Financial Peace University Part 5 – Tips on buying and selling real estate

Written by Sam on August 22, 2007 – 10:43 pm -

Buying a homeFor this installment of the Financial Peace University series, I’ve summarized some of Dave’s main tips about buying and selling real estate (along with my commentary) into list form.

Dave is a proponent of purchasing your own home, but only in a very responsible manner. He points out that real estate is a good investment for the following reasons:

  1. Home mortgages act as a forced savings plan.
  2. Owning a home is a hedge against inflation.
  3. If you live in a house for 2 years or more you don’t have to pay taxes on the appreciation (limited to $250,000 per person).

However, Dave doesn not recommend using real estate as an investment unless you can pay cash outright.

The most powerful point Dave makes about buying or selling a home is that these are the largest transactions most people will make in their lifetime. As a result, it’s possible to lose or make a lot of money depending on how you do it. It’s well worth putting in some extra effort and hiring expert help to ensure you maximize the benefits and gains of real estate transactions.

Here are Dave’s tips on buying and selling real estate.

Tips on selling a house

  1. Don’t “live” in your home when it’s on the market – You have to think like a retailer and market your home. When your home is on the market, you must constantly be thinking about how others will percieve it. You can’t really live in your home as usual when it’s on the market – it has to be ready to show at a moment’s notice. Don’t require the buyers to use their imagination.
  2. 50% of real estate sales come from the sign out front and curb appeal – Make sure the outside of your home looks nice and well groomed. Tear out overgrown shrubs and trees. Paint the outside. Repair damage in the concrete. My own personal tip is to take a photograph of your home; you tend to see flaws much more easily looking at a photograph for some reason.
  3. Get a good realtor. He/she will make your more than what they cost you. A good realtor knows how to market your home, negotiate (good cop, bad cop), and evaluate the value of your home better than you do. Don’t hire a relative as your realtor. Interview realtors. They should be in the $1 million club (have sold $1 million in real estate in the last year). They should present to you their plan and referrals.
  4. Don’t buy home warranties unless it’s a condition of the sale.. They’re not worth it.
  5. Appraisals aren’t the law, but they’re better than your “feelings” – Appraisers give only an opinion and don’t have the final, difinitive value for your home. However, their estimate will still be more accurate than your gut feelings.

Tips on buying a house

  1. When buying a home buy title insurance – Title insurance is worth it. It covers you when there’s unclear ownership of house (e.g. aunt suzy never signed off on sale of house and still has rights to the home). It also covers undiscovered liens against house.
  2. Get a survey when buying – Oftentimes, the advertised property boundaries and the actual boundaries are quite different. This is particularly true on a property without clear boundaries such as fences.
  3. If you use an agent to buy, get a “buyers” agent – a “buyers” agent is an agent that only represents you, the buyer. Some agents represent both sides – the buyer and the seller – and therefore have an inherent conflict of interest. A buyer’s agent will only have your best interest at heart.
  4. Don’t buy at the top of the neighborhood, but at bottom – The crumbiest house in a nice neighborhood will inherently be worth more by virtue of the neighborhood. If you fix it up at all, the value of the house can significantly increase. In contrast, if you buy the nicest house in the neighborhood and fix it up, the value can only increase so much because it will typically stay within the range of the value of the other houses in the neighborhood.
  5. Houses tend to appreciate most in locations with views and on the waterfront
  6. Look for houses that don’t look nice and you can get a bargain – This is the inverse to the principle of marketing your house – you want to look for owners that haven’t marketed and presented their house very well. If you can use your imagination and overlook cosmetic flaws that can be easily fixed, you can often get the best deals. A little imagination and elbow grease can go a long way.
  7. Always buy a home that is attractive from street and has a good basic home plan – It’s very hard and costly to make changes to the bones of a house. Unconventional home plans and lots can be very hard to sell.
  8. Get an independent house inspection when buying – Getting an independent house inspection will not only protect yourself against hidden flaws and problems, but you can also use it in the contract as a way out of the deal if things don’t line up to your expectations. In many cases you can negotiate to have seller pay for home inspection
  9. Don’t take out a mortgage for more than 25% of take-home pay (e.g. after taxes, 401k, etc.) – Dave recommends putting down as much as you can on your house. His suggestion to take out a mortgage for no more than 25% of your take-home pay is radical but would save people endless financial headaches if followed. See my earlier post about calculating how much of a mortgage you can afford.
  10. You should put at least 10% down – Dave ideally recommends paying cash for your home but recognizes that most people won’t do this. Instead, pay as much down as possible. Most people follow the opposite advice and try to pay as little down as possible.
  11. Never get a 30 year mortgage – get a 15 year mortgage instead – Again Dave goes against common practice with this recommendation. If you already have a 30 year mortgage, he recommends you keep it and pay it down like a 15 year mortgage. If the current interest rate is lower now, re-finance to a 15 year mortgage. The idea that you’ll take out a 30 year mortgage and pay extra is statistically not true. In the end, you’ll just pay what is required. Sam’s note: I agree that most people won’t pay extra on their mortgage. However, if you have a proven track record of controlled budgeting, go ahead and do it. Because my wife and I keep to a tight zero-based budget, we are successful following this strategy.
  12. Never get an adjustable rate mortgage – Adjustable rate mortgages are meant to protect banks against decreasing interest rates, not to protect you. Particularly in today’s environment interest rates are historically very low and for the most part have nowhere to go but up. Another reason to avoid ARMs is that 35% are calculated inaccurately. If you already have one, make sure you audit it. Dave recommends refinancing your ARM if you have one.
  13. Put 25% down to avoid paying Private Mortgage Insurance (PMI) – PMI costs roughly $75/mo for every $100k in loan value. If house appraises to 20% equity, call the mortgage company to remove the PMI. The bank may require an appraisal. Once your equity reaches 22% of the value of the house, the mortgage company is required to drop the PMI without notice.
  14. Avoid FHA and VA loans – FHA (Federal Housing Administration) and VA (Veteran Administration) loans are not good deals and are meant for people without enough money to get into a home otherwise. They are guaranteed by the government. FHA and VA loans charge an MIP which is just like PMI, but it’s carried throughout the life of the loan so they are more expensive.

Posted in Real Estate | 8 Comments »

How to buy a piano (or anything) online for less than half price using RSS feeds

Written by Sam on August 15, 2007 – 8:30 pm -

shopping RSSSeveral months ago I wrote a post detailing how to put your online shopping on steroids by using RSS feeds to find great deals. Not long after writing the article, my sister heard about it and decided to try using the RSS technique to buy a Yamaha DisKlavier piano.

The piano she had in mind retails for about $10,000 and she had seen used, older models for as low as $6,000. She was hoping to find one at an even lower price of $5,000.

She had been spending 2-4 hours a week searching extensively from October to March and had found nothing. She was willing to travel within a 12 hours radius to pick up the piano if she found a good deal so she was even actively searching classified ads and on Craigslist in other major cities – but still no success.

Once she read my article, she had her husband set up an RSS search feed on for the piano. Literally within 2 days she found an available piano about 12 hours away for the ridiculously low price of $2,500. It seemed to good to be true but they drove there anyway. It turned out to be a piano in excellent condition that had only been played once! They literally walked away with an $8,000 piano (that’s the going used price) for $3,500.

Shopping using RSS feeds really is a revelation. I’m surprised I haven’t seen the topic catching on more. I’m surprised by how much the general population doesn’t know about RSS feeds yet. Particularly when they can make such a huge difference in productivity. If you haven’t been introduced to RSS feeds yet, particularly for use in shopping online, check out the two posts below.

Shopping using RSS feeds
RSS shopping website guide

Posted in Shopping, Spending | 5 Comments »

Financial Peace University Part 4 – How to be a smart consumer

Written by Sam on August 14, 2007 – 10:40 pm -

ConsumerIn part four of the Financial Peace University I’ll cover week 9 titled “Buyer Beware.”

Week 9 Buyer Beware

Dave Ramsey talks about how marketing affects behavior and subsequently debt levels. Some of the information about how companies use marketing to entice consumers is interesting but I somewhat question the usefulness on a practical level. Simply knowing the tactics companies are using doesn’t mean you’ll be immune to their effect.

Beware of marketing tactics

Here are some examples Dave uses:

  • The number of daily marketing impressions the average person is exposed to has increased from 500 in 1971 to over 4,000 today. I believe it. In today’s multimedia culture, particularly with the internet, we are exposed almost constantly.
  • More than half the GDP consists of consumption spending.
  • Dave outlines the ways we’re sold to, including
    1. Personal selling – Sales materials are increasingly customized and personal. By using database technologies, companies often have much information on potential buyers and are able to target individual needs.
    2. Financing – Many businesses provide lines of credit or other forms of financing. In fact, some businesses make more money from financing than they do on actual consumer goods sales. I shouldn’t even need to mention that it’s a mistake to buy consumer goods with borrowed money.
    3. Repetition – This one is self explanatory. This one is self explanatory.
    4. Product positioning – Ever noticed the ice cold drinks displayed prominently in the store on a blistering hot day? Large companies are very savvy and do extensive research to determine the best way to position products in a store.

Again, I found this information useful but not incredibly useful or practical. There are many ways companies market that Dave left out. In fact, I currently run the marketing for a multi-million dollar internet company and am very familiar with many additional sophisticated marketing techniques. For example, a techniques called means-end laddering identifies the high-level personal benefits and values of consumers and emotionally ties the products features to them. Statistical clustering allows marketers to profile certain market segments in great detail and can effectively predict how certain segments will react to products. Conjoint analysis allows marketers to predict how much more a consumer will pay for a product given a tweak in the features of the product (e.g. gel vs. paste consistency in toothpaste).

Although marketers use these techniques, they are not necessarily bad. While they can be used for evil purposes, for the most part they can actually benefit the consumer. Using such tools, companies can create products that more fully meet consumer preferences. As a result, the consumer’s quality of living increases over time.

How to save on big purchases

On the more practical side, Dave gives a few very good tips for spending less, particularly on large purchases.

  1. Wait over night before making a large purchase (being defined as $300 to $1,000 depending on how much money you make). Many of the large, multi-hundred dollar purchases people make are surprisingly impulse purchases. This happens particularly when people receive large lump sums of money such as a bonus. They go on a shopping spree and before they know it have spent the money on things they may not care that much about. The simple act of waiting overnight to make the purchase will deter most frivolous impulse purchases. Once the excitement of the moment has worn off, your brain actually thinks about it and realizes you’d rather spend the money elsewhere or even save it.
  2. Understand the difference between needs and wants. You don’t need the wide screen 60″ LCD TV. You might really, really, really want it, but you don’t need it. Your needs are food, shelter, clothing, and transportation.
  3. Never buy anything you don’t understand. If the sales person can’t explain it in terms you understand, don’t buy it. Buying things you don’t understand inevitably will cause you to buy something that doesn’t really fit your needs.
  4. Consider the opportunity costs (what else could you do with the money). Opportunity cost is an economic term defined as the most valuable foregone alternative. Put in layman’s terms, what else could you do with your money? For example, if you spend $1,000 on the TV, what will you not be able to buy with that $1,000? Maybe there’s something else on your list of wants that you’d rather have even more. I frequently experience regret from buying several smaller items and realizing later that I could have saved that money to buy a bigger item that I want significantly more than the smaller ones.
  5. Seek the counsel of your spouse. As painful as it may be, two minds are better, or at least more reasonable, than one. Unless you are spending personal money, you should consult your spouse on all major purchases anyway. A spouse can offer a different perspective and can often bring to your attention other uses for the funds or other alternatives that may meet your needs at a lower cost.

Posted in Dave Ramsey, Shopping, Spending | 3 Comments »

How to increase your income by creating empowering beliefs

Written by Sam on August 9, 2007 – 11:34 pm -

attitudeOne of my favorite bloggers, Steve Pavlina, recently posted a couple of articles about replacing limiting mindsets with empowering ones. They are entitled Quality and Contribution and The Abundance Mindset. I’m amazed by the limiting beliefs people have about making money. Steve Pavlina refers to the “scripts” we run – a preset pattern of thinking and relating to the world. This concept of scripts really resonated with me because I’ve recently been able to take a step back and see myself running the same limiting scripts over and over again. It’s like telling yourself a story. You need to justify what you’re dissatisfied with so you create a story to tell yourself.

Limiting beliefs and scripts

Here are some common beliefs about money or scripts I personally have run or have seen others run:

  • It’s hard to make money.
  • Work isn’t meant to be fulfilling but is rather a necessary evil.
  • Starting a business is hard and takes too much time.
  • Socially responsible people get an education and then go to work at a 9 to 5 job regardless of whether it’s fulfilling or not.
  • Following your passion is irresponsible and can’t provide an adequate income.
  • I don’t have enough time (this is one of my personal favorites).
  • I get home from work and I don’t have energy to do more than watch tv.
  • I would break out of the 9 to 5 routine if only it weren’t for my wife, family, job, [insert excuse here].
Creating new beliefs and scripts

One exercise that has helped me break out of my limiting beliefs, at least to some degree, is to conciously identify which scripts I run and which beliefs I may be holding subconsciously. I can then create new empowering beliefs and scripts. For example, one belief I’ve adopted is “making money is easy given enough time, patience, and consistency.” By embracing this more empowering belief I’ve been able to make progress towards my goals without self sabotaging myself. It’s given me the liberty to take things one step at a time.

Expanding your beliefs step-by-step

Steve Pavlina promotes a similar approach of taking one step at a time, particularly when it comes to starting your own business.

Start where you are, and stretch yourself to let go of those limiting beliefs that hold you back. If you think it’s fairly easy to earn $10 or 100, try to open your mind to the possibility that maybe, just maybe, it could be equally easy (maybe even easier) to earn $500 in the same amount of time or less. One you’ve reached that point, push on to $1,000, and keep going from there. When you think that a certain amount of money is “no big whoop,” you’ll find a way to earn that much, and that means you’ll be contributing more value to others. The money you receive as compensation is your receipt.

When I started this website I took the approach Steve describes. I knew that if I could make $5 a month then I could then make $100. If I could make $100, I could make $1,000. Taking baby steps in such a manner allows you to push the boundaries of your beliefs little by little.

When I started this site I was absolutely thrilled when I had my first $5 month. I actually remember it quite vividly. One of my early posts was picked up by lifehacker and I received thousands of hits. I literally did a celebration dance like I had won the lottery or something. It was the most exciting $5 I’d ever made, not because of the monetary amount, but because it was a representation of the possibility of earning even more. I had taken action and created something capable of generating income. I now had an asset to build upon.

Now it’s commonplace for me to make $5 a day and sometimes I make considerably more than that. It’s still hard for me to realistically believe I could make, say, $10,000 a month, but as I gradually expand my belief system it doesn’t seem nearly as hard as it once did.

A way to practice

Last week I mentioned a way to learn how to make money online from the Thirty Day Challenge website that shows people how to make $10 online in one month. I’ve told several people about it and the responses have shown people’s beliefs. Some people say “what’s the use – it’s only $10.” Others say “it’s just too hard to start and maintain a business and I don’t have the time.” They just kick start their favorite script and away they go. It’s a shame that people don’t catch what the $10 represents. They don’t realize that once they learn how to make $10, they can use the same techniques to make $100, $1,000, or even more.

If you have any desire to make more income or a supplemental income, I strongly encourage you to participate in the 30 day challenge. I’ve been very impressed so far with the content. Most of it I’ve known already but I’ve also learned some incredibly useful tricks. They start from scratch so it’s doable even if you’re new to the internet. And part of the beauty of the program is that it’s flexible enough that you can choose to make money off of a topic that you’re passionate about.

Take some time and examine your beliefs about making money. Do you have any limiting beliefs or scripts? What new beliefs could you establish?

Posted in Income, Personal Development | 3 Comments »

Financial Peace University Overview Part 3 – Retirement and College Planning

Written by Sam on August 9, 2007 – 1:16 am -

Financial Peace UniversityPart 3 of the FPU overview covers week 8 of Financial Peace University – Retirement and College Planning. This post will apply to Dave Ramsey’s baby steps #4 and 5. Baby step #4 is: Invest 15% of your income into tax-favored investments (typically Roth IRAs or 401ks). Baby step #5 is : College funding. It is assumed that you won’t start doing either of these steps until you have saved a full emergency fund (3-6 months of expenses) and paid off all your debt except your house.

If you’re joining this series late and want to catch up see the links below for parts 1 and 2:
FPU Overview Part 1
FPU Overview Part 2

Why should I have an emergency fund and no debt before investing for retirement and college?

Dave is very strict about having an emergency fund and paying off debt before investing for retirement. He even says you shouldn’t put money in a 401K with a match (which is when your company matches a portion of what you invest – it’s basically free money). When we attended Financial Peace University we were already contributing to a 401K with a match and decided not to follow his advice on this point. It would have been much more disruptive to stop contributing. We would have lost the match and had to wait until the enrollment period to start up again.

Saving an emergency fund before saving for retirement

I’m aware that many people disagree with Dave’s advice on this point because if you wait to invest, you lose some of the advantages of compound growth. I personally can see it both ways. I tend to agree that you should have an emergency fund first. Otherwise you may have to dip into your retirement savings to cover emergencies and invoke severe tax penalties. If you take funds out of a 401K or IRA before retirement you pay excessively high taxes which would be like kicking you when you’re already down.

Paying off debt before saving for retirement

Having all your debt paid off before saving for retirement is a more tricky argument. Frankly, Dave doesn’t address it much. As far as I can tell, the main reason for doing so is focus. The more you focus ALL available money on paying off debt the more momentum you’ll get. There’s a strong psychological benefit to seeing your debt paid off at an accelerated rate.

From a math perspective, you can argue either way. If the interest rate on your debt is higher than the interest rate you’d get investing (typically about 10-12% if you invest in mutual funds), you’re better off paying down your debt. Otherwise, you’re better off investing. Having said that, even if you think you could earn 10-12% on a mutual fund, you’re not necessarily guaranteed that rate of return whereas you are guaranteed the return by paying off your debt.

In the end, I don’t think it matters much whether you pay off debt first before investing or not. I would do whichever gives you the most motivation and peace.

What investment vehicles should I use to invest for retirement?

During the session, Dave explains many savings vehicles in great detail including IRAs, Roth IRAs, SEPs, 403Bs, 457s, and 401Ks. Rather than explain them all, I’ll hit the highlights. Here is Dave’s basic strategy for investing for retirement:

  1. If your company’s 401K offers a match, invest just enough to take advantage of the full match.
  2. Next invest in Roth IRAs until you reach your maximum contribution.
  3. If you still have money left to invest, go back and invest in company plans (401Ks) or SEPs.

Within IRAs, Roth IRAs and 401Ks, you can choose what stocks, bonds, and mutual funds you want to invest in. For Dave’s advice on how to allocate funds see Financial Peace University Summary Part 1

Now let’s briefly explain the differnt retirement vehicles. Keep in mind that these are the most basic definitions. I’ve included links with more information for those interested.

Types of retirement investment vehicles


IRA stands for Individual Retirement Account (or Arrangement). An IRA allows you to invest money pre-tax and allows your investment to grow tax free. You then only pay taxes when you withdraw the money at retirement. The IRA itself is really a stock, bond, mutual fund, or other investment that is simply designated as an “IRA.” Even real estate can be used for an IRA. As Dave puts it, the IRA is just a “coat” to keep your investment protected from taxes.

To invest in an IRA you have to have a earned income in that year. In 2007 you can invest up to $4,000 per person if you’re 49 or younger or $5,000 if you’re 50 or older.

Wikipedia entry about IRAs

Roth IRA

A Roth IRA is similar to a regular IRA with one huge difference – with a Roth IRA you invest money post-tax but then your investment grows tax free and you can withdraw it at retirement tax free. In very basic terms, you would typically choose a Roth IRA if you think your income at retirement will exceed your current income. Otherwise, a traditional IRA would make more sense.

Wikipedia entry about Roth IRAs


A 401K acts like an IRA in that you invest money pre-tax and your savings grows tax free. You are then taxed when you withdraw the funds. One of the main differences between an IRA and 401K is simply that a 401K is offered specifically through your employer.

With a 401K you are also more limited in your investment options. The company running your 401K usually provides a pre-selected set mutual funds to choose from.

One benefit of 401Ks is that some employers offer a match – they will match a portion of the amount you save. For example, my current employer matches 100% of my contribution up to 4% of my income and then 50% of my contribution from 4 to 6% of my income. Just to make the math simple, if I made $100,000 and saved 6% of my income, rather than ending up with $6,000 invested I’d end up with $11,000 ($6,000 contribution plus a $5,000 match). It’s basically free money and you should definitely take advantage of a matching program if your employer offers one.

Dave points out some people don’t use the 401K if there is not a match. That’s a mistake. Even though they don’t offer a match you still get the great tax benefits and should still contribute.

The maximum contribution to a 401K for 2007 is $15,500.

Wikipedia entry about 401Ks


A 403B is essentially the same as a 401K but is offered by hospitals, schools, and non-profit organizations rather than corporations.

Wikipedia entry about 403Bs


Simplified Employee Pension (SEP) plans provide a way for small business owners to provide retirement plans to themselves and their employees. When an employee participates in an SEP, they essentially create an IRA, which in this case is known as an SEP-IRA. SEP-IRAs have the same tax implications as traditional IRAs. Employees can contribute up to 25% of their income. Self employed individuals can contribute up to 18.6% of their net profit.

Wikipedia entry about SEPs


The 457 allows you to defer your compensation. Instead of receiving income now and being taxed on it now, you can receive it and be taxed on it later. Rather than receiving the income, you can invest it. Essentially this acts similarly to a 401K. I’m personally not familiar with 457s and Dave didn’t recommend them. Use your company’s 401K instead.

Standard Thrift Plan for government employees

For federal government employees you have the standard thrift plan. Dave recommends putting 40% in C fund (common stock plan, 17% return over 10 years. Modeled after S&P index), 40% in S fund (small company fund [aggressive growth], modeled after Barclays index, averaged 14% return over 10 years), and 20% in I fund (International, 8-9% return, modeled after the Barclays EAFE index).

Rolling out funds

401Ks, 403Bs, and 457s are all offered by your employer. The good news is, you can transfer or “roll out” these investments when you leave the company. You can also roll over IRA accounts. Dave recommends rolling out funds whenever you have the option because you have more flexibility in a non-employer plan – you can invest the funds exactly how you want rather than being forced to choose from a limited selection. 401Ks and IRAs can typically only be rolled when you leave the company. However, 403Bs can be rolled at any time.

When you roll funds, be sure to do a direct transfer rather than bringing the money home first. If you have them cut you a check they have to hold 20% of the money until you decide where to invest it. Then if you don’t reinvest you have taxes of about 40% on those funds.

When you roll out funds, you need to decide if you want to roll them to an IRA or Roth IRA. Dave recommends you roll them to an IRA unless you meet the criteria below, in which case you should roll them to a Roth IRA:
1. You will have saved $700,000 by the age of 65.
2. You can pay your taxes separately out-of-pocket. For example, if you roll $10,000 to a Roth IRA, you have to pay taxes on the $10,000 immediately. If you don’t have the funds to pay the taxes right now, you can roll funds in chunks as you have money to pay the taxes.
3. You have less than $100,000 in income the year of the roll. Rules state that you can’t roll to a Roth IRA if you have $100,000 or more in income that year.

Borrowing against 401K – DON’T DO IT!

Some people ask about borrowing money against your 401K. On the surface it seems like a good idea – you can pay yourself interest rather than the bank. However, you should never borrow against your 401K because there are severe risks. Here are 3 reasons why you shouldn’t borrow against your 401K.

  1. You unplug yourself from the stock-like returns.
  2. You might leave or be fired. If you leave, that loan is due in full within 60 days or it’s considered an early withdraw.
  3. If you die, you are deemed to have left the company and your spouse has to pay back the loan.

Saving for Education

For the seemingly rare few who already have a full emergency fund, all debt paid off, and are saving 15% of your income for retirement, you can move on to baby step #5: Funding your child’s college education. I think this step is appropriately placed in relation to the other goals. You need to make sure you take care of your own financial situation, including retirement, before worrying about your kids’ educations. If you don’t, they will have to take care of you financially when you retire. Of course, I paid for almost all my college education and therefore am biased towards having children pay their own way and/or get scholarships. Regardless of your stance, Dave’s placement of this baby step is prudent and appropriate.

Use ESAs and UTMA/UGMAs to save for your child’s education

Dave’s advice is pretty straight forward – save for your child’s education first using an ESA, then using an UTMA/UGMA if you max out the ESA.

Education Savings Accounts (ESA)

An ESA is essentially an IRA for education rather than retirement.
A parent sets up an ESA for his/her child and acts as the custodian. Contributions to an ESA grow tax-exempt. If the child uses the funds for qualified educational expenses, those distributions can be used tax free. You can make a maximum of $2,000 in contributions each year. You have have an income under $110,000 if filing as a single or $220,000 for married couples to use an ESA.

Investopedia has a nice overview of ESAs

Uniform Transfer to Minors Act (UTMA/UGMA)

If you max out your ESA contributions or you make too much money to contribute to an ESA you can use an UTMA. The Uniform Transfer to Minors Act allows you to open a Mutual Fund account in the name of the child. The parent is custodian of the account until the child is 18. The downside (or upside if you’re the child) is that funds in an UTMA don’t have to be used for education. The child can use funds how they want when they turn 21.

Wikipedia entry about UTMAs

Don’t use 529 plans or use life insurance for college savings

Dave recommends staying away from 529 plans which force you to put the money into pre-defined mutual funds that don’t provide a good enough return. Age-based 529 plans invest the funds more conservatively as the child reaches 18 and give you no control. They are too conservative.

Dave also recommends avoiding the following:

  • Using life insurance policies (such as the Gerber Life Insurance policy) to save for college
  • Use savings bonds or zero-coupon bonds for college investing
  • Using pre-paid college tuition


Please recognize that the above descriptions are not meant to be comprehensive by any means. Dave Ramsey goes into quite a bit more detail in Financial Peace University and even his descriptions are not comprehensive. Hopefully this will give you a base line for understanding your investment options and spur you on to learn more. Stay tuned for part 4.

Other Resources

Retirement Savings or Debt Reduction: Which is the Top Priority? [Get Rich Slowly]
Retirement Savings Or Debt Repayment: Which Is More Important? [The Simple Dollar]
3 Common 401(k) Mistakes [The Consumerist]

Posted in Dave Ramsey, Education, Investing, Retirement, Saving | 5 Comments »

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