Getting started on Dave Ramsey Baby Step #4 Means Getting Over the Fear of Investing
You will never become financially independent by trading time for dollars. You need to develop some passive streams of income, which brings us to Dave Ramsey’s Baby Step 4: Invest 15 percent of your income.
I am not a financial adviser; I am not an accountant; and I am not an attorney. So, what you are reading here should not be considered as advice on investment, tax or legal advice. It is just a fellow traveler trying to do his best to get ahead.
You also should know investing is not a game. When you invest in mutual funds (or individual stocks), all of your money is at risk. Realistically, you are taking a gamble that your money today will be worth more at a future date.
I learned a long time ago only two things are guaranteed: Death and taxes.
So, if you are going to invest, as Baby Step 4 suggests, make sure it is money you can stand to lose. As a friend once said: This is not a game.
This post is the third of eight sharing the real-life experiences of two readers as they work through the Dave Ramsey Baby Steps and Total Money Makeover. I’ve met so many people that have seen their finances saved by the Baby Steps, I wanted to share this series and some great ideas to put your personal finances back on track.
Get Started with Baby Step #1 and 5 Steps to Start Your Emergency Fund
Check out last week’s article how to Use the Debt Snowball Method and Baby Step #2
Finish your Emergency Fund Savings in Baby Step #3 with these Steps
Compound Interest is Your Friend
Investing is but one form of a passive income. It is letting your money work for you, instead of you working for your money. The overall goal is to buy shares of mutual funds low and eventually sell those shares down the road when they are worth more.
When Albert Einstein was asked what was the greatest invention of all time, he allegedly replied, “Compound interest.” Compound interest is the money you make off your earnings and other interest, so it's the money you make on the money you made.
Essentially, your money is working for you to make money.
For those who punch a time clock, we are trading our time for our employer’s dollars. We will only receive an amount that is directly related to the number of hours we worked. When I started my own business in January, my going hourly rate was more than three times what I made at the newspaper, but I was still exchanging my time for my client’s dollars.
For much of my time at the newspaper, there was little incentive to contribute into a 401k retirement plan. There was no fixed match on my contributions. At the end of the year, the company determined how much it would add, and the amount was split among all of those in the 401k plan.
I invested some because there was still a little benefit. But, my wife, Wendi, and I decided to put the bulk of what we invested into her retirement plan because it was a much better match.
For Baby Step 4, Dave Ramsey recommends taking full advantage of your employer’s generosity when it comes to investing in a 401(k) plan. If they match your contribution dollar for dollar, then you have already earned a 100 percent rate of return on your investment.
Investing in the Stock Market
For me, investing in mutual funds is a long-term proposition. When you look at the stock market, every day prices go up and prices come down. Historically, the markets have been on an upward trend with little ups and downs along the way.
People used to say there has never been a 10-year period where stocks were lower at the end than at the beginning. That is, until the Great Recession. Over the period between 1998 to 2008, this actually happened once.
However, that was for a single asset class. Dave Ramsey recommends buying mutual funds in four categories: growth, aggressive growth, growth and income, and international. “Even a couple hundred dollars a month invested now can make you a multi-millionaire over time,” Dave says.
I have a good friend who retired several years ago as a financial analyst. He helped me better understand the stock market, the value of investing in mutual funds, and the need to be resilient when prices go too high or drop too low.
I remember a time when I was working at a newspaper in Florida on Black Monday (Oct. 19, 1987) when the Dow Jones Industrial Average plummeted 508 points.
I called my friend to get his take on it, and he was very calm about the whole ordeal: “Everything’s on sale.”
How do I even start investing?
If you’re taking the time to read this, congratulations! You are already one step closer to venturing out onto your investing journey! This is the first step in the direction of financial freedom!
I do understand that it’s easy to simply say “okay, I’ll invest my money,” without ever questioning how you would even do it. Thankfully, M1 Finance makes this process very simple.
M1 Finance is an online, automated investing platform that allows you to invest your money safely and with ease. You simply set up an account with them, link your bank account for the transfer of funds and choose which investments you would like to make.
One of the perks that M1 Finance offers is that there is no minimum amount required to open an account or invest This means that it’s free to get started, and you can begin building your portfolio right away after signing up. Give it a try!
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Take emotions out of investing
What he said made sense. When we go to the store, don’t we like to buy things on sale? When buying stocks, aren’t we told to “buy low and sell high?” In order to buy low, prices will need to drop.
The stock market is driven by speculation and fear of what will happen down the road. When you invest, try to be a Steady Betty.
When you get to the point of Baby Step 4, invest 15 percent of your income. Put as much as you can in pre-tax retirement accounts and purchase Roth IRAs with the rest (you invest post-tax dollars, but when you qualify to pull your money out, it is tax-free).
Getting started on Baby Step 4
To begin experiencing the thrill of earning money via investments, you have to start. Here’s a few reasons why you should follow Baby Step 4 and invest 15 percent of your income:
- Risk diversification: Mutual funds contain a variety of stocks in their portfolios to help spread the risk and guard against sudden drops. When you purchase mutual funds you are buying into several companies, so do you do not have to worry about picking a winner or loser.
- Investment expertise: It takes a lot of research to know which companies are worth investing in … time I don’t have. Life is busy enough without having to worry about what company should be in my stock portfolio. Buying mutual funds also means hiring investment experts to do the work for you.
- Low capital investment: The advent of 401(k) investment vehicles have allowed regular folks like Wendi and me get involved. Several years ago, another financial adviser told me it really wasn’t worth buying a stock unless I could purchase 100 shares. Mutual funds allow for people like me to get in with small, regular contributions.
Getting started on Dave Ramsey's Baby Step #4 is just a matter of…getting started. It can be intimidating opening up that first investment account but it really takes less than five minutes. Once started, your money will start working for you. That means, someday, you can relax and let it take over completely.
Read the Entire Savings Series
- How my Parents Taught me the Importance of Saving
- Capital One 360 Savings Review [Special $25 Cash Bonus]
- 20 Money Saving Tips to Save $7,500 a Year
- How Much is Social Security? [The Retirement Savings Crisis Explained]
- Get 150-Times More Interest on Your Savings (Best High Interest Savings Account 2021)
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.