Invest Wisely: Dave Ramsey's Style With Fidelity

Dave Ramsey is a well-known financial advisor with a large following. His investment philosophy is based on a few key principles: getting out of debt, saving for emergencies, and building wealth through Baby Steps. Ramsey recommends investing 15% of your income in tax-advantaged retirement accounts, specifically in good growth stock mutual funds. He suggests investing in four types of funds: growth and income funds, growth funds, aggressive growth funds, and international funds. These funds are meant to provide a stable foundation, offer growth potential, and diversify risk. While Ramsey's advice has helped many people, it is important to note that investing involves risks and individuals should consider their own financial situation and seek professional advice before making any investment decisions.

Invest in good growth stock mutual funds

Dave Ramsey's investing philosophy is centred around the idea of "mutual funds", which are a safe and proven way to build wealth and retire as a millionaire. Mutual funds are a way of investing in a lot of companies at once, from the largest and most stable to the newest and fastest-growing. This means that your investment is spread across many companies, which helps you avoid the risks that come with investing in single stocks and other "trendy" investments.

According to Ramsey, you should divide your mutual fund investments equally between four types of funds: growth and income, growth, aggressive growth, and international. This lowers your investment risk because you're invested in hundreds of different companies all over the world in a whole bunch of different industries.

Here's a closer look at those four types of funds and what they bring to your investment portfolio:

• Growth and income funds: These funds create a stable foundation for your portfolio by investing in big, well-known American companies that have been around for decades. They are more predictable when the market shifts and are also called large value, large-cap, blue chip, dividend income or equity income funds.
• Growth funds: These funds are made up of medium to large American companies that are currently experiencing growth in their market. Their performance tends to ebb and flow with the economy, and they often make the latest "it" product. Other common names include mid-cap or equity funds.
• Aggressive growth funds: These funds are the wild child of your portfolio. They invest in smaller companies that have tons of potential, but they can be risky. When they're up, they're really up, and when they're down, they're really down.
• International funds: These funds help spread your risk beyond American soil by investing in large companies that aren't based in the U.S. Just don't confuse them with global funds, which bundle U.S. and foreign stocks together.

By balancing your investing dollars between these four types of funds, you create the stable and diverse portfolio you need for long-term wealth building.

Get out of debt and save for emergencies

Getting out of debt and saving for emergencies is the first step to building wealth. Here are some steps to follow Dave Ramsey's style to get out of debt and save for emergencies:

Save $1000 for your starter emergency fund:

Your emergency fund will cover unexpected life events that you can't plan for. You don’t want to dig a deeper hole while you’re trying to work your way out of debt. Try to save $1000 as fast as you can.

Pay off all debt (except the house) using the debt snowball method:

List all your debts from smallest to largest, ignoring the interest rates. Make minimum payments on all your debts, except the smallest one. Attack that one with a vengeance. Once it's gone, take that payment and put it toward the second-smallest debt, making minimum payments on the rest. This is called the debt snowball method, and you’ll use it to knock out your debts one by one.

Save 3–6 months of expenses in a fully funded emergency fund:

You’ve paid off your debt! Take that money you were throwing at your debt and build an emergency fund that covers 3–6 months of your expenses. This will protect you against life’s bigger surprises, like the loss of a job or your car breaking down, without slipping back into debt.

Make a budget:

Give every dollar a job and cut out unnecessary expenses. This will help you confidently cover all the essentials and add more money to your debt snowball.

Increase your income:

Think of your income as a shovel. The bigger your shovel, the faster you can dig yourself out of debt. You can increase your income by working extra hours, snagging a side hustle, or selling your stuff.

Cut up your credit cards:

You’ll never get out of debt if you keep creating more debt each month. It’s time to handle your money on your own terms, instead of the credit card company’s terms. Cut up those cards and never look back!

Find your "why":

Why do you want to get out of debt? What could you do if you had zero payments holding you back? Knowing and prioritizing your motivation is a key part of the debt payoff process.

Take Financial Peace University:

Choosing the right debt payoff strategy is crucial. If you’re serious about ditching debt, you need to change how you handle your money. Financial Peace University (FPU) is a nine-week class that teaches you how to pay off debt using the debt snowball method, save for emergencies, and build wealth.

Frugal habits:

Adopt frugal habits like buying generic products, cancelling unused subscriptions, reducing energy expenses, taking your lunch to work, and doing it yourself when you can. This will help you save more money to put towards your debt snowball.

Stay away from tempting stores:

When you’re trying to get out of debt or save money, avoid stores that tempt you to spend. Be honest with yourself and stay away from stores that make you want to buy things you don't need.

Remember, getting out of debt and saving for emergencies is just the first step. Once you've achieved this, you can move on to investing 15% of your income in tax-advantaged retirement accounts and building wealth.

Invest 15% of your income in tax-advantaged retirement accounts

Investing 15% of your income in tax-advantaged retirement accounts is the second step in Ramsey Solutions' Investing Philosophy. This step can only be taken once you've completed the first three Baby Steps, which involve getting out of debt and saving up a fully-funded emergency fund.

The reason for investing 15% of your income is to build a solid nest egg for retirement. Research has shown that your savings rate is the most important factor in determining whether or not you'll have enough money for retirement. By investing 15% of your gross income each month, you can grow your money and set yourself up to retire comfortably.

There are several types of tax-advantaged retirement accounts that you can use to invest your money. These include:

• Traditional IRAs and Roth IRAs
• 401(k)s, 403(b)s, and Thrift Savings Plans (TSPs)
• Health Savings Accounts (HSAs)
• Backdoor Roth IRAs
• After-Tax 401(k) Contributions

When deciding which type of account to use, it's important to consider the tax implications and contribution limits of each option. Traditional IRAs and 401(k)s, for example, allow you to contribute pre-tax dollars, while Roth IRAs and Roth 401(k)s use after-tax dollars. Backdoor Roth IRAs are a convenient loophole for high-income earners who want the tax advantages of a Roth IRA but are restricted from contributing directly. HSAs offer a triple tax break but can only be used for qualified medical expenses. After-Tax 401(k) contributions allow you to contribute more money overall but don't offer any tax breaks on those additional contributions.

To maximize your tax efficiency, it's recommended to put investments that lose more earnings to taxes into taxable accounts and those that lose less earnings to taxes into tax-advantaged accounts. It's also important to remember that you should only invest 15% of your income in retirement accounts after you've maxed out your other financial goals, such as saving for your children's college funds and paying off your mortgage early.

By following these guidelines and working with a financial advisor, you can make the most of your investments and build a secure future for yourself and your loved ones.

Work with a financial advisor

Working with a financial advisor can be a great way to get expert advice and guidance on your investment journey. Here are some tips on how to work with a financial advisor the Dave Ramsey way:

• Find the Right Financial Advisor: Ramsey Solutions offers a free service called SmartVestor, which connects you with financial advisors and investment professionals in your area. These professionals are vetted and have agreed to a code of conduct. However, it is essential to interview multiple advisors to find one that suits your needs and with whom you feel comfortable.
• Understand Their Role: A good financial advisor will give you insight and direction based on their experience. They should take the time to answer your questions and ensure you understand the investments they recommend. Remember, you are the decision-maker, and a financial advisor is there to guide you.
• Discuss Investment Options: Dave Ramsey recommends investing in good growth stock mutual funds. When working with your financial advisor, discuss the different types of mutual funds, such as growth and income, growth, aggressive growth, and international funds. Understand the risks and potential returns of each and how they fit into your overall investment strategy.
• Consider Fees: While Dave Ramsey is not opposed to paying commissions and fees for financial advice, it is essential to be mindful of the costs. Discuss the payment arrangement with your financial advisor and ensure you understand any associated fees. Remember that higher fees do not always equate to better performance.
• Long-Term Perspective: One of Dave Ramsey's key principles is to keep a long-term perspective when investing. Work with your financial advisor to create a buy-and-hold strategy and avoid making impulsive decisions based on short-term market fluctuations. Focus on consistent investing over time to build wealth.
• Customised Advice: A good financial advisor will tailor their advice to your specific circumstances and goals. Be open and honest about your financial situation, risk tolerance, and investment objectives. This will enable your advisor to provide you with the most relevant and beneficial guidance.

Keep a long-term perspective and invest consistently

Investing is a rollercoaster, and there will be ups and downs. The key to investing is to keep a long-term perspective and not panic when the market is down. The market has historically recovered from its dips 100% of the time.

Dave Ramsey's investing philosophy is to keep a long-term perspective and invest consistently. He recommends investing 15% of your income in tax-advantaged retirement accounts. He also suggests investing in good growth stock mutual funds, which are a proven way to build wealth and retire as a millionaire.

Mutual funds are a safe way to invest as they contain stocks from multiple companies, so if the value of a single stock goes down, the overall value of the fund should still go up over time. Mutual funds also offer active and professional fund management and instant diversification.

When choosing a mutual fund, it is important to review the fund's prospectus or online profile, including the fund's goal and strategy, the fund manager's experience, the fund's performance, and the fees involved.

It is also important to diversify your investments by spreading your money across different types of funds, such as growth and income funds, growth funds, aggressive growth funds, and international funds. This helps to reduce risk and create a stable portfolio for long-term wealth building.

Remember, investing is a long-term game, and it is crucial to have patience and trust the process. Don't give into fear and make impulsive decisions. Stay focused and consistent with your investments, and you will be on your way to building wealth and retiring comfortably.

Frequently asked questions