We’ve come a long way on the Journey toward Financial Freedom! At Destination Six, there is a nice nest egg building in the retirement account and money has been set aside for emergencies. Cars and debts have been paid off and now we’re seeing the light at the end of the tunnel. At Destination Six the two milestones are having the home mortgage paid off in and having our children’s education fully funded.
One important thing to think about once the house is paid off is to make sure your investment is secure. More often than not, property will not transfer to your loved ones without the benefit of a will, trust or Joint Ownership provision on the deed. These different vehicles have different uses and different tax implications so be sure to meet with an Estate Planner, even before the house is paid off, to direct the property to a beneficiary the best way possible. It would be heartbreaking to have worked so hard to pay off the home mortgage only to have it go into probate if the title-holder were to pass away.
Some people don’t want to pay off their home mortgage because they don’t want us to lose the tax advantage of the mortgage interest payment. Well, the tax advantage of a mortgage is often overrated.
Let’s say you’re in the 25% tax bracket, so for each $1,000 you pay in home mortgage interest, you save $250 in taxes—25 percent of the $1,000 interest paid. You still pay $750 in taxes. You are paying $1,000 to save $250. Why not just save the whole $1,000 by eliminating the mortgage payment? So while there is a tax benefit, it’s not as much as many may think.
The second argument some people use against paying off their home mortgage this, “Why pay off my home when I can invest and earn a greater return than the interest on my mortgage?”
There’s just one catch—there’s no such thing as a sure thing in investing. Here’s my advice: do both. Allocate some of your monthly surplus to investing and some to prepaying your mortgage. So, I want to encourage you, when you reach Destination 6 on the Money Map. Go for it! Get that home of yours paid for.
The second milestone is having the children’s education funded. Depending on how long you have been saving for your children’s education, you might be getting close to putting this money to work. Evaluate the investment risk on those funds, as it may be time to start moving money into liquid accounts such as CDs or money markets. The reason for this move is to preserve the capital that has been accumulating over the years without worrying whether the stock market will be kind to you when you need to write that tuition check. There will also be books and various other fees that will need to be covered by these funds so it is imperative that at least some of the funds are easily accessible.
Thirty years ago tuition and fees for a private four-year college were $4,000 and last year they were more than $30,000. According to the College Board, the average cost of tuition and fees for the 2014 school year was:
- $31,231 at private colleges,
- $9,139 for state residents at public colleges,
- $22,958 for out-of-state residents attending public universities.
So, with all this in mind, what can parents do to help their children avoid crushing school debt? First, even while they young, start praying with your children for the Lord to provide the funds needed for the college education he wants them to have. This is a great opportunity for parents and their kids to grow closer to each other and to the Lord. Ask God to give you ideas and the kids work opportunities that will eliminate the need to borrow.
Encourage your children to begin working and savings some of what they earn for college as soon as they are able to begin babysitting or mowing lawns. This will allow them to have some of their own sweat and blood invested in their college experience and they’ll be more serious about getting a good education.
Here’s another suggestion: parents and children should start putting aside saving for college as soon as possible. That’s why the Compass Map recommends that you begin saving for their education as soon as you pay off your credit card and consumer debts and have three month’s living expenses saved. The earlier you start saving, the more time you’ll have for the principle of compounding to work for you. And this can make a huge difference in the final amount that you’re able to accumulate for college.
Last, choose the most appropriate account for your college savings. Options include state-sponsored 529 plans and prepaid tuition plans, Coverdell Education Savings Accounts, and Roth IRA’s. Each of these has pros and cons–talk to a qualified advisor to see which is right for you.
It is exciting to watch your children learn and grow into responsible adults. It is also important to help them do it by giving them responsibilities and advice when needed. But the most important thing is to teach them God’s way of handling money so they can be content. Hebrews 13:5-6 tells us, “Let your life be free from love of money but be content with what you have, for he has said, “I will never forsake you or abandon you.” Thus, we may say with confidence: ‘The Lord is my helper [and] I will not be afraid. What can anyone do to me?’”
One thing to consider once the house is paid off and the children’s education is funded is to redistribute the money you were spending on those items into other pockets of your spending plan. Maybe paying the mortgage has been your A-number-one goal for some time and you have really scaled back in other areas of your spending plan such as your grocery budget, cable services, gym memberships, or subscriptions to newspapers or magazines. Now that you have met your goal to pay off the mortgage, and save for college you may be able to expand some of these categories again.
As you can see, the end of the road to Financial Freedom is close at hand and there are many more options at the end of the journey than there were in the beginning. It is my hope that by showing each step of the Money Map in detail, it will provide the motivation necessary to get to the final destination, Total Financial Freedom!