like a car or roof repair.

Review your progress

Think of the old trick of saving coins in a jar. Being able to see progress toward a savings goal can inspire you to save more. So, review your retirement and investment accounts regularly. You may even want to contact Social Security to get an estimate of your benefits so you can map out what your retirement income stream will look like.

Work with a fiduciary

Unlike the legal and medical professions that require specific degrees and extensive exams, anyone can call himself or herself an investment advisor. However, consumers often mistakenly assume that there are professional standards and that the advice they receive will always be in their best interests. In reality, only professionals registered as investment advisors with the Federal Securities and Exchange Commission (SEC) or comparable state regulators operate as fiduciaries under a legal obligation to put their clients’ interests first.

Calculate your entire net worth annually

In addition to checking your portfolio’s returns, include other assets such as legacy stocks and real estate in your review. This exercise gives you the perspective you need to make good investment decisions. It also minimizes the pressure you may feel for every investment in your portfolio to beat the market. That is, even if some investments under-perform, your real estate holdings may be up.

Update your insurance

Dig into your policies. The fine print matters. Homeowners insurance usually covers wind and fire damage, but you’ll need separate flood coverage if that’s a concern. Also, re-estimate the value of your household goods. Low policy limits may mean you need to insure your jewelry separately. Finally, look for opportunities to cut premiums by consolidating policies with one insurance company.

Check your credit report

Take the time to request a free credit report each year from Equifax, Experian, and TransUnion, the three main credit reporting companies. You can get the free report at AnnualCreditReport.com which is the official site set up by the Federal Trade Commission. Monitoring your credit report is a crucial step in protecting yourself from identity theft.

Disaster-proof your financial records

The recent Colorado floods should prompt us to ask: “Am I prepared to get out of my home quickly?” To that end, put copies of all your important papers including your will, passport, mortgage and financial statements, car titles, birth certificates, and other personal records in a bag that you can grab quickly. You’ll also want to include some cash and any necessary medications.

Consider your estate plan

The new $5 million exception has made trusts less essential, but estate planning is still important. Apart for your finances, it’s important to name a medical advocate, someone to make medical decisions in the event you can’t make them. Also, in addition to your will, prepare a letter of instruction to provide your family and executor with the location of assets and financial records as well as contact information for your professional advisors.

Working with a trusted advisor who is a fiduciary can help you to discover your goals and develop a flexible game plan to reach them. Your advisor also will help you to monitor your progress toward your goals and adjust your goals to reflect any changes in your life.

Kimberly Foss (CFP, CPWA) has spent 30 years helping people grow their wealth with solid investment advice. She currently runs Empyrion Wealth Management Inc. as the president and founder of the company. She also takes her wealth management advice and insights on the road as a popular speaker. Her new book, Wealthy by Design, is currently available for purchase.

Debt Reduction Diet: 10 Ways Debt Reduction Is Like Dieting

May 21, 2013 By Danielle Warchol 3 Comments

Dieting is probably not the first word that comes to mind when you think of debt reduction. However, when it comes to trying to reduce your debt, many of the steps you have to take are very similar to the steps you’d take when trying to reduce weight. Probably the most essential part to both is that to gain a healthy life with both, it requires a lifestyle change rather than a quick fix. Diets don’t work if there are only for a short period of time without making long-term fundamental changes in the way that you eat, and the same is true with debt reduction. Both require that you make changes to your current lifestyle to solve the issues and habits that have created the current situation.

Acknowledging That There is a Problem

Perhaps the best similarity between debt reduction and dieting is that you have to acknowledge that there’s a problem. Just as it’s easy to ignore poor eating habits, it’s very easy to ignore money problems. You might not want to believe that your debt keeps piling up or that you have no way to pay it all off. If you’re serious about trying to reduce your debt, the first step you need to take is acknowledging that you do have a problem that needs to be fixed.

Figuring Out the Exact Problem

The next step you need to take is figuring out the exact problem. Where is your debt coming from? Why can’t you pay it off? What is causing your inability to reduce your debt? Is it a lack of income or poor spending habits? Once you figure out the exact problem, you can then search for a solution.

Prioritize

Whenever you want to reduce your debt or start a diet, an important step is prioritizing your goals. Setting realistic goals should be your first priority. For instance, if you have multiple layers of debt, you might want to prioritize reducing one area of debt before another. If you have trouble saving money or deciding how to allocate debt reduction payments, you might need to prioritize money saving and spending habits before you can start actually paying off your debt.

Create aWweekly or Monthly Plan

Once you figure out what your problem is and how you would like to prioritize it, it’s a good idea to start small and create a weekly or monthly reduction plan instead of creating an overarching plan. As with dieting, it’s easy to think of the long term benefits rather than short term goals. However, it will be easier and more feasible for you to start your reduction plan on a small week by week scale rather than a larger scale.

Take Action

After you acknowledge, pinpoint, and prioritize your problem, the next step is taking action. Acknowledging and prioritizing your debt reduction plan is great, but the real importance is actually putting that plan into motion. You can plan things out all you want, but that plan becomes meaningless if you don’t actually do anything. Many people find that taking that first step to start their diets is difficult, so it makes sense that taking that first step to reduce your debt might also be difficult. But it’s a necessary step to take.

Trim the Excess

Trimming the excess is a great way to reduce your debt, just as it’s one of the steps people on diets are urged to take. When it comes to debt reduction, trimming the excess means reassessing your spending habits and cutting unneeded expenses. For example, you may be spending too much money eating out each week. That spending habit should be trimmed or pared down so that you can use the money to pay down your debt.

Track Your Habits

A good way to make sure you’re keeping up with your reduction plan is by keeping track of your spending, debt level, and payments toward reducing your debt. Tracking your habits will help you see how well (or poorly) you’re doing. Sometimes, making note of everything you’ve done is a great way to help yourself keep your plan moving.

Reduce a Little at a Time

When someone starts dieting, they generally start slowly. They might start eating smaller portions or cutting out one or two foods or even exercising for a little but each day until they eventually extend the amount they exercise or decide to cut out additional foods. Reducing your debt is similar. You should reduce a little at a time instead of trying to cut out a chunk all at once. It’s easier to stay with your reduction plan if you chip at it slowly instead of doing one lump payment one month and then nothing again for another few months.

Don’t Deprive Yourself

One of the most important things to keep in mind when reducing your debt is not to deprive yourself! When you diet, you don’t want to starve yourself and when you try and reduce your debt, you don’t want to cut yourself off from your bank account. It’s good to take things step by step and put a little towards your debt instead of throwing all your savings towards paying your debt down. You’ll still need that money for other bills, necessities, and potential emergencies.

Maintain Your Reduction Plan

Of course, after you start reducing your debt you need to make sure that you stick to your plan. It’s easy to commit to paying off debt for a month or two, but it’s also easy to get behind in your payments. Sticking with your plan to pay down your debt is definitely something you should push yourself to do.

(Photo courtesy of Alan Cleaver)

10 Legitimate Reasons Not to Get Your Finances in Order

March 24, 2013 By Jeffrey Strain 3 Comments

When it comes to putting in the time and effort to get personal finances in order, I have heard a lot of supposedly good reasons why people haven’t started. There is no doubt that there are a lot of sacrifices that need to be made and it’s not an easy process for many. That being said, here are the top 10 legitimate reasons I’ve heard for not getting one’s finances in order:

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

The truth is that if you think you have a legitimate reason for working on getting your finances in better shape, your “legitimate reason” is likely nothing more than an excuse. While that excuse may make you feel better not taking the needed steps, in the end it’s nothing more than an excuse. Nobody said it was going to be easy, but that doesn’t mean is shouldn’t be done. If you haven’t started, today is the day to begin.

On a side note, if you came to this post due to the title with the hope of finding a legitimate reason not to get your finances in order, it’s a pretty telling sign that you know that you really should be…

Dave Ramsey Financial Peace University Review: Week 10

April 22, 2010 By Maggie Ellis 2 Comments

This week we moved on to Baby Steps Four and Five, which are saving for retirement and saving for your kids’ college education. Baby step four was on deck first, which is to save 15% of your household income in tax-advantaged plans. Dave points out that, at the time this class was filmed, 53% of all workers had less than $25,000 in retirement vehicles. Further, when asked how they plan for retirement, 44% said that they guess at the amount they’ll need and the investment products to use. Those are some scary numbers. Most people figure retirement’s too far away or they’re too busy living for today that they “forget” to take care of their future. Big mistake. Since pensions are almost a thing of the past and Social Security cannot be counted on, most of these people are going to have a hard time making ends meet in retirement.

Dave spends the first part of the lesson discussing the most popular retirement products, including the 401(k), IRA, SEPP, and other speciality plans like 403(b)’s and 457’s. The most commonly used are the 401(k) and the IRA (and it’s cousin, the Roth IRA). The point of any of these plans is to use tax-favored money to save for your retirement. You’re either putting in pre-tax money and allowing it to grow tax free (IRA, 401(k)), or you’re using post-tax dollars that will grow tax free and not be taxed when you withdraw the money (Roth IRA).

Dave strongly advocates for the Roth IRA. In a Roth IRA, you invest after-tax money but your earnings grow tax free and you are not taxed on any withdrawals when you retire. There’s also a little more flexibility with a Roth in terms of early withdrawals without penalty. Dave argues that you have more investment choices with a Roth, also. That’s probably true when compared to a 401(k) that offers only a few funds, but you can open a traditional IRA at any brokerage and have access to thousands of funds and stocks, just like with a Roth. The ability to withdraw money tax free after you retire is the big draw. If you’ve saved a lot of money, you’ll likely be in a higher tax bracket when you retire since most of your deductions will be gone and you may be pulling in more per year than you did when you were employed. If that’s the case, tax free withdrawals are great news.

Related Articles

Dave Ramsey Financial Peace University: Week One

Dave Ramsey Financial Peace University: Week Two

Dave Ramsey Financial Peace University: Week Three

Dave Ramsey Financial Peace University: Week Four

Dave Ramsey Financial Peace University: Week Five

Dave Ramsey Financial Peace University: Week Six

Dave Ramsey Financial Peace University: Week Seven

Dave Ramsey Financial Peace University: Week Eight

Dave Ramsey Financial Peace University: Week Nine

Dave Ramsey Financial Peace University: Week Ten

I have nothing against the Roth, but I don’t believe in it as strongly as Dave does. I just cannot imagine that in the thirty years I have until retirement that the government will not find some way to tax those withdrawals. I cannot see them letting that large pool of money remain untouched. I think it will be at a low rate, but I think it will be taxed. There was a time when Social Security earnings were tax free and that is no longer the case, so the government has proven to go back on its promises. I prefer to hedge my bets and use a regular IRA. Yes, I’ll have to pay taxes when I withdraw the money, but at least for now I’m able to reduce my taxable income each year. Since I hover right on the brink of a higher bracket, that reduction in taxes now is worth more to me than a promise that might not be honored by the time I’m retirement age. You might consider using both types of IRA’s and taking some deductions now, while hoping for tax free withdrawals later.

After discussing the types of retirement plans, Dave offers a reminder to roll your retirement money directly into another qualified plan if you leave your job. Never touch that money or you’ll have to pay taxes and penalties on it. You want it to roll seamlessly into another plan. He also counsels us to never borrow against retirement money. Not only do you lose out on the compound interest, but any loans must be repaid within 60 days of leaving your job. If you can’t repay it, you’ll be taxed and penalized on that money.

As far as what to do with the 15% of your income that you’re saving, Dave suggests this order:

1. Fund your 401(k) or other work plan up to the amount that your company will match.

2. Above the matched amount, or if the company does not match at all, fund Roth IRA’s up to the amount you’re allowed by the tax code.

3. If you still haven’t hit 15% of your income yet, go back and put the remainder into your employer’s plan.

His plan isn’t a bad one. It gives you a good distribution of your assets in plans that use both pre- and post-tax dollars and which have different tax structures for the withdrawals. If you don’t have a plan at work, I would suggest putting some money into a regular IRA and some into a Roth. That way you get the same type of tax structure.

Dave then moves on to saving for college. This part of the lesson is very short. He advocates using an Education Savings Account (ESA which is like an IRA for education. You invest pre-tax money into the account and the money is taxed when it’s withdrawn. If you can’t use an ESA, then Dave recommends a 529 plan. Just make sure that you stick with one that gives you complete control over the money and does not make any type of automatic adjustments based on the child’s age. Dave does not recommend using any other savings products including insurance, savings bonds, or pre-paid college tuition plans. Most of these simply don’t make the returns you’ll need to adequately grow your money. Some are also ripe for scammers.

You should do Baby Steps 4 and 5 concurrently, which is why Dave caps the retirement savings at 15% of your income. Ideally that leaves you with some left over to put away for college. Dave does not say this, but I will. If you are older and need to really catch up on your retirement savings, I say skip the college savings and put as much as you can into your retirement. Kids can find work, scholarships, and financial aid to pay for college. You can’t find aid to pay for retirement. Similarly, if you don’t have kids and don’t plan to, go ahead and funnel as much extra as you can into retirement. Don’t just accept the 15% cap. The more you can save, the better off you’ll be.

In small group we talked a little bit about our fears for retirement. We have several people in our group who are in their late forties and fifties, so this is a topic that scares them. Several of them admitted to being below even the reported average of $25,000 in retirement, with no pensions to pick up the slack. A couple of them admitted that they just never gave it much thought until now. They were so busy raising kids, working, and building a life that they let time slip away. They are like the people Dave brought up in the beginning of class who just live for today without much conscious thought for the future. They’re worried now that they won’t be able to retire or, if they can, that they won’t be able to have any fun. They mentioned that, having gone through this class, they are committed to saving from this time forward, but they worry that time has run out and that they’ll never be able to save the kind of money that will give them a good retirement.

From there we talked about what motivates you to get serous about retirement. Every single person in the room listed total fear as their primary motivator. Fear of having to work at Wal-Mart until they die, fear of living on state assistance, fear of not getting the health care that they need, fear of eating Alpo in their old age, and fear of not being able to do anything that they want to do. Fear is a powerful motivator, no doubt. Now that many people in the class are considering this seriously for the first time they are realizing just how far behind they are and how the safety nets they assumed would be there (pensions, Social Security) just aren’t going to be there. It’s scary stuff. Our group leader suggested we try to think of some positive motivators for planning for retirement, just so that terror isn’t the only reason. We came up with wanting to have fun, wanting to give to good causes, wanting to be able to help grandchildren, and wanting to leave a life changing amount of money to our heirs.

We also talked about why it’s a bad idea to borrow from or cash out a retirement vehicle to pay off debt, no matter how much you may want to be out of debt. One man in our class took out a 401(k) loan and used it basically as a debt consolidation tool. He paid off all his credit cards and high interest loans with it to the tune of about $40,000. This worked well until, two months later, he was laid off from his job. That loan was due within 60 days or he was going to have to pay the taxes and penalties on about $38,000. Ouch. He tried all he could to raise the money, but given that he was already living on the financial edge, he couldn’t do it. That 38K was considered income by the IRS and he had to pay the tax bill, plus the penalties for early withdrawal. He ended up losing a big chunk of his money, not to mention the amount of compound interest he lost by moving the money out of the account in the first place. It was an expensive lesson to learn; one from which he is still trying to recover.

As most of the people in the class are older with grown kids or no kids, we didn’t talk much about the college saving aspect of the lesson. However, we did wonder about the amount of guilt people feel if they don’t save for college. Many people put college savings before retirement because they feel so bad about it. But we talked about how a kid can work through school, or get loans or scholarships, whereas a parent has to fund his or her own retirement with no help from outside sources. The parents have to take care of themselves, first.

If you remember, last week we had to do the worksheet that showed how much money debt is robbing from retirement (or other long term goals). The results came up in group and they were eye opening. A quick calculation (using Dave’s charts) of the average in my class showed that debt has cost each person in that room about $2 million dollars in retirement money. The numbers will continue to grow until all of the debt is paid off so the total in the end will be much higher, assuming that it takes most of them several years to get out of debt. One woman said that this exercise motivated her to get out of debt more than anything else in the class so far. She’s probably in her mid-forties, so retirement isn’t that far off. once she saw how much she’d lost over the years, she got very scared and then very serious about paying off debt. Good for her!

This was one of those weeks where we had a really good discussion. Retirement is one of those things that everyone has an opinion on. It’s also something that scares and intimidates many people. I think this weeks’ discussion ended up being like a therapy session for many. It gave them a chance to air their fears and talk with others who are in the same boat. Maybe it made it seem a little less scary.

Homework roundup: This week we have to complete the monthly retirement and college planning forms to determine how much money we should be saving towards these goals. This is to give us a definite number to shoot for instead of just guessing, which is most people’s method of calculation. I don’t have kids so I skipped the college funding worksheet.

The first step in this exercise is to determine what sort of annual income you want to generate in retirement. I shot high and said $100,000. I’d like to travel a lot and I know that medical care and inflation are going to eat away at any income I have, so I aimed high. I doubt I’ll really need that much but I’d rather aim higher than lower.

We then divide that number by .08. The .08 comes from the idea that you are saving at a 12% return, but inflation is 4%, giving you a net gain of 8%. (As I said last week, I think his returns are high, but since this is homework I’m using his numbers.) Using this formula, my target number is $1,250,000.

To figure out your monthly savings amount, Dave has you multiply your target number ($1,250,000) by an 8% factor that matches your age (he provides a table that lists the factors at every five years of age, starting with age 25). Since my age falls slap in between two factors, I did this calculation twice. I need to be saving between $838 and $1,313.75 per month to reach my target number. The higher figure assumes the older age, while the smaller figure assumes the smaller age. Turns out that, according to Dave’s formula, I’m right on target. I currently save $1,227 per month in tax-advantaged accounts (the maximum I’m allowed by law based on my compensation) and another $300 per month in regular investment accounts for long term savings. So I’m at just over $1,500 per month or ahead of Dave’s calculation.

Lastly, if you aren’t interested attending the course yourself, consider picking up the Dave Ramsey Financial Peace University DVD Home Study Kit (9 Week Course) 2012 Release. It sells for between $185.00 and $200.00 on Amazon. This is pretty good deal when you factor in the time savings relative to attending the full course.

Next: Dave Ramsey Financial Peace University Review: Week Eleven

This is a series of posts about what you will find in Dave Ramsey’s Financial Peace University course. You can find the previous posts here: week one — week two — week three — week four — week five — week six — week seven — week eight — week nine