In previous columns I have written about Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). I know that Dave Ramsey is not the only legitimate source of personal finance information out there; however, his methods for teaching personal finance are the best I have found after several years of learning from many different sources. He doesn't necessarily teach anything new, but he packages the information in a way that makes it very easy to understand and follow. The Baby Steps in particular are a great road map for moving effectively through our financial lives.
With that explanation for why I spend so much time talking about Dave Ramsey, I would like to move beyond Baby Step 4, which is when it gets really fun. Getting out of debt, building an emergency fund, and socking away 15% of income for retirement is kind of like exercising for most people. It's well worth the effort, but it's not always the most fun at the time. It requires sacrifice and intensity to get the results you would like. But after you have built the foundation of the first 4 Baby Steps, which only takes 18-24 months for the average family, you can afford to relax a little and be more flexible in your priorities.
Baby Step 5, which is funding kids' college, and Baby Step 6, paying off your home mortgage early, if they both apply to do, can be done at the same time. Different people might place different priorities on these steps. Maybe I will feel more generous toward my kids as they get older, but my priority is to pay off my home before I help my kids with college. Even though it was painful at times, I put myself through university, and I feel like I'm much better off for it. After I pay off my home, I would like to figure out a way to help them without creating a disincentive to work hard for scholarships and in part-time jobs. Please email me if you have figured out a good system for helping kids with college.
In Canada, the Registered Education Saving Plan (RESP) is a great tool for saving for kids' college. The rules can get a bit complicated depending on your situation, so I won't try to cover every scenario in this column. You can learn more on the CRA web site (http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menu-eng.html) or by talking to an investment broker. Basically, the government will match at least 20% of your contributions up to $2500 per year per child. If you contribute $2500, the government will chip in $500. More assistance is available for low-income families.
This benefit is also retroactive back to the child's birth, and each year you can catch up on one year. For example, if you don't start saving until your child is 8, for the next 8 years you can contribute $5000 each year with a $1000 bonus from the government (numbers may vary at little depending on the year). There is a penalty for withdrawing the money and not using it for valid college expenses, but it is only intended to recover the government contributions.
If you have any questions or topics you want me to address, please email me
