Invest for Retirement

This may include maxing out your 401k – I have a hack to do that here – ROTH IRA’s, and/or traditional IRA’s, depending on your income level. Can’t max due to your income (i.e., $18,500 isn’t reasonable)? You’ll want to make sure at least 10-20% of your income is going here – and more if you want to . Where you fall in that percentage range depends on your age and current savings level. If you’re 22 and starting in the workforce, planning on a traditional retirement 40 years from now, or you already have a substantial base of savings, 10-15% could work.

If you’re 22 and planning to reach financial independence by 30, or if you’re 40 with nothing saved, you’ll want to go to 20% or higher. You don’t need to do this all at once, though. Increase slowly over time and you won’t notice where the money went. This is the stage where your investment policy statement becomes ever more critical. If you haven’t completed it already, you’ll want to do so now.

Invest for College

This step is only applicable if you have kids, or plan to have kids in the future. Just like with retirement, the sooner you start this step the less you have to save. You can put small amounts of money aside for a long period of time, or lots of money aside for a short period of time. I prefer the former, and you can see my real 529 numbers here. Or learn more about how America pays for college.

Investing doesn’t have to mean only money – you can help your kids seek a path to get a debt free degree using company reimbursements. I myself went from community college to an MBA – debt free – and your kids can do the same thing today. Yes, they really can. You can also encourage family to give the gift of college instead of stuff.

Don’t make the mistake of thinking the old saw about “your kids can get loans for college but you can’t get loans for retirement” lets you off the hook. It doesn’t – the government really doesn’t care if you don’t feel like saving.

You’ll want to adjust your college compact over time, as your kids grow, your income situation changes, and the cost of college adjusts.

Invest in your Dreams

This is the fun part. You’ve built a solid foundation, protecting yourself and your family against disasters. You’ve gotten rid of your debt, except that mortgage if you own a house. Now it’s time to invest in your dreams, those dreams you developed all the way back in the first tier.

This kind of investment can take many forms. Maybe it’s a fund to one day take the family on an epic international trip. Perhaps it’s an investment to start a business. You could be buying properties to get rental income, to eventually have the rents cash flow your lifestyle. Only you can decide on what your dreams are. You can pursue them even in the face of enormous obstacles.

Mortgage Freedom

I have this as one of the last steps for a few reasons. It’s often the lowest cost debt you have. And I know there is a large contingent of people out there who feel you should never pay off your mortgage. As a family that’s survived an extreme medical crisis, getting rid of our mortgage is important to us, although I respect those with a different opinion. We currently have a 15 year mortgage – which I highly recommend – at 2.75% that I plan to destroy before I’m 40. I hate my mortgage company and can’t wait to get rid of this one. Freeing up this cash flow will make Tier 5 all the better.

Done With The Fourth Step – On To Enjoy Your Freedom

Once you’re done here, you’re free. Lets explore more of what that means in the next step.