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by Christy Bieber | Published on Sept. 4, 2022
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Make sure you set yourself up for success by checking out his advice.
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Investing is one of the best paths to wealth building. When you open a brokerage account and buy assets, you no longer have to work for every dollar you earn. Your money can actually make more money for you because you can earn returns that are reinvested and then help you earn even more.
You need to make smart choices about investments, though, because investing carries risks. Finance expert Dave Ramsey has outlined five steps you should take to do it right — although some of his tips are better than others. Here's what he suggests doing to get started investing.
According to Ramsey, the first key step to get started investing is to work your investments into your budget. Specifically, he recommends investing 15% of your income for retirement.
"Investing 15% of your income consistently month after month, year after year, will put you on the path to becoming a Baby Steps Millionaire thanks to time and compound growth doing its thing," the Ramsey Solutions blog says.
Ramsey provided some advice on how to free up cash, including packing your lunch instead of paying for it in a restaurant and canceling cable. These are great tips because you do want to re-allocate some of your money toward investing, if you aren't doing so already, so you can build a secure future.
However, Ramsey says you should pay off debt first before investing and that's not necessarily always true. If the returns you can earn by investing are higher than the interest rate on debt you have, then you likely want to put money into the market first rather than focusing on becoming debt-free.
Ramsey's next tip is to put your invested funds into growth stock mutual funds. "Good growth stock mutual funds are the best way to invest for long-term, consistent growth because they allow you to spread your investment among many companies — from the largest and most stable to the new and fast-growing," Ramsey says.
While Ramsey is right that spreading your money around is a good idea, many people would actually be better off investing in exchange-traded funds (ETFs) instead of mutual funds. ETFs that track the performance of market indexes can provide instant diversification just as mutual funds do, but they trade like stocks so may be easier to buy into and may come with a lower expense ratio.
The next tip from Ramsey relates to the type of account you should use. Specifically, he says to prioritize putting your investment money into one particular account first.
"If your company offers a 401(k) with matching contributions, start investing there first," he advises. This advice is absolutely spot on. Matching funds from an employer are free money. You should be sure to invest enough to get all the free cash you can.
Ramsey suggests maxing out a Roth IRA after you've earned your full company match.
"Whenever you hear the word Roth, your ears should perk up," the Ramsey Solutions blog reads. "First, the money you invest in your Roth IRA grows tax-free. Second, you won’t owe taxes when you withdraw your money in retirement. So, if your account grows by hundreds of thousands of dollars over time, all that money is yours free and clear when it’s time to use it in retirement! Talk about a win!"
A Roth, like a 401(k) is a tax-advantaged retirement plan. And Ramsey is right, you should consider investing in it if you want to defer your tax savings until retirement. Whether you should opt for a Roth or put more into your 401(k) or into a traditional IRA will depend on your situation, though.
A 401(k) and traditional IRA both provide a deduction in the year you make your contribution, which a Roth IRA does not. You pay taxes on withdrawals with these accounts though. So if you think you will be taxed at a higher rate in retirement than a Roth is best — but if you think you will be in a lower tax bracket later, you'd be better off taking the tax deduction when you invest rather than deferring it until later.
Finally, Ramsey advises getting help from an investment professional. And while this can sometimes make sense if you don't know where to get started, the reality is that the fees you will pay eat into your returns. Investing does not have to be hard if you use these tax-advantaged retirement accounts and spend a few minutes on research to decide which ETFs to buy.
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Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
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