Building Wealth Pt. 2
In Building Wealth: Part 1 we walked through the first 3 Baby Steps Dave Ramsey teaches about. I gave you some simple ways to take action on these and left you with a challenge to really get the ball rolling on paying down debt and being smarter with your finances. If you haven’t read Part 1, I encourage you to read Building Wealth: Part 1 prior to reading below.
There are 2 reasons you need to get through those 3 Baby Steps before you can really start talking about wealth building:
- Your income is your number one wealth-building tool. The majority of millionaires are not trust-fund babies or lottery winners. They are everyday people like you and me that tell their money where to go instead of the other way around. But when you are in debt you don’t really have your income working for you because you are giving it to Chase Bank, Toyota, and Sally Mae. You need to work through these first 3 Baby Steps, so you can work towards your future with your income instead of literally paying for your past.
- Like I said in the “Honesty in your Finances”, that having a margin in your finances is a prerequisite to building wealth. So, once you get those first 3 Baby Steps complete now you are back to ground 0 and you are ready to build.
Baby Steps 1-3 are complete, so now what do I do?
You are going to start working your way through
Baby Steps 4-7.
Baby Step 4 is Invest 15% of your gross household income.
Baby step 5 is to save for your children’s college fund
Baby Step 6 is to pay off your mortgage
Baby step 7 is to build wealth and give.
Let’s break it down.
Baby Step 4
I’m going to say something obvious just to point it out, Baby step 4 comes before Baby Step 5. Baby Step 4 which is focused on Retirement comes BEFORE Baby Step 5 which is your child’s college fund.
Why in this order?
- You can’t get loans or grants or scholarships for retirement. Your children can get those things (hopefully not loans) for college. If they really want to go to school then they can work and pay for it themselves, apply for scholarships and grants, and they can make it happen. There is no rule that says that it is your responsibility to save up and pay for every dime of your kids' college, that is not a burden you need to carry. Your retirement and I’m not talking about retiring as a multi-millionaire on the beach somewhere where you play golf all day, although that would be pretty awesome. I’m talking about basic retirement where you will need enough to put a roof over your head and food on your table when you are unable to work any longer. That time will come. Some people think they are helping their children by putting away money for college and ignoring retirement. But the truth is when the rubber meets the road and you have to retire and no longer have an ability to earn an income if you don’t have a retirement at all and your children now feel the weight of that responsibility when they now have a family of their own. That’s not fair to them or you. I’m not saying family shouldn’t help each other and obviously, when parents become extremely old and sickly, sure kids step up and step in wherever is needed. I’m not talking about that. I’m talking about you at 70 years old, with 20+ years of life ahead of you, but for one reason or another, you can’t work any longer, who is going to pay for your housing and food and whatever else for those 20 years? You are. Because you are going to have prioritized your basic retirement funds.
So how do we do this?
Once you have no debt and have built up your 3-6 months savings, you invest 15% of your gross household income.
- You should start by contributing whatever your employer will match into your 401K plan. This is a no brainer because it’s taking advantage of FREE money so you would be silly not to take advantage of it. Next, you should invest whatever percentage is left into a Roth IRA.
- A Roth IRA (Individual Retirement Account) is a retirement savings account that allows you to pay taxes on the money you put into it upfront. The growth in your Roth IRA and any withdrawals you make after age 59 1/2 are tax-free, as long as you’ve had the account for more than five years.
- Because you pay taxes on the front end, you get to capitalize on the compounding interest throughout the life of the account with no tax taken out when you retire. To put this into perspective, if you put $30k in now you are taxed on the $30k now, but in 30 years when you pull it out and it is worth hundreds of thousands of dollars, you get to take that money out tax-free saving thousands of dollars in taxes.
At this point, you are out of debt, you have 3-6 months savings, and are funding your retirement. This is a great place to be but guess what? We’ve got a few more steps to go.
Baby Step 5
Baby step 5, saving for your children’s college fund. Oh man, how some of us would do things differently when it comes to student loans? Gosh. They are an absolute nightmare and I think in hindsight, many of us wish we could have approached this differently now that we are staring down what seems to be an insurmountable pile of debt.
- PS. This could be an entirely different episode but there are ways to work with some federal loans. Definitely look up the type of loan you have and figure out what can help. For mine...they erased 18,500 of my student loans if I committed to working 5 years teaching in a low-income school in a high need field. I applied for this grant because I already knew I wanted to work in an inner-city school, I had an incredible opportunity during my student teaching to work at a school that happened to be considered low income and I fell in love and since I am a special education teacher - my field was considered high need so it was perfect. I will say that the paperwork was an absolute bear and it took filling 20-30 times across the better part of a year to get the approval and forgiveness, but those options are out there if you are persistent. Also, if you do automatic payments, you can often get lower interest rates so more of your payments go towards the principal on that loan. The bottom line is that there are ways to minimize the impact if you do some research in your field so I would highly encourage you to take advantage of any and all avenues to help you get through your balance faster.
My boys will not be getting loans for school. They will absolutely not bring in this debt so many of us in this generation carry into relationships. We will figure out another way.
They will work hard and save and apply for grants and they will work during the summers and the school year even if their friends are not as disciplined because we will teach them and show them the vision of how coming out of school with no debt can dramatically change the trajectory of their lives.
We will also be a safety net. Part of why we are so passionate about building wealth and staying out of debt is so that we can be in a financial position to save for our boys. We want to have the ability to prevent this obstacle from overwhelming them so that they can start off their careers focusing on building wealth and giving generously.
We have a 529 account for each of the boys that we put money in each month. We have personally put $100/month/kid starting on their 1st birthday. We don’t have any desire to pay 100% for their college. We really believe that our kids need to work, apply for scholarships or grants, and be invested in their own education.
Plus, who knows if all 4 of our boys will go to some kind of post-secondary schooling. I don’t know all of their passions at this point. We will likely stop contributing when they hit 10, and allow that money to compound, but the nice thing about 529 accounts is that it is transferable between children so if one has better luck with grants or one chooses a trade school that is cheaper, that money can be distributed however you choose on their education.
The way that I look at it is I want our money, the money Justin and I work hard to save, to be supplemental to their life. I have no desire to give my children millions even if we ever made it to the point where we were to reach that level financially. I want my sons to build their own life with their wives and to have a work ethic and not rely on their parents' money. Now, with that said, it doesn’t mean we don’t want to give them a good foundation if the means exist.
Proverbs 13:22 says:
“A good man leaves an inheritance to his children’s children, but the wealth of the sinner is stored up for the righteous”
The major driving force in our “why”, that drives Justin and me to stay on top of our finances so that we have the ability to help our children’s future in this way. And the truth is, maybe you have no desire to help your kids with school or a down payment, but wouldn’t you at least like to have the option to help if you wanted to? I would.
Now, if you are hearing me talk about that stuff and are feeling discouraged because you feel so far off from that ever even being a talking point for you and your husband, let me remind you, we started our debt snowball less than 4 years ago from the time of this recording. It’s amazing what the focus, consistency, and the compound effect of the snowball can do in a couple of years for your family.
Don’t be discouraged girl, be encouraged that you can absolutely do this!
Keep on grinding, and find your inner grit so you can build out your emergency fund, or stick with your snowball, or accumulating that 3-6 months savings. Wherever you are, it takes discipline, but I promise you it is worth it. Nothing worth having happens overnight. It happens one step at a time.
Baby Step 6
Baby step 6 is paying off your mortgage. This is pretty self-explanatory. You have no debt, you have 3-6 months of savings, your retirement accounts are working for you, and you are investing in your kids’ education consistently.
First of all, you should congratulate yourself. Getting to this step means you are disciplined, fierce in your decisions, and have been laser-focused on your future. It is a major accomplishment and should not be glossed over.
Now it’s time to sit up a little straighter and stare down your mortgage. The last thing between you and complete financial freedom. Can you imagine? Can you imagine having no mortgage? In my Facebook LIVE, I did a while ago my mom and I showed you the power in paying more principal on your mortgage and how you can jump ahead MONTHS on your amortization chart with just a single extra payment. You can bypass hundreds, if not thousands of dollars of interest with every payment. Yes, please. If you are not in my community group go here: Legacy through Motherhood community group with Stephanie Sims and join there to see some of these live training sessions I talk about in these episodes.
Okay, now I have to address the big question people ask when they get to this step. The question is this, ”Should I really pay off my mortgage? I thought that was the only good debt I could have so that I can continue to get the tax deduction.”
Okay, so I’m going to give it to you straight from the mouth of Dave Ramsey. Here is his response to that question...ready?
“If you have the opportunity to pay off your home and you don’t pay off your home in order to keep the tax deduction, that would be an indication that you are poor at mathematics. It’s a nice way of saying you’re stupid and you believe cultural lies that are out there. The cultural lie is never pay off your mortgage because you’ll lose the tax deduction.
Let me help you with the mathematics on this. Let’s use an example. Let’s say you have a $200,000 mortgage at 5% interest. If this is your personal residence and you do itemize—by the way, only 27% of Americans who file taxes itemize—you can write off the interest portion of your payment on your personal residence. If you have a $200,000 mortgage at 5%, that would be $10,000. We have a $10,000 tax write-off because we have a $200,000 mortgage at 5%. That’s a tax deduction, meaning if that couple makes $75,000 a year and they take a $10,000 tax deduction, they don’t pay taxes on $75,000. They instead pay taxes on $65,000. If you do this weird Dave Ramsey thing, though, and you pay off the house, you no longer pay taxes on $65,000 because you would not have a tax deduction. You’d have to pay taxes on $75,000. You’re in a 25% tax bracket if you make $75,000 a year. That $10,000 a year that we’re talking about is taxed at 25%. By paying off your home, 25% of that $10,000 that you’re going to have to pay extra taxes on is $2,500. In essence, you lost a $2,500 savings on your tax bill, but you gained $10,000 by not having to pay it to the bank.
A $10,000 tax deduction is the same thing as saying, “I would rather give Countrywide $10,000 than give the government $2,500.” I’m not fond of giving the government money, but I think that that’s a pretty stupid trade, by the way. If you’re so dumb that you think giving Countrywide or Wells Fargo or whoever your mortgage company is $10,000 to avoid a $2,500 tax bill, you flunked math in the third grade. That’s stupid. I used to be that stupid. I believed that same mythology that a lot of you believe.
Here’s another idea. What if, instead of a $200,000 mortgage creating a $10,000 tax deduction, you wanted to trade $10,000 and save $2,500, why don’t you just give an extra $10,000 to your church or to the Red Cross? You don’t have to be in debt $200,000 to trade $10,000 for $2,500. You could do that just by increasing your charitable giving. Where are all these financial sophisticates who are suggesting that a mortgage is somehow financially sophisticated? Where are these sophisticates when it comes to saying increase your charitable giving? It’s the exact same mathematics as having a tax deduction on your mortgage. We live in the land of doofuses. That’s where they are. It’s what’s known as the blind leading the blind. The stupid leading the stupid, and I’ve been one of them. I’m not saying I’m above it. I’ve made these exact same mistakes. It was an old farmer in bib overalls who taught me that, and I’ve got a finance degree. Apparently, I didn’t learn much at that college. And apparently some of you CPAs didn’t if you’re suggesting people keep debt solely because a tax deduction is somehow mathematically a good deal. It’s not a good deal. Do not keep a mortgage to call yourself sophisticated. Bad plan.
Now if you’ve got a mortgage, until you get it paid off, for goodness’ sake, take the tax deduction. But don’t stay in debt telling everybody how smart you are.”
Well okay then, One thing you can’t say about Dave is that he sugar coats things. If you need someone to shoot it to you straight, check out Dave Ramsey for books, podcasts, and other resources to consume yourself with financial wisdom.
Final Step, Baby Step 7
Building wealth and giving. Oh man, how I can’t wait to be at this place. I really believe this is where we are all meant to live. This is a small sight of heaven we get to experience here on earth. Being completely debt-free, building wealth, and giving abundantly. Yes, please. At this point, you can really begin to leave a legacy for your kids and your kids' kids and your kids, kids, kids.
A church in our area just paid off 46.5 million dollars of medical bills in our tri-state area. 46.5 MILLION dollars in medical debt wiped away for 41,233 households, in 103 zip codes. This is from a church that is able to give abundantly. Now, most people are in awe and so thankful while others are skeptical of the church and asking, “wow, I can’t believe the church has that much money.” Well, for one they worked with a non-profit, and Every $100 they contributed wiped out $10,000 worth of debt. So they didn’t pay 46.5 million...they paid 46,500. Only God can take 46,500 and turn it into 46.5 million. Either way, you look at it, it’s a blessing.
You hear all the time about people paying off layaway items for Christmas or paying off any lunch debts in schools. I mean that’s the kind of stuff that I am ramping up for now. That’s the way we are supposed to be living. Bill and Melinda Gates are working to eradicate malaria, that type of Philanthropy is where I want to get to as fast as I possibly can and I want to have each and every one of you on this mission with me.
That is Generational Change.
Let me remind you. I am a stay at home mom and have zero income. My husband does make a pretty good income but it’s not always been what it is now. We also did not receive any crazy amount of inheritance. We did receive some that helped towards a down payment for a house and after the deaths of grandparents, but I would say they were very typical, not like hundreds of thousands of dollars or anything.
My point in this is, this is something that is attainable. It doesn’t take extraordinary circumstances or a winning lottery ticket. It takes discipline, a plan, and a vision. So you got this!
The journey will look different for all of us but it is within your reach. I want you to remember throughout this entire journey it’s easy to beat yourself up or be discouraged, but remember you are already enough just the way you are.
Dave Ramsey says, “If you have made mistakes with money, do you know what that makes you? Over 12”.
So take a deep breath because you are not alone and not stupid. We all got sucked into this stupid consumer culture and now we just have to work to get out and teach our kids about a different type of life.
I am going to leave you with one of my favorite verses. It’s from Galatians 6:9 and it says this.
“Let us not become weary in doing good, for at the proper time we will reap a harvest if we do not give up.”
Don’t give up!
You are fighting the good fight as you are getting your finances under control. Hop into Legacy through Motherhood with Stephanie Sims OR follow me @ Legacy_through_motherhood to stay encouraged or to receive continued training throughout your week!
My sole purpose in this business is to help you find your grit while completely covering you in grace. <3