There's Rice At Home - The 7 Baby Steps Part II
7 BABY STEPS
In today’s post, I’ll talk about the last four steps of the 7 Baby Steps that were taught during the Financial Peace University (FPU) course.
Again, I’m not an expert in any way and I am still learning (especially on these last four steps) so it’s important that you do what works for you as God leads. I am using this series as a way to share what I’ve been taught in hopes that anyone who reads these posts will be motivated to want to do better in the area of personal finance.
STEP FOUR: Invest 15% of Your Household Income in YOUR PENSION
Now I’ll be honest, when this part came up during the course I was so lost mainly because Dave Ramsey uses a lot of American terms and references (obviously). Thankfully the Clever Girl Finance class I took on retirement really explained a lot of the terms Dave uses and I’ve been able to understand this step a little better.
Dave advises, once you’re debt-free, start investing 15% of your income towards your pension. While completing the previous steps you should be saving towards your pension, however, once all your debts have been paid (except the house) allocate 15% of your annual income towards your pension.
How you ask…
Invest via Your Employer’s Match Pension Scheme (Stakeholder Pension)
After spending money on Aso Ebi, travelling to the venue and celebrating with the celebrant(s), at African parties guests are given truck-loads of goodies ranging from so useful to not-so-useful items, anything from pens, notebooks, Ikea trays, and sometimes a weekly grocery shop is covered by the freebies given. Spaghetti, cooking oil and salt anyone? A good pension works the same way - an amount or percentage of your income, agreed by you, is deducted and saved in your fund, your employer then matches the amount you’ve allocated and places that in your fund. This concept is “freebies at an African party”, you don’t go home empty-handed.
An example - Aunty Rita has £50 deducted from her salary every month and her employer matches her £50 (capped at £30). So every £50 she saves, her employer deposits £30 into her pension fund which is invested.
Open a Private Pension Fund
Dave Ramsey encourages splitting your 15% between your employer’s pension scheme and an external high yielding one. In the US it’s called a ROTH 401K or ROTH IRA and in the UK it’s referred to as Self-Invested Personal Pension (SIPPs).
You can also open your own stakeholder pensions but you need to be working to contribute to this.
You’re leaving the party a little early with your freebies and because it’s Saturday you’re off to another party, this time just to show face. You’ve shown your face, sprayed a few notes on the celebrant (it’s the 70th birthday party of your friend’s mum) and again you’re leaving with freebies; two small bags of rice, a desk clock, dishcloths, kitchen utensils, a travel iron, a kettle and two hand lotion and body spray sets, which all sit comfortably in your new laundry basket.
Some SIPPs include a Stocks & Shares ISA which you can open via your bank
Note:
Pension funds are investments (there is risk involved so discuss and read your policy very well)
Employers will have a cap on how much they match - take the maximum match to maximise your investment (find out how much you need to put in order to take full advantage of your employer’s match)
Depending on the plan your employer offers, you can choose where you want your money invested.
Do your research when looking for private pension schemes outside of your employer - only work with reputable firms and ensure you understand what your money is supposed to be doing for you. If you don’t understand it, don’t sign up.
You shouldn’t be withdrawing/using your pension fund before retirement age - there are taxes and penalties associated with pensions and retirement funds (I don’t know enough about this to share how it works, but I do know you should just let your money grow, leave it alone).
For more information on UK Pensions and Pension terminology, you can check out The Money Advice Service. Also, next week I’ll be sharing some resources/apps that can help with saving towards your pension (UK only).
STEP FIVE: Save for Your Children’s College/University Fund
One thing that clearly annoys Dave Ramsey is Student Loans and the debt crisis many people are finding themselves in. He is a firm believer that people can graduate from university without student loan debt and he encourages parents to start saving and investing money towards their children’s further education. The reason why this step is number five on the list and not higher up is because not everyone goes to university and he, therefore, places emphasis on getting steps 1-4 done and started. Even if a child chooses not to further their education, the money is still saved and can be invested further for the child/children (and used for them in other ways).
Saving towards a child’s higher education is reminiscent of the moments when mothers and aunties alike are seen collecting party bags for their children, nieces, nephews and cousin’s cousin, who for some reason weren’t at the party. “Omo mi nko ati niece mi? Won si’n bi.” (What about [a bag for] my child and my niece? They’re not here).
Be this aunty for step five - collect and save all the party bags you can and start early - the children don’t have to be around before you start saving.
To start saving for children’s education you can do so by opening a Junior ISA account (as an example) - the US equivalent is an Education Savings Account IRA. There are a number of funds and educational trusts available with private firms/investors to choose from when it comes to saving and investing towards education for your children.
STEP SIX: Pay Off Your Home Early
By this step you’re completely debt-free, you have your savings, your pension investments are making more money for you without you doing anything, and your children are set for a debt-free life after university, now focus on completely paying off your home. It’s the only ‘real’ debt you have.
Dave says that 100% cash down is definitely the best option but not everybody can and so, and advises to put a least 10% of your own cash towards your home and opt for a 15-year mortgage with a monthly payment of no more than 25% of your salary (after tax).
I don’t know a lot about the technicalities of buying a home and all the terminology, but it is something I am learning about; Aunty Rita, however actually owns a home and two apartments in Nigeria with her ‘estranged’ husband (they’re still working things out); the home is ‘theirs’ while they rent out the apartments. Aunty Rita and her husband have been saving and investing their rental income for their young boys and because they built their home and the apartments they don’t have a mortgage to pay.
STEP SEVEN: Build Wealth and Give
As I get older I realise that showing up to an African party/event is often to show support as much as it is to have a good time, it’s about representing and making yourself available to the celebrant(s) because of your closeness and friendship with each other. It’s an act of giving back and appreciation.
Wealth is best enjoyed when it’s given freely (and sensibly lol). There have been times where I’ve wished I had more than I do, so I could give away to other people. I really do believe that wealth should be shared and this is one of the reasons I am pursuing a godly-wealth journey.
Giving without restriction, without expecting it back and with joy.
"Each one must give as he has decided in his heart, not reluctantly or under compulsion, for God loves a cheerful giver."
2nd Corinthians 9 verse 7, English Standard Version - ESV
While getting to step seven, get used to giving (as God leads) and give what you know you can afford to never get back, so by the time you get here giving easy for you to do.
God encourages us to give because ultimately He is the one that has given us the resource of wealth and He replenishes so that the giving never stops. God owns it all.
We Give because God gave and keeps giving us more than we actually deserve.
Give towards work done to proclaim the Gospel of Jesus (yes, your local ‘church’ has bills to pay too).
Give towards your future - Proverbs 13 verse 22, English Standard Version - ESV: "A good man leaves an inheritance to his children's children, but the sinner's wealth is laid up for the righteous."
Give to those in need - James 1 verse 27, The Passion Translation - TPT: "True spirituality that is pure in the eyes of our Father God is to make a difference in the lives of the orphans, and widows in their troubles, and to refuse to be corrupted by the world’s values."
One scripture I really like when considering and balancing this wealth journey is Proverbs 30 verse 7-9, New Living Translation - NLT:
"O God, I beg two favours from you; let me have them before I die. First, help me never to tell a lie. Second, give me neither poverty nor riches! Give me just enough to satisfy my needs. For if I grow rich, I may deny you and say, “Who is the Lord?” And if I am too poor, I may steal and thus insult God’s holy name."
I hope you’ve enjoyed today's post? AND YES, freebies mentioned in this post have been given away at parties I’ve been to. The list is endless.
Next week I’ll be sharing resources and templates with you that can help towards these steps and at the end of this series, I’ll share a review of where I’m at with my wealth goals.
I’m looking forward to sharing more with you all and I’m also looking forward to hearing your wealth stories!
Don’t forget to subscribe to get notified when each post is available; a new wealth post will be out every Monday at 7pm (GMT) - this one was extremely late, next week I’ll do better (lol).