What Does Dave Ramsey Say to Invest In?

Dave Ramsey is a widely recognized financial personality known for his direct approach to personal finance. This article outlines his investment recommendations and the underlying philosophy that shapes his advice.

Core Investment Principles

Dave Ramsey’s investment philosophy emphasizes establishing a strong financial foundation before investing. A central tenet involves becoming completely debt-free, with the exception of a mortgage, to free up income for wealth building. He advocates for a long-term perspective, consistently investing over time rather than attempting to time the market or seeking quick returns. This disciplined approach helps individuals avoid speculative ventures.

He prioritizes simplicity and consistency in financial decisions. Ramsey stresses that investing should be straightforward, avoiding complex products that can obscure fees or risks. He believes that consistent, regular contributions to investments, regardless of market conditions, leverage dollar-cost averaging, which helps reduce the average cost per share over time. This strategy aims for steady growth and financial security rather than chasing high-risk, high-reward opportunities.

Recommended Investment Vehicles

Dave Ramsey primarily recommends investing in growth stock mutual funds for the general public. These funds represent professionally managed portfolios that hold stocks from various growing companies, providing built-in diversification. He advises splitting investments across four types of mutual funds: growth, growth and income, aggressive growth, and international funds, typically in equal proportions. This diversification strategy helps to spread risk and contributes to a balanced approach for long-term wealth accumulation.

Ramsey prefers mutual funds over individual stocks due to their professional management and inherent diversification. This structure mitigates the risks associated with investing in single stocks or speculative investments. While some actively managed funds might charge higher fees, Ramsey suggests that a financial advisor’s guidance helps investors stick to their plan during market fluctuations. He believes that historical performance, looking at a fund’s long-term returns, is a key factor in selecting appropriate mutual funds.

Integrating Investing into Financial Steps

Investing according to Dave Ramsey’s plan is integrated into his “Baby Steps” framework, a sequential guide to financial freedom. Individuals begin serious investing only after achieving foundational milestones, ensuring financial stability.

• Baby Step 1 involves saving a starter emergency fund of $1,000.
• Baby Step 2 focuses on paying off all non-mortgage debt using the debt snowball method.
• Baby Step 3 means building a fully funded emergency fund covering three to six months of essential expenses.
• Baby Step 4 instructs individuals to invest 15% of their gross household income into retirement accounts. This typically includes employer-sponsored plans like 401(k)s, especially to capture any employer matching contributions, and Roth or traditional IRAs.
• Baby Step 5 involves saving for children’s college education, often utilizing tax-advantaged accounts such as Education Savings Accounts (ESAs) or 529 plans.
• Baby Step 6 focuses on paying off the home mortgage early, which liberates additional income for continued wealth building and generosity.

Investment Approaches to Avoid

Dave Ramsey advises against several investment types and strategies due to their risk, complexity, or misalignment with his long-term, debt-free philosophy. He warns against investing in individual stocks, as they lack the diversification and professional management found in mutual funds. Speculative investments, such as cryptocurrency and commodities, are discouraged due to their high volatility and unproven track record for building wealth. Ramsey views cryptocurrency as highly risky, comparing it to gambling due to its price swings based on speculation rather than underlying company performance.

Annuities are not recommended by Ramsey due to high fees, restricted access to funds, and their complexity. He suggests that traditional retirement accounts like 401(k)s and mutual funds are better alternatives. Whole life insurance is advised against as an investment vehicle. Ramsey believes life insurance should serve its primary purpose of income replacement, advocating for simpler, affordable term life insurance instead of combining insurance with investment components.