What Is Baby Step 4 and How Do You Start It?

Dave Ramsey’s Baby Steps provide a structured approach to personal finance, guiding individuals through sequential financial goals. This framework helps people gain control over their money, eliminate debt, and build lasting wealth. Each step builds upon the previous one, creating a disciplined path toward financial peace.

Understanding Baby Step 4

Baby Step 4 involves investing 15% of your gross household income for retirement. This step aims to build long-term wealth and secure financial independence for your later years.

This investment typically occurs within tax-advantaged retirement accounts. Common options include employer-sponsored 401(k) plans (traditional or Roth) and individual retirement accounts (IRAs), also available as traditional or Roth.

Traditional 401(k) contributions are made with pre-tax dollars, lowering your current taxable income, and investment growth is tax-deferred until retirement. For 2025, employees can contribute up to $23,500 to a 401(k), with those aged 50 and older allowed an additional $7,500 catch-up contribution, totaling $31,000. Employer contributions, if offered, are also pre-tax and contribute to a combined limit of $70,000 for employee and employer contributions in 2025, or $77,500 for those 50 and older.

In contrast, Roth 401(k) and Roth IRA contributions are made with after-tax dollars, meaning you pay taxes now, but qualified withdrawals in retirement are entirely tax-free. For 2025, the Roth IRA contribution limit is $7,000, with an additional $1,000 catch-up contribution for individuals aged 50 and older, totaling $8,000. Eligibility for Roth IRA contributions is subject to income limitations, with single filers needing a modified adjusted gross income (MAGI) below $150,000 and joint filers below $236,000 in 2025 for full contributions.

Traditional IRAs also allow for tax-deferred growth, and contributions may be tax-deductible depending on your income and whether you or your spouse are covered by a workplace retirement plan. The 2025 contribution limit for Traditional IRAs matches that of Roth IRAs: $7,000 for those under 50 and $8,000 for those 50 and older. Withdrawals from a Traditional IRA are taxed in retirement, similar to a Traditional 401(k).

Implementing Baby Step 4

Beginning Baby Step 4 requires calculating 15% of your gross household income, which is your income before taxes and other deductions. For example, if your household earns $75,000 annually, you would aim to invest $11,250 per year, or approximately $937.50 per month.

When deciding where to invest, prioritize accounts to maximize returns. First, contribute enough to your employer’s 401(k) to receive any employer matching contributions. Next, focus on funding a Roth IRA, up to its annual contribution limit, due to its tax-free growth and withdrawals in retirement.

After maximizing your Roth IRA, direct any remaining retirement savings toward your employer-sponsored 401(k) or other available pre-tax retirement accounts until you reach your 15% investment goal. If your employer offers a Roth 401(k), you might consider using it to invest your entire 15%. Diversifying your portfolio within these accounts is also important, typically through growth stock mutual funds, to spread risk and promote long-term growth.

Baby Step 4 in Context

Baby Step 4 is part of the larger Baby Steps plan, building on foundational financial achievements. Before investing for retirement, individuals complete preceding steps. This includes saving an initial emergency fund, typically $1,000, for minor unexpected expenses.

Next, the plan emphasizes eliminating all non-mortgage debt using the debt snowball method, paying off debts from smallest to largest. After debt elimination, the third step involves fully funding an emergency savings account with three to six months of living expenses. Only once these prerequisites are met is the individual financially stable enough to begin consistent retirement investing.

Baby Step 4 often runs concurrently with Baby Step 5, which focuses on saving for children’s college education, and Baby Step 6, which involves paying off the home mortgage early. This simultaneous approach allows for progress on multiple significant financial goals. The final Baby Step, number 7, is dedicated to building substantial wealth and engaging in generous giving, representing financial freedom achieved through disciplined application of the preceding steps.