Baby Step 5 of Dave Ramsey’s Plan is to set aside some money for your child’s college education.  After Baby Step 4 is underway (saving 15% for retirement), you should set aside some money to help send your child to college.

If you have 5 years or longer until your child will be starting college, then you should invest the money in a good mutual fund inside of an ESA (Educational Savings Account) or 529 plan.  This will be after-tax money that is invested, but much like a Roth IRA, the money will grow tax free if it is used for your child’s college education.

The #1 goal is to not take out a student loan in order to send your child to college! The last thing that your child needs is to graduate from college with $100,000 in student loan debt hanging over his or her head.  This means that the choice of college is very important.  Unless your child receives an academic or athletic scholarship, then a state college should be the destination of choice.  Private schools are too expensive and, except in rare circumstances, employers really are not interested in where your child went to college.  Employers are interested in whether or not your child learned something while they were in college.

As your child approaches college age, he or she can assist with paying for college in a number of ways:

One way is by working full-time during the summer and a few hours per week during the school year.  Many people worked while attending school and you are not a child abuser if you insist that your child be one of them.

Another way is by maintaining a high grade point average and doing well on standardized tests like the SAT and ACT.  Be sure that your child enrolls in prep courses for the standardized tests that he or she plans to take.  Often, a high score on the standardized tests will open the door to scholarships that otherwise would not have been available.

If your child is a junior or senior in high school, a fantastic part-time job is for them to go online and use some of the search engines or purchase one of the computer programs that are available for finding scholarships.  Then, have your child to apply for each and every scholarship that they find.  This will include things like writing essays or submitting art portfolios (depending upon the type of scholarship sought), so it will keep the child very busy.  Dave Ramsey often recounts the story of a listener who purchased one of the computer programs that help find scholarships.  This listener applied for 1,000 scholarships and was turned down for all but 30 of them.  Those 30 scholarships netted her $38,000.  That is not bad for a part-time job!

If you have tried the methods above and you still don’t have enough money to send your child to college, then your child can do what millions of college graduates did…  Your child can work his or her way through college.  It will not kill them!

The most important thing to remember about funding your child’s college education is that you may find yourself in a financial position where you are not able to help your child pay for college.  Either your child is too close to college age or you are in really bad financial shape and you will not have made it to Baby Step 5 in time to help.  If this is the case, you are not a child abuser, so do not feel guilty!  You have kept a roof over your child’s head, clothing on his or her body, and food on the table.  Helping pay for college is at the bottom of the list until you get your own finances in order.  That’s why it is the 5th Baby Step behind paying off all debt except the mortgage, saving a 3 to 6 months of expenses for an emergency fund, and investing 15% of your income into retirement savings.

If, like my wife and me, you do not currently have any children, then you should skip this Baby Step.  Do not set aside college savings for children that you plan to have in the future.

Baby Step 2 of Dave Ramsey’s Plan is to pay off all of your debt, except for your primary home mortgage, using the Debt Snowball.

The Debt Snowball is where you make a list of all of your debts, smallest payoff balance to largest payoff balance.  You then pay only minimum payments on all of the debts except for the smallest one and you attack that smallest one with a vengeance.  You throw every extra penny that you can scrape together at that smallest debt until it’s gone.  Once it’s gone, you take the money that you were using to pay on the smallest debt, plus every extra penny that you can scrape together and you throw it at the next smallest debt, while continuing to pay minimum payments on the larger debts.  You repeat this over and over until, finally, you are debt free except for your home mortgage, if you have one.

According to Dave Ramsey, the average family who works this plan is able to become debt free, except for their mortgage, within 18-24 months.  For us, it was longer…  It took us 3 years, 3 months, and 10 days, but when it was all over, we had paid off $80,820.37.

I’ll admit that we did not cut our lifestyle all the way to the bone as Dave recommends.  We did sacrifice in many areas, but we continued to do some things that delayed our progress.  For example, we decided to keep our season tickets and Lifetime Rights seats to NC State University football games.  The key is that we, my wife and I, made a conscious decision to keep doing some of those things with the full knowledge that it would take a little longer to get out of debt.  Also, we never took our eyes off of the prize of becoming debt free.

Dave’s plan, as the book title indicates, is all about having Financial Peace.  For those who are reading this and are on the fence about whether or not to get out of debt, try this exercise:  Close your eyes and imagine what it would be like to be debt free, except for your home mortgage if you have one, and to have $15,000 in cash in the bank as an Emergency Fund.  No payments.  Your most powerful wealth-building tool, your income, has been returned to you for use as you see fit.  How does that feel?  Can you breathe a little bit easier?

We have not borrowed a dime since July 2003.  No credit cards, no in-store financing, no car payments, no student loans, NO DEBT PERIOD.  When we want something, we save up and pay for it.  When we go to purchase something, we learned to stop asking, “How much down and how much per month?”  Instead, we learned to ask the question that wealthy people ask, “How much?”  That means, how much does that item cost for me to purchase in full, right now, if I pay cash?  Also, because I’m paying cash, I’m looking for a bargain!

On November 10, 2006, my wife and I got out of bed early and, before I headed off to work, we visited the First USA VISA web page for the very last time.  We entered in our final payment amount and, with both of our hands on the mouse, we clicked the submit button and we were finally debt free.

The sacrifice to get out of debt is not easy, but it is so worth it!  When you only have a house payment, you relax in places that you didn’t even know were tense.  Your paid-for cars drive better.  Your paid-for HDTV displays a sharper picture.  The air you breathe is cleaner.  Life is better on the planet when you are no longer a financial slave to the lender.