Baby Steps to Financial Freedom Pt. 2 (#23)

In this episode host Josh Nelson covers the second set of "baby steps" to financial freedom. But these "baby steps" are incredibly powerful steps that will help anyone reduce debt and obtain an income that pays for the life that they want for the rest of their life.

Step #4: Invest a percentage of your household income toward retirement.
Step #5:  Saving for your children's college.                                                                                       
Step #6 Pay off your house mortgage early

(Debt Snowball episode link below)   https://www.buzzsprout.com/1183136/episodes/5609005

Please Like/Subscribe/Download (and share) The Wiser Financial Advisor podcast

Contact Josh
https://www.keystonefinancial.com/

Instagram: https://www.instagram.com/keystonefin/
Twitter: https://twitter.com/Keystone_Fin?advisorid=33004651
Contact Josh Nelson: https://www.keystonefinancial.com
Contact Jeremy Busch: https//www.keystonefinancial.com
Podcast Editing: Tim Leaman/info.primegen@gmail.com

Transcript

Wiser Financial Advisor – Baby Steps to Financial Freedom, Part Two

Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money. 

This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we'd love it if you would pass it on to me directly at josh@keystonefinancial.com . Also, please stay plugged in with us and get updates on episodes and help us promote the podcast. You can subscribe to us at Apple podcasts, Google, Spotify, or your favorite podcast service. Let the financial fun begin!

Today we are continuing our discussion on the Baby Steps to Financial Freedom. For those of you who missed the last episode, we covered Baby Steps One to Three. These are Dave Ramsey's steps, by the way, so credit to Dave. He's got a lot of great resources, not only the Ramsey podcast. There are a bunch of different financial experts that speak, as well as Financial Peace University and a number of different books. I definitely want to credit him for these Baby Steps.

I first heard the idea of taking baby steps from Bob Wiley, the character played by Bill Murray in the movie What about Bob?  In the movie, Dr. Leo Marvin is Bob’s therapist and he recommends his own book called Baby Steps. It was very helpful for Bob because he was able to take some small steps toward what he wanted and not be so debilitated. 

So today we're going to jump right into Baby Steps four through seven. First, a quick update on Baby Steps one to three: 

• Number One: Save $1000 for your baby emergency fund.
• Number Two: pay off all debt using the debt snowball technique with one exception which is the primary mortgage for your home. 
• Number Three: Save the real emergency fund which is 3 to 12 months’ worth of living expenses. To be clear, emergency fund means a savings account or checking account where you're keeping cash, someplace very liquid and very safe. 

So, moving on from there we come to Baby Step Four.

Baby Step Four: Invest a percentage of your household income toward retirement. We’ll use the word retirement here but I also like financial independence or financial freedom. Whatever sounds good to you, more or less what everybody is after beyond their immediate needs is getting financially secure. That means having enough wealth to produce enough income to  cover all the things that you want to do, and for the rest of your life. That's the ultimate goal for most of our clients. So, Baby Step Four is investing a percentage of your household income toward retirement.

Now there are a lot of different percentages that get thrown around out there as far as how much you should be putting away. I've heard anywhere between 10% to 30%. The number Dave Ramsey likes is 15%. I like 20%.

Historically, the percentage that got thrown around was 10% to 12%. It was 10% for men and 12% for women. Why more for women? Because the assumption was that women are going to live longer and so they need more money saved up. I never liked those percentages but remember those were back in the old days when we could count on Social Security. And in a lot of cases people had company pension funds that they could rely on for a portion of their retirement income. Now, two things have changed. First, people are skeptical as to whether Social Security is going to be there, or at least whether the number they see on their benefit statement will be the actual number. Second, most companies have done away with pension plans, so that puts a lot of pressure on us as individuals to build the wealth to create the income that we are going to need.

The number I like for how much to invest is 20%, because the numbers have changed to put more pressure on the individual situation. Also, for the early part of my career, I worked with people who would put money into their 401K and also into a company stock purchase plan. They would put 10% of their income into their stock purchase plans, which was usually the maximum. Then oftentimes they would put 10% or so into their 401K at work. And that worked out really well for a lot of my clients. They have plenty of money to be able to retire on.

That 20% figure would be for if you start early, but if you start late then you're going to need to go up and put more of your pay away. 

I like 20% of your income and that does not include any company matching. I don't like to use company matching because the company doesn't have to match your contributions. It’s not a legal requirement that they match, and if the company is struggling as happens when we go through a recession, companies backpedal and cut those matches very quickly. I've seen that happen on a number of occasions, so you want to rely on you. You don't want to be relying on anybody else or the government or your company. You want to rely on your own dollars going away for retirement.

We're not going to get into where that money should go within your retirement plans. There are 401K's, IRA’s, non-retirement investment accounts, brokerage accounts, things like that—and that's a whole other topic that we don't have time for today. So we're just going to assume that you do some reasonably smart things with that money when it gets saved for retirement. 

So to review, how much would we be putting away? Dave Ramsey says 15%. I say 20%, and if you're playing catch up, might even need to be up to 30% of your pay going away for savings and retirement. 

Now let’s move on to Baby Step Five.

• Baby Step Five is saving for your children's college. 

This is not one that everybody must have. Not everybody has kids and in some situations kids get scholarships or go into the army and get a full ride. So, this is not something that always has to be a goal. 

Assuming it is a goal for you, there are several ways to do this. You could use a college savings plan, often known as a 529 plan, and there are some tax advantages associated with that. You also could use Roth IRAs, which are a tax advantage vehicle that could allow some distributions for college expenses. You at least want to look at those and to see if they would be good alternatives for you and your family. Or you could just invest the money into a normal investment account and be building it up. Some people like the flexibility of that even without the tax advantages, because then the money can be used for anything; there are no restrictions as far as how the money needs to be used. 

When should you start saving for your children's college? As soon as possible. I started saving when my kids were very little. And it made it a lot more palatable, right? It didn't hurt my budget nearly as much as if I had to play catch up later on.

I look at this step as part of the debt snowball in a way. Because you're just paying an expense that's going to be incurred no matter what. You know it's coming up down the road, and it's a big-ticket item, so it's something that does warrant saving for in advance.  Everybody has a different idea of what they want to contribute toward college. I know some people who say they paid for their own and their kids are going to pay for their own. And I know other people who say that they will pay for whatever kind of college education that a kid will qualify for, including medical school and so forth. So clearly, it can get into the hundreds of thousands of dollars. It's completely up to you as far as what you're funding. It's just very important to start as early as possible. Save automatically. Set it up so it's coming out of your checking account, just like your 401K retirement funds, that sort of thing. Again, start early. Make sure it's going into a vehicle that can get some level of growth.

Here we are at Baby Step Six. You're doing great if you can get to Number Six.

Baby Step Six is to pay off your house mortgage early. A lot of people, myself included, would like to pay off the mortgage faster than 30 years. The idea here is that when you take out the home loan to begin with, take out a 15-year fixed mortgage. Don't do the 30 year because a 15-year will put you in a position to pay it off much earlier. Also, it will help you to not overspend on a house.

Adding extra to your principal payment each month should be done automatically just like all the other stuff we've been talking about, because the more we have to think about these things, the more likely we are to procrastinate and not get around to doing them. So, set it up automatically.

I know of no bank that would say you can't pay off the mortgage early. You can easily call up your mortgage company and tell them, “Hey, I'd like to put extra on the principal with each payment,” and then you give them the dollar amount. If you go to daveramsey.com they have a great mortgage payoff calculator you can use that will show how much you would need to do each month for each year to pay off your house early.

If you've got a 30-year loan right now, well, interest rates are pretty low. You might be able to refinance to a 15-year and cut down your interest. Even if you can't, there's nothing preventing you from putting extra onto the principal each month automatically to get yourself paid off in 15 years or whatever time frame you can make work.

If you can be debt free completely by retirement, that would be absolutely wonderful. I'm told that it feels really good to have no debt going into retirement. And your fixed expenses will be much lower if you can get to that point.

We’ve arrived at the last baby step, which is Baby Step Seven. 

• Baby Step Seven is to build wealth and give. 

Once you get to Baby Step Seven, you are in good shape financially. Now it's just about doing extra. You’re  continuing to accumulate wealth to be able to help yourself but also you could be helping your family, your grandkids, your kids. Maybe you provide some extra experiences.

It's fun to work with clients that are financially free, financially independent, because at that point when there’s all this extra money, there are a lot of choices and things that people can be doing. I've seen people have all kinds of adventures. They get to do things with their kids, funding special experiences or vacations, helping pay for grandkids’ college education. 

Also,  giving may not just be to the people you know. It may be gifts to charities or it could be your church. It could be gifts to other organizations you'd want to support, like your alma mater. There are all kinds of opportunities. Believe me, there are a lot of organizations that need help, especially these days when we're in the midst of a pandemic. Many organizations that help people are finding themselves in tough shape. 

So Baby Step Seven is not only about building wealth, but it's also about giving money away. Once you get to Step Seven,  you are at the point where you've got excess. You've got abundance. And abundance simply means that you've got spillover. You’ve got more money than you need to spend. 

You can leave all your wealth when you pass away. Some people choose to do that. You can leave your wealth to individuals or to charities, churches, things like that. But one thing to consider is that if you truly have abundance and you don't have much odds of running out of money, that wealth could provide a lot of fulfillment while you're living, fulfillment based on being able to give and enjoy seeing experiences. I've got a couple of clients who have taken their entire family—kids, grandkids—down to Disney World several times now, and although they're probably beyond going on a lot of rides and being crazy and running around, they're having a lot of fun watching their grandkids and being able to make those memories with them. 

So having abundance is a great place to be. It opens up opportunities like that to be able to enjoy experiences or to enable other people to have some quality of life that they may not have if not for our help.

Contribution is an area where there's a huge amount of fulfillment created, contribution not only to other individuals but also to organizations that we can support now and at death as well. I don't want to discount estate planning and what you could be leaving then.

Now, at the end of What About Bob? Bob says to Dr. Marvin, “Hey, I'm doing the work. I'm baby stepping. I'm not a slacker.”

So your homework here is to find out what financial Baby Step you are on and be willing to do the work. Take the opportunity now to identify where you are in these seven steps. And if you want to create different steps and call them different things, great. These are Dave Ramsey's Baby Steps and I think they work out really well. We use these with clients all the time and we see some amazing financial turnarounds and financial progress people have been able to make. Remember, this is not just about building wealth, it's also building financial character. Ultimately, this feeds on itself. There's momentum that gets created once people jump onto this track and get focused on their finances.

I want to wish you the very best. And if you're not sure where you are, or how to implement any of this, let us know. Reach out to us individually. We want to help individuals that may need our assistance. We try to be here as a resource, not just for people who have already accumulated wealth but also for people who are starting out and are serious about building for the future. We want to be here for them.

With that in mind, please help us promote the podcast. It's been really fun to create this experience, and to be able to contribute. That's a huge part of what I like to do as an advisor, to help people get started. Almost every client that I’ve talked to that has accumulated wealth, (and they're probably retired at this point) says, “You know what, I was successful, not only because I was willing to do the work and put the money away, but somebody early on helped me out.” Maybe it was a manager or a coworker that was older. Maybe it was one of their parents. Someone got them started and helped them get on the right track, contributing to the 401K and not taking on credit card debt, all these financial principles that we talk about.

We want to be here as a resource for somebody who hasn't heard that message yet and needs to get on the right track. 

Bob Wiley provides a good example,  It wasn't that Bob didn't want to get better or that he wanted to be overwhelmed. He just didn't know what to do and he was overwhelmed by everything. So, Dr. Marvin's book actually ended up working. Together, they created baby steps that allowed Bob to focus on what was in front of him and not get so concerned about the future. In that spirit, I encourage you to focus on the Baby Step that’s right ahead of you and what you need to do today.

I hope this was helpful for you. Please like our podcast and if you’ve got coworkers, friends, family that would benefit from this please subscribe and pass it on to them.

Have a wonderful week, and God bless.

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.