Where Does Dave Ramsey Say to Invest Money?

Dave Ramsey is a widely recognized financial personality known for his practical, step-by-step approach to personal finance, which emphasizes debt elimination and wealth building. His philosophy guides individuals through a structured process designed to achieve financial peace and security. This article will explore his specific recommendations on where to invest money, aligning with his overarching financial principles that prioritize long-term growth and simplicity. Understanding his investment perspective begins with recognizing the foundational steps he advises before any investment takes place.

The Foundation of Dave Ramsey’s Investment Advice

Dave Ramsey’s investment advice is built upon his “Baby Steps,” which dictate when an individual should begin investing. Before investing, individuals establish a $1,000 starter emergency fund, then pay off all non-mortgage debt using the debt snowball method. Once debt-free, they save three to six months of expenses in a fully funded emergency fund. This methodical approach ensures investors begin wealth-building from a position of strength, not relying on debt.

After these initial steps, individuals are ready for Baby Step 4: investing 15% of their household income into retirement accounts. This marks the beginning of long-term wealth accumulation. Ramsey’s core investment principles center on consistent investing, long-term growth, and avoiding debt for investment purposes, advocating a straightforward approach to financial security.

Baby Step 5 focuses on saving for children’s college education. Baby Step 6 advises paying off the home mortgage early. Finally, Baby Step 7 involves building substantial wealth and giving generously, the culmination of his plan. This progression ensures investing occurs from a position of financial strength.

Core Investment Vehicles

Dave Ramsey’s primary recommendation focuses on growth stock mutual funds. He advocates diversifying investments across four distinct categories: growth, growth and income, aggressive growth, and international. This strategy mitigates risk and enhances returns by spreading investments across various market segments. He suggests allocating investments evenly, often 25% in each.

Growth funds invest in companies with significant potential for future expansion, often large-cap firms. Growth and income funds focus on stable, larger companies that pay increasing dividends, combining capital appreciation with income. Aggressive growth funds, also known as small-cap funds, target smaller, newer companies with higher growth potential but increased volatility. International funds provide diversification by investing in non-U.S. companies.

Ramsey generally advises against individual stocks, bonds, or annuities for the typical investor. He believes individual stocks lack diversification and carry higher risk. While bonds are safer, he argues they do not offer the same long-term growth potential. He also expresses reservations about annuities due to their complexity, high fees, and restricted access to funds, preferring mutual funds within tax-advantaged accounts.

Leveraging Tax-Advantaged Accounts

Mutual funds are typically held within tax-advantaged accounts as part of Dave Ramsey’s strategy. He emphasizes employer-sponsored plans like 401(k)s, especially those offering an employer match, as this represents “free money” that boosts retirement savings. For 2024, the employee contribution limit for a 401(k) is $23,000, with an additional $7,500 catch-up contribution for those aged 50 and over. These plans allow contributions to grow tax-deferred, with taxes paid upon withdrawal in retirement.

Ramsey also recommends Roth IRAs for retirement savings. Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals in retirement are entirely tax-free. For 2024, the maximum IRA contribution is $7,000, with an additional $1,000 catch-up contribution for those aged 50 and over. Roth IRAs have income limitations for direct contributions, but a Roth 401(k) option, if available, allows for tax-free growth and withdrawals without income restrictions.

For college savings, Ramsey suggests utilizing 529 plans or Educational Savings Accounts (ESAs). A 529 plan is a tax-advantaged investment vehicle designed to encourage saving for future education costs, offering tax-free growth and withdrawals for qualified education expenses. ESAs have different contribution limits, with an annual limit of $2,000. These accounts provide tax benefits for long-term investment goals.

Guidance from Financial Professionals

Dave Ramsey recommends working with financial professionals to implement his investment principles, particularly through his network of “Endorsed Local Providers” (ELPs), now SmartVestor Pros. These professionals are vetted by his organization and align with his financial teachings, serving as guides. The SmartVestor program connects individuals with advisors.

An ELP or SmartVestor Pro helps individuals choose appropriate mutual funds within retirement accounts like 401(k)s and Roth IRAs, or assists with setting up college savings plans like 529s. They provide practical guidance in selecting funds that fit Ramsey’s categories and align with his debt-free, long-term wealth-building philosophy. These advisors simplify the investment process for the average person, helping them implement a disciplined and consistent investment strategy.