There has been a lot of buzz around these particular Baby Steps. Baby Step 4 is to invest 15% of your household income into different investment vehicles. By now, you have paid off debt, established a 3-6 month emergency fund, and can focus on investing for the future. Baby Step 5 is to save for college (where applicable). Baby Step 6 is to pay off your house early.
Let’s unpack each one of these.
Baby Step 4 – investing 15% of your household income. Whatever your take home pay is, you would need to calculate how much 15% is and how it should be invested. Since almost all pensions are of the past, the most convenient way to invest is through an employer’s 401(k) plan. You can invest in a lot of other things as well such as: Individual Retirement Account (IRA), ROTH (after taxes) IRA, mutual funds, the list could go on. It is important to understand the different investment vehicles and how you would like to invest your money. Don’t let someone else dictate what that money should be doing!
Baby Step 5 – save for college. If you don’t have children, you may be able to skip this portion. If you have children, I recommend reading Anthony Oneal’s book Debt Free Degree. It offers insight on what to do for college from 7th grade! Details on scholarships, grants, financial aid (FAFSA), money for grades. Every little bit counts. If you can start investing now, compound interest will work in your favor and you could have your child go to any school they wanted to. Provided that they do not take out student loans. The important thing to know is that education is a good idea. Going into debt to get an education is not a good idea. Also, this is a good opportunity to research 529, ESA (education savings plan), and other investment vehicles so your child can thrive when it comes time to make a decision regarding school.
Baby Step 6 – pay off your house early. “Why would I want to pay off my house early? I get a tax benefit!” The reason you want to pay off your house early is because you eliminate all debt entirely, can build incredible wealth and subsequently, you can be very generous. When you don’t have a mortgage payment, you begin to pay yourself that money that used to go elsewhere. Most millionaires have paid off their homes in an average of 11.2 years. Granted, that is an accelerated path. These folks were intentional. They had a plan for their money and they stuck to the plan. Some were able to pay off their mortgage sooner, and some were able to pay off their mortgage later. You would need to find your own balance.
“Should I work these simultaneously?” Yes. You don’t have to be as intense as you were in the first 3 Baby Steps because you can relax, and take your foot off the gas. Money was meant to be enjoyed as well. You can’t live life on such a strict budget that you don’t have any fun. You might reach retirement and not get to enjoy any of the fruits of your labor. These are all things I have to constantly remind myself since I tend to be laser-focused on all of my goals.