updated October 31,2022
Okay, so you have a solid amount in your savings just in case sh*t hits the fan. You paid off your debt. And now you’re planning for your future retirement. You’re crushing it!
These next few steps are more intermediate-advanced level, so if you are not ready for that, I would recommend going back and reading my post, Breaking Down Dave Ramsey’s Baby Steps 1-4, so you can build a foundation for these next few steps. Let’s keep planning for the future, pay off that mortgage (say what?!), and build your wealth!
Baby Step 5: Save for Your Children’s College Fund
For those of you that have a family and children, this is probably something you may have already thought about even before you had your first child! Dave Ramsey recommends 529 college savings plans, or Education Savings Accounts (ESA).
ESA’s work similarly to a Roth IRA, as you invest post-tax dollars per year, per child. As of writing this post in December 2021, you can invest up to $2,000 per year, per child. And just like a Roth IRA, this money will grow tax free! If you invest $2,000 every year up until your child graduates high school, with an average stock rate of ~12%1 that can provide over $100,000 to go towards their education. Caveat to ESAs though: you must make under $190,000 in modified adjusted gross income ($95,000 for single filers) to create an ESA for your child, and these funds MUST be used by the beneficiary before they turn 30
If you want to invest more, or you and your spouse make more than $190,000 in modified adjusted gross income, a 529 plan would be the way to go. A 529 plan allows much higher contribution rates with no income limits, grows tax-free, and typically doesn’t have any age restrictions. Some of these plans can even allow you to move the funds from one family member to another, in case little Timmy decides to go into a vocational school and has leftover money for his brother Billy who wants to go to veterinarian school.
But Dave Ramsey warns that not all 529 plans are created equal – find plans that allow you to choose what funds you invest in. These plans are typically called “flexible” plans. The “fixed” or “life phase” plans can freeze your options or automatically change your investments based on your child’s age.
Baby Step 6: Pay Off Your Mortgage
This step is the most debated topic that gets a lot of scrutiny of all of Dave Ramsey’s Baby Steps. Dave Ramsey is all about paying off debt. All. Of. It. So this includes your mortgage. According to the Federal Reserve Bank of New York, mortgage balances—the largest component of household debt—rose by $230 billion and stood at $10.67 trillion at the end of September for the US.2
At this point, your mortgage is the only thing keeping you from true financial freedom. Putting any extra money you may have towards paying off your mortgage can save you thousands of dollars in interest!
Baby Step 7: Build Wealth and Give
This final step is what we all want – true financial freedom! You have no debt to pay. You are financially secure. With your newfound wealth, you can start to plan giving while you’re living your financially free life. As you keep building wealth, you can become more generous. That sounds like the dream to me!
I hope you found these break downs of Dave Ramsey’s 7 Baby Steps to be helpful for you on your path to financial independence. As someone who has done (and is currently working on) some of these steps, it’s a great guideline to give you control over your finances.
If this blog post makes you feel overwhelmed about your financial situation, read my blog post on 3 Ways to Recover from Financial Mistakes. We’re all human, we all make mistakes. But it’s about how we learn and recover from this mistakes, that will make our future bright!
Note: I am not a certified financial advisor/planner or a certified financial analyst or a CPA or an accountant or a lawyer. Remember, I am an allied health professional, just like you! This website/blog is for entertainment and educational purposes only. Please consult with your financial advisor(s) regarding your personal finance, investment, and tax matters.
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