Last week – Clause and Effect
Last week was week 8 in Dave Ramsey’s “Financial Peace University“. Week 8 was all strategies for negotiating, and using cash to reduce the cost of the items you buy.
- Don’t be afraid to negotiate. Be willing to walk away.
- Always use the power of cash.
- Remember the places where you can find great deals.
It was a good reminder for me in week 8 that a lot of places that you think might not be negotiable, are in fact negotiable. Give it a try, you can often still find a great deal!
This week – Of Mice and Mutual Funds!
- The best way to invest is to be OUT OF DEBT first.
- Don’t put all your eggs in one basket – diversify.
- Only work with investment advisors who have the heart of a teacher.
When should I start investing?
When you are working on the Dave Ramsey plan, you’ve got a few steps to finish before you start investing. You got out of debt first, and build up your emergency and reserve funds! So before you invest, do these things:
- Start an emergency fund.
- Get out of debt.
- Save up three to six months of expenses.
Once you’ve completed those steps you’re ready to start saving 15% of your income on retirement.
Where do I start?
There are so many options nowadays for people to invest in, it can begin to get quite confusing. So where should you start when beginning to invest? Dave Ramsey gives his theory:
If you receive a company match in your 401(k), 403(b), or TSP; invest in those plans, up to the match, first. Once your contribution equals the company match, fully fund a Roth IRA for you and your spouse. If you’ve maxed out your contribution to your Roth IRA and still have money to invest, invest the rest in your 401(k), 403(b), or TSP.
So contribute up to the 401k match (if there is one), then do a Roth IRA up to the maximum. Then max out your 401k or other plan.
A lot of people are hesitant to start investing when it is a down market. Dave Ramsey says that you needn’t worry because over the long run the market will go back up, and as long as you’re in it for the long run, you’ll come out ahead.
If you still need some reassurance, here is a clip from Dave Ramsey’s radio program where they talked about this very point:
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What are my investment choices?
Your choices for different types of investment is pretty wide and varied. One thing to keep in mind when investing – diversify! Don’t get caught with only your company’s stock, or a couple of stocks you think will perform well. You’ll end up getting burned (think Enron)!
Some of the options that you have when you invest, and what Dave Ramsey thinks of them:
- Mutual funds: select mutual funds that have a winning track record of more than 5 years and preferably more than 10 years. I don’t look at their 1 year or 3 year track records because I think long term. I spread my investing evenly across four types of funds. That means I put 25% of my investment amount into each of the following:
• Growth and Income Funds
• Growth Funds
• International Funds
• Aggressive Growth Funds - Single Stocks: Ramsey doesn’t suggest buying single stocks as the returns you see won’t consistently be as high as just buying mutual funds. If you do buy single stocks, keep it to less than 10% of your portfolio.
- CDs: Not good for long term investing. They offer low interest rates that can’t keep up with inflation, restrict access to your money and often carry penalties for early withdrawls.
- Bonds: Not suggested as they can be volatile and can have lower returns than mutual funds over long periods of time.
- Fixed Annuities: Ramsey says – “Stay away”!
- Variable Annuities: VAs are savings contracts with a life insurance company. The primary benefit of
VAs is the tax deferred growth. However, 401(k)s, Roth IRAs and Traditional IRAs offer tax deferred
growth without the additional costs that VAs charge. - Exchange Traded Funds (ETFs): ETFs are bunches of single stocks that intend to operate like mutual funds. Ramsey says they’re good in theory, but he doesn’t recommend them.
- Real Estate Investment Trusts (REITs): REITs just don’t stack up to good growth stock
mutual funds. If you decide to invest in a REIT, keep it to a maximum of 10% of your portfolio. - Equity Indexed Annuities: Equity Indexed Annuities contractually agree to limit your loss while you agree to limit your gains. Not recommended by Ramsey.
- Thrift Savings Plan (TSP): Ramsey’s suggestion is as follows: Put 60% in C fund, 20% in S fund, and 20% in I fund.
So as you can see Dave Ramsey mainly suggests that you get invested in mutual funds through a Roth IRA and/or company 401k plan. Some other options may be acceptable, but not necessarily recommended by Ramsey.
Values based investing
Another thing that often becomes an issue is the topic of values based investing or ethical investing. I won’t go into it too much here except to quote what Dave Ramsey says on the topic:
I do not use a values based investing approach. I agree with the concept; it makes sense to invest in something that aligns with your beliefs. However, very few of these funds meet my criteria for picking mutual funds. For you, this is a very personal decision to make. It’s also known as a slippery slope.
For instance, if you no longer invest in funds that might invest in a company that supports abortion you would also need to stop banking because nearly all banks contribute to United Way, which supports Planned Parenthood. Whatever your stance, just be sure you don’t choose these funds out of guilt. Don’t make poor investment decisions to choose these funds.
Next Week
Next week is a lesson entitled “From Fruition to Tuition” which talks more in depth about saving for retirement, saving for your children’s school, and more!
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Hi. I am a long time reader. I wanted to say that I like your blog and the layout.
Peter Quinn
Good information. Down markets are the best time to invest in mutual funds, they’re “on sale!”
If you’re systematically investing (i.e. monthly) and you’re in it for the long-term, the current state of the market isn’t important at all. For me personally I’d rather have the market stay where it is, or even drop, for 30 years while I’m buying shares, and then in the following 10 years sky-rocket.
Yeah it might hurt a little temporarily when you see your 401k or IRA balance drop, but in 40 years are you going to care what it did in 2008?
Thanks for sharing these tips from Dave Ramsey. I’m in the getting out of debt and saving stage, but these will come in handy later.
Nice information. Just curious as to why Dave Ramsey in comparison to Crown Financial Ministries with Larry Burkett and Ron Blue?
No real reason beyond the fact that I’m more familiar with Dave Ramsey’s material. I do love Larry Burket and Crown having read a couple of his books, but as I said, I’m just more comfortable with Dave Ramsey having just taken his class, and having helped teach it.