What Does Dave Ramsey Say About Investing?

Dave Ramsey’s financial philosophy centers on establishing a strong foundation of financial security before embarking on wealth creation through investing. His approach prioritizes debt elimination and robust savings, viewing these as prerequisites for effective long-term investment. This disciplined method is designed to provide individuals with stability and control over their finances, setting the stage for future growth. The core of his guidance emphasizes a practical, common-sense pathway to financial peace, where investing is a natural progression after addressing immediate financial vulnerabilities.

Laying the Foundation for Investing

Dave Ramsey advocates for a structured approach to personal finance, encapsulated in his “Baby Steps.” The initial steps involve saving a starter emergency fund, typically $1,000, and then aggressively paying off all non-mortgage debt using the debt snowball method. This debt-free status liberates income that can then be directed towards building wealth. Once consumer debt is eliminated, the next step involves fully funding an emergency reserve, which should cover three to six months of essential living expenses, providing a substantial buffer against unexpected life events. With this fully funded emergency fund in place, individuals are then prepared to consistently invest a portion of their income, specifically 15% of their gross household income, towards retirement.

Recommended Investment Approaches

Dave Ramsey primarily recommends investing in growth stock mutual funds for long-term wealth accumulation. He emphasizes these funds for their inherent diversification, as they typically hold stocks from dozens or even hundreds of companies, mitigating the risks associated with individual stock ownership. This approach benefits from professional management, where fund managers actively research and select companies for the fund’s portfolio. Ramsey suggests a specific allocation strategy, often referred to as a “four-fund approach,” dividing investments equally among four categories: growth, growth and income, aggressive growth, and international funds. Consistent, long-term contributions to these diversified mutual funds are encouraged, often channeled through tax-advantaged retirement accounts like employer-sponsored 401(k) plans (especially up to any employer match) and Roth IRAs, which offer tax-free growth and withdrawals in retirement.

Investment Vehicles to Avoid

Dave Ramsey advises against several investment vehicles due to their perceived risks, fees, or complexity:
Individual stocks: He strongly cautions against them, viewing them as too risky for the average investor due to the extensive research required and the lack of diversification.
Bonds: Generally not recommended for long-term growth as Ramsey believes they offer lower returns compared to stocks and barely outpace inflation over time.
Annuities: Particularly those with complex structures, are also advised against due to their high fees and often opaque terms that can obscure their true costs and benefits.
Whole life insurance: He contends that it conflates insurance with investing, leading to higher premiums and poor returns on the investment component. Instead, he recommends purchasing more affordable term life insurance and investing the premium difference in growth stock mutual funds.
Other vehicles: Certificates of Deposit (CDs), cryptocurrencies, and timeshares are typically not recommended for long-term wealth building due to their low returns, high volatility, or lack of investment value.

View on Risk and Returns

Dave Ramsey acknowledges that all investing carries some degree of risk, but he emphasizes that long-term participation in the market, particularly through diversified growth mutual funds, helps mitigate much of this risk. He promotes a “buy and hold” strategy, encouraging investors to remain invested through market fluctuations and avoid emotional decisions like panic selling during downturns. This consistent, disciplined approach is central to his philosophy for weathering market volatility. Ramsey frequently cites a historical average return of 10-12% for the stock market as a benchmark for what investors can expect over decades. He maintains that while annual returns can vary significantly, the long-term average demonstrates the market’s capacity for substantial wealth creation for those who stay committed.

Role of Financial Professionals

Dave Ramsey encourages individuals to seek guidance from qualified financial advisors, particularly when navigating the complexities of investing. He endorses a network of professionals known as “SmartVestor Pros.” These advisors are vetted by Ramsey Solutions and are committed to a “client-first” mentality, focusing on educating and empowering individuals rather than simply selling products. SmartVestor Pros are expected to align with Ramsey’s core financial principles, including debt elimination and long-term investing. They assist individuals in selecting appropriate mutual funds and developing an investment strategy that fits within Ramsey’s framework, serving as a resource for those new to investing or facing more intricate financial situations.