Dave Ramsey Baby Step #4- Invest 15% of your income to Retirement

Now this is the baby step where a lot of people start to disagree with Dave. Almost everyone agrees starting a savings is a good idea. Nearly everyone agrees that consumer debt is not a good thing (maybe not all debt is bad though) and once those things are done to continue building a larger savings amount or start saving for house. After you have done these things you will now have more income and more savings so the next logical thing to do is to make sure you are never in a situation again where you need to rely on others for money! Investing is a scary thing for a lot of people and just because Dave says one thing, does not necessarily make him right either. At the end of the day, doing something is better than nothing though so here is what he suggests.

401K- Your company should have some type of retirement plan. You should be using it and understanding what is happening with your money. If your company has a match then you should DEFINITELY take advantage of that. It is free money you should be earning!

Roth IRA- If you have a 401K and are taking full advantage of the match, then the next best step is start investing in a Roth IRA. Why? Because any money you put into the Roth IRA grows tax free. If you were to put $1,000 dollars into a Roth vs $1,000 into a traditional 401K plan assuming no match, with the Roth you get taxed for that initial amount. If we assume 10% tax that means you would pay $100. For the traditional 401k (or any IRA for that matter) you pay nothing up front, but everything later on. Lets say your $1,000 grew to $100,000. You would now have to pay $10,000 in taxes because you are paying on $100,000 not $1,000. Hopefully you can see how the Roth can make you more money in the long term. Yes you have to pay more upfront and yes you can only put in a certain amount per year, but it will benefit you greatly in the long term.

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Mutual Funds- Dave suggests that mutual funds are the safest form of investment because they are consistent and proven. Or at least you can find ones that meet that criteria. Look at funds that have performed well over a 10 year period. He suggests 4 different types of mutual funds- Growth, Growth and Income, Aggressive Growth, and International

Single Stocks and other Investments- There are plenty of investments that Dave suggests not to do or would avoid because they do not keep up with the rate of inflation or have low returns. Probably the two that most people disagree with are his stance on single stocks and Whole Care life insurance. There is nothing wrong with single stocks, however they are more risky and more prone to high highs and low lows. If you want to invest into single stocks, you should definitely be willing to put in even more time to make sure you are making good choices and be ready to have an exit strategy. Whole Care Life Insurance is another thing Dave is not a fan of and we tend to agree. It is very confusing to follow, but basically you are using life insurance (which you should have especially if you have a family) as an investment strategy. You “make” money by getting a percentage back and also building a “savings” account. The problem in our opinion is if we were to put money away for such a long time with the hopes of using it one day, we would just want to take it out and not jump through hoops to get it. It just seems overly complex for something that should be simple. Being great or foucsing on one thing is sometimes better than being average or stretching yourself too thin. In our opinion that is what whole life insurance is…average and too complicated.

Getting Help- If you are nervous to do the investing yourself seek out help in terms of a financial advisor. Make sure it is someone who you feel like you can trust, but do the research on what they say so you can make an educated decision. Do not just blindly listen or trust what they tell you. If you do not feel comfortable investing in something then you should not do it. Do some research your self to make yourself more comfortable with the investments you are making. Your future depends on it.

We could go into much more detail here, but we are not investing experts and do not want to give in depth investing advice. A professional would be able to help you much better. We wanted to point out what Dave Ramsey thinks of investing and how he would handle it once you made it through the baby steps. Regardless of what you do, once you make it to baby step 4, exciting things start to happen because you are not worrying about money really anymore. You have a significant savings and you have even more of a peace of mind because you are taking care of your future…now. The controversy continues with the next baby step, saving for kids college.

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