Investment Methodology
How Dave Ramsey's Baby Step 4 Builds Wealth
In Dave Ramsey's 7 Baby Steps, Baby Step 4 focuses on investing 15% of your gross household income into tax-favored retirement plans. The strategy hinges on two foundational pillars:
- Match beats Roth beats Traditional: Always take employer 401(k) matches first (free 100% immediate return). Next, fund a Roth IRA up to the annual limit. Finally, return to your employer 401(k) or 403(b) until you reach the full 15% contribution mark.
- Consistent monthly DCA: Dollar-cost averaging every month ensures you buy more fund shares during market pullbacks and fewer shares at peaks, capturing long-term market gains.
Frequently Asked Questions
What is Dave Ramsey's 15% investment rule?
Dave Ramsey recommends investing 15% of your gross household income into tax-advantaged retirement accounts once you are completely debt-free (except for your mortgage) with an emergency fund of 3 to 6 months of expenses.
Why does Dave Ramsey recommend 4 mutual fund categories?
Dividing capital equally into 25% Growth, 25% Growth & Income, 25% Aggressive Growth, and 25% International provides broad diversification across domestic large-cap, value, small-cap, and global foreign equities.