Dave Ramsey’s Baby Step Four – Invest 15% of Your Income for Retirement (2024)

562 Shares

The last week, I wrote anoverview of Dave Ramsey’s baby stepssystem from his book,The Total Money Makeover, and I have been dissecting each of his individual baby steps as well. The Total Money Makeoveris a personal finance book that I highly recommend and one of the greatest personal finance books to read. Baby step 4 talks about investing for your retirement.

Today, we will look at Baby Step 4in more detail which is to invest 15% of your income for retirement. There are seven Dave Ramsey baby steps that you should follow in order that will lead you to financial peace. Dave Ramsey’s baby steps are…

Baby Step 4 –Save 15% of Your Income for Retirement

Dave Ramsey’s best-selling book and system, The Total Money Makeover, talk about baby step 4 to invest 15% of your gross pay in good growth stock mutual funds. While it is just a rule of thumb, he recommends 15% of your gross pay and not your net pay which means that you calculate the investment before taxes.

So, for example, if you earn $60,000 per year, you should be setting $9,000 aside in either a Roth IRAif you qualify for one, your employer’s 401k especially if they have a matching contribution program, and then in taxable accounts through stock mutual funds.

Dave Ramsey is especially fond of growth stocks thanks to their historic rate of return. The stock market has been struggling lately, but over the long term of almost one hundred years, the stock market has provided an excellent investment.

What Should You Invest Your Money In?

Dave Ramsey’s Baby Step Four – Invest 15% of Your Income for Retirement (1)

So, now that you know how much money you should be saving every month from your paycheck, then the ultimate question becomes where to put it? This is a problem that many people dwell on and the subject of baby step 4. Should you invest in individual stocks, bonds, mutual funds, or your company’s 401k? What about Roth IRAs?

If you stick strictly to the Dave Ramsey method that he outlines in The Total Money Makeover, he recommends buying good growth stock mutual funds to help you build your nest egg for retirement. You should have a well-diversified portfolio of stock mutual funds that include international stocks, mid-cap, small-cap, and large cap or capitalization companies. For most people, using a Roth IRA is one of the best tax advantages that you can find.

By using after-tax dollars in a Roth IRA, you can withdraw your investment and its earnings tax-free in retirement. Another investment that you should use first is a 401k if your company matches your contributions. Many employers match the first 3% of the investment that you make in a 401k. Not taking them up on that offer is essentially throwing away a 100% rate of return.

There is actually a rhyme to the reasoning as to where the 15% comes in. Dave Ramsey recommends 15% no more and no less. Investing more could hinder you from completing the next baby steps of funding your children’s college education and paying off your home mortgage early.

Other things that are taken into consideration are the average rate of return for the stock market, inflation, how large a nest egg you will need to have in retirement, how many years you will invest before retirement, and how much of your nest egg you will withdraw.

If you’re looking for places to keep traditional investment accounts, you might want to check out investing with M1 Finance, Robinhood,Betterment,orStash Invest.

M1 Financesimplifies the investment process for beginning and experienced investors alike. M1 Financedoes notcharge a fee per trade, and it gives you the option of taking more control over your investments if you want them (and less if you don’t). M1 Finance is great for buy and hold investors.