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Jun 16, 2020

Saving for college

Dear Dave,
What percentage of our income should we save for our kids’ education? We know you recommend setting aside 15 percent for retirement, but do you have a similar rule that applies to paying for college?
Andrew

Dear Andrew,
I don’t really have a rule, or percentage, for how much you should save toward a college fund. If you’re following the Baby Steps, I recommend getting 15 percent of your income going toward retirement before saving for college. After you’ve got your retirement savings rolling, put what you can, based on your own unique situation, toward college funding.

If you’ve got teenagers in the house, you need to get serious about college funding soon—like right now. There’s no rush if they’re toddlers, but you might want to start looking at things like a 529 or an ESA (Education Savings Account).

The thing is, there are just too many variables, the main one being the ages of the kids, to set a strict percentage. You’ve also got to consider things like where you’re thinking about them going to school, how much you want to save up, and other factors.
—Dave

Don't put your home on the line!

Dear Dave,
We’d like to start preparing for the future, but our debt is preventing us from investing for retirement. Would it be okay to use a home equity line of credit to start investing? We were thinking the eventual returns might justify doing this.
Nick

Dear Nick,
No! Never put something as important and meaningful as your home on the line just for the sake of investing. Do not borrow against your home!

I’m guessing you’re new to my way of doing things, so let’s start from the beginning. First, follow the Baby Steps. Getting $1,000 in the bank as a starter emergency fund is Baby Step 1. Next, pay off all your debts from smallest to largest—except for your home—using the debt snowball method. That’s Baby Step 2. It’s time then to revisit your emergency fund, and bulk it up to a full three to six months of expenses in Baby Step 3.

Now, it’s time to really start thinking about your future and retirement. In Baby Step 4, take 15 percent of your gross household income and start investing it for retirement. Start with your company’s 401(k) plan, up to the full employer match. Then, invest the rest into Roth IRAs. One for you, and one for your spouse, if you’re married.

Here’s the thing, Nick. Investing becomes easy at this point, because you’ve freed up your income. And that’s the most important wealth-building tool you have!
—Dave

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