Sell your home in record time with these simple tips.
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We all know how to deal with debt—pay it off! Investing, however, is more complicated, and most people have questions about how and when to do it. So, to give you the answers you need, we put together everything Dave has to say about long-term wealth building in one place.
For in-depth investing help, contact your investing Endorsed Local Provider (ELP). Dave's investing ELPs are financial advisors who will show you how to invest the way Dave teaches. ELPs don't work for Dave but they have earned his endorsement because they are honest professionals and who will make sure you understand your investments.
Special Note: Even though many people value Dave's advice, you should not simply do what Dave does just because he's Dave Ramsey. If you get the help of a financial advisor, even an ELP, you are responsible for making your own decisions. Never invest your money in something you don't understand.
Dave's Investing Philosophy (printer-friendly)
Baby Steps: Don't invest before you complete Baby Step 3
Your income is your most important wealth-building tool. As long as your income is tied up making debt payments, you won't be able to build wealth. And, if you begin investing before you've built up your emergency fund, you'll end up tapping your investments when an emergency comes along.
If you are still on Baby Steps 1-3, be patient. Put off investing for now. Avoiding a crisis with a fully funded emergency fund and paying off high-interest debt is a fantastic investment!
- $1,000 baby emergency fund
- Pay off all debt using the debt snowball
- Save 3-6 months of expenses as your fully funded emergency fund
- Invest 15% of household income into Roth IRAs and pre-tax retirement
- Save/invest for your kids' college
- Pay off your home early
- Build wealth and give! Continue to invest in mutual funds and real estate.
Investing For Those Just Getting Started
- Be sure you have completed the first three Baby Steps.
- Begin by doing pre-tax savings (in 401(k), 403(b), TSP, Traditional IRA) and tax-free savings (Roth IRA, Roth 401(k))
In Baby Step 4, you'll invest 15% of your income. If your employer matches your contributions to your 401(k), 403(b), TSP, then invest up to the match. Next, fully fund a Roth IRA for you (and your spouse, if married). If that still doesn't total 15% of your income, come back to the 401(k), 403(b) or TSP.
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Dave recommends mutual funds for your employer-sponsored retirement savings and your IRAs. Divide your investments equally between each of these four types of funds:
- Growth & Income
- Aggressive Growth
Choose A shares (front end load) and funds that are at least five years old. They should have a solid track record of acceptable returns within their fund category.
If your risk tolerance is low, which means you have a shorter time to keep your money invested, put less than 25% in aggressive growth or consider adding a “Balanced” fund to the four types of funds suggested.
Dave does not own single stocks and does not suggest single stocks as part of your investment plan. Single stocks don't consistently generate returns as high as mutual funds do in the long-term. If you really want to own a stock for some reason (company stock, for fun, etc.), limit single stocks to no more than 10% of your investment portfolio.
Certificates of Deposit (CDs):
Dave recommends CDs only for savings (for a purchase, taxes if you own a business, etc.), not for long-term investing because of their low rate of return. Long-term investments must earn a high enough rate of return to outpace inflation (3-4% per year) and cover taxes on the gains if not inside a retirement account. Most investors need to average a minimum of 6% per year over time to do these two things.
Dave does not own any bonds and does not suggest them as part of your investment plan. People mistakenly believe bonds are "safe" investments that have slightly lower rates of return than equities. Single bonds can actually be very volatile and go down significantly in value. Bond mutual funds can at least be tracked for historical returns but do not offer the returns equity mutual funds do.
Dave does not own any fixed annuities and does not suggest them as part of your investment plan. Simply stay away from these!
Variable Annuities (VAs):
Variable annuities cause more confusion than any other financial product.
What are they?
- A VA is a savings contract with a life insurance company.
- They offer tax-deferred growth on an after tax investment.
- They offer beneficiary designation, which allows the account to be transferred to a beneficiary outside of probate court.
- VAs carry penalties if the contract is broken prior to the contract time period, usually a declining surrender charge that lasts from six to 11 years.
- 10% IRS penalty for withdrawing prior to age 59 1/2.
- VAs offer many bells and whistles, such as guarantees of principal, life insurance, etc.
- VA fees vary widely.
Dave has strong suggestions for investors considering VAs
- Only consider VAs when you reach Baby Step 7. At that point, you're debt free including your home and all other tax-deferred options have been used.
- VAs can be useful investment tools because they allow your investments to grow tax-deferred.
- When purchasing VAs understand the fees, surrender period and any riders or options you choose.
- When purchasing VAs, stay with the four types of mutual funds Dave suggests inside the VA.
If a person earns too much to contribute to a Roth IRA and is limited to what he can contribute to a 401(k) plan due to top-heavy rules (unable to contribute 15% into pre-tax or tax-free investments), Dave recommends using either low-turnover mutual funds or a combination of low-turnover mutual funds and variable annuities. While this is an option for high-income earners, Dave still does not personally use variable annuities.
- Don't commit to VAs until you're sure you are ready. Once you're in, you're in.
- Never, ever, ever roll an IRA, 401(k) or 403(b) into a VA. These three things already have the benefit of tax-deferred growth, and you do not need a VA.
- While Dave fits all the pre-requisites for VAs he does not personally own any. He prefers mutual funds and paid-for real estate for investors on Baby Step 7.
Investing For College
Dave recommends investing the first $2,000 per year in an Education Savings Account (ESA, Coverdell Savings Account). ESAs are very simple and work much the way a personal IRA does. When saving for a young child who will attend a public school, the ESA will usually be all you need.
For investing more than this amount or if your income exceeds $200,000 annually, choose a 529 plan. The challenge with 529s is that every state has a different 529 plan and they all work differently. Some allow you to pick mutual funds, some require you to choose funds based on your child's age, while others are pre-paid tuition programs.
When choosing a 529 plan, pick a plan that allows you to choose the funds up front and to keep those funds all the way up until time to use the funds for education. Remember to stick with the four types of funds Dave suggests. Don't use the pre-paid plans or ones that do age-based asset allocation.
Long Term Care Insurance (LTC)
Dave recommends making LTC part of your plan when you turn 60 years old. LTC is a wise choice even if you do not have a sizable estate to protect as long as the premiums are well within your budget. For example, a 60-year-old couple with a plentiful current income but a smaller estate may choose LTC simply for the quality of care it will provide them.
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Dave recommends everyone purchase long-term disability insurance to replace income in the event they are disabled. The cost of long-term disability depends on your occupation. White-collar employees carry less risk than blue-collar employees and therefore are less expensive to insure. For short-term disabilities (90 to 180 days), a fully funded emergency fund will cover your expenses, so Dave does not recommend purchasing short-term disability policies.
Everyone should have 15-year (or longer) level term life insurance. Your coverage should equal to eight to 10 times your annual income. The logic behind this is that a beneficiary could invest the entire amount into mutual funds and draw 8-10% annually as income without actually consuming the original insurance amount. Effectively, this replaces the income that was being generated by the deceased person. Never purchase any type of cash value or permanent insurance such as whole life, variable life, universal life, etc. Never cancel any old policy until the replacement policy is fully in force.
Exchange Traded Funds (ETFs)
Dave does not own ETFs and does not recommend them as part of your investment plan. ETFs are baskets of single stocks that are intended to operate like mutual funds, but they are not mutual funds.
Separate Account Managers
SAMs are third-party investment professionals who buy and sell stocks or mutual funds on your behalf. Dave prefers to sticking with the team of managers in large, old, experienced mutual funds.
Real Estate Investment Trusts (REITs)
Dave does not own any REITs and does not suggest them as part of your investment plan. As a category, REITs don't perform as well as good growth stock mutual funds. If you really want to invest in REITs, limit this to no more than 10% of your total investment portfolio.
Equity Indexed Annuities
Dave does not own Equity Indexed Annuities and does not suggest them as part of your investment plan. Equity Indexed Annuities agree contractually to limit your loss while you agree to limit your gains. Instead, invest directly into index funds if you want to follow an index such as the S&P 500 or similar.
Thrift Savings Plan (TSP)
Dave's suggestion is to invest:
- 60% in C fund/plan
- 20% in S fund/plan
- 20% in I fund/plan
Dave does not use a values-based investing approach. Here's why:
- In values-based investing, you pick between two similar mutual funds that align with your beliefs--a good concept.
- However, few of these funds stand up to Dave's criteria for picking mutual funds (five-year or longer track record of strong rates of return, professionally managed by a team of mutual funds managers, etc.)
- This is a very personal decision you will have to make. It's what is known as a slippery slope. If you no longer invest in funds that might invest in a company that supports abortion, to be consistent, you will need to stop shopping at the grocer that sells pornography. You would also need to stop banking because nearly all banks contribute to United Way, which supports Planned Parenthood.
- Do not choose these funds out of guilt. Do not make poor investment decisions to choose these funds.
Commissions and Fees
Long term, class A shares are much less expensive than B shares or C shares, so Dave recommends them.
Dave does not personally choose fee-based planning (paying 1% to 2.5% annual fees for a brokerage account). With an A share mutual fund, you pay an upfront load of 5% to 6% once. But with a fee-based account, also known as a wrap account, you agree to pay a 1% to 2.5% fee every year—forever. As your account grows, the 1% to 2.5% fee will really add up.
Pay a Pro or Do it Yourself?
Pay a pro. Dave still chooses to use a pro and suggests you do too. Statistics show that "do-it-yourselfers" are quick to jump out of funds when they begin to underperform. A good professional advisor will remind you why you chose the fund and prevent you from buying high and selling low.
Working With Your Advisor
They advise, you make decisions. This is very important. You are paying them for advice and the ability to teach you enough to make smart decisions about your investments. You are not handing over this responsibility because they are a professional or even because they are trusted by Dave Ramsey. Retain ownership and responsibility for all final decisions. Don't invest in anything unless you can easily explain how the investment works to your spouse. If you cannot communicate easily with your financial advisor, find one that does a better job of communicating. Take your time and make wise decisions.
Seem too simple? Investing doesn't have to be complicated. Dave fits all the profiles of a wealthy, knowledgeable investor, but he really does keep it as simple as you hear him teach on The Dave Ramsey Show each day. Wealthy people find simple ways that work and then do them over and over and over. Happy investing!
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