Use this calculator to estimate the potential growth of your investments following Dave Ramsey's Baby Step 4 advice: investing 15% of your household income into growth stock mutual funds.
Dave Ramsey's approach to personal finance is widely known for its "Baby Steps" framework, designed to guide individuals and families toward financial peace. When it comes to investing, his advice is straightforward and focuses on long-term growth, primarily through growth stock mutual funds.
Baby Step 4: Investing 15% of Your Household Income
After establishing an emergency fund (Baby Step 3), Ramsey advises moving to Baby Step 4, which involves investing 15% of your gross household income for retirement. This percentage is a cornerstone of his investment strategy, emphasizing consistent, disciplined saving over decades.
Why 15%? This figure is chosen to be aggressive enough to build substantial wealth over a typical working career, assuming a reasonable rate of return.
Why Gross Income? Ramsey stresses using gross income (before taxes) to ensure you're investing a significant portion of your earnings, rather than just what's left after deductions.
Growth Stock Mutual Funds: The Preferred Vehicle
Ramsey is a strong proponent of investing in growth stock mutual funds. He typically recommends diversifying across four types of funds:
Growth and Income: Large, established companies that pay dividends.
Growth: Mid-cap companies with strong growth potential.
International: Companies outside the U.S. for global diversification.
Aggressive Growth: Small-cap companies with high growth potential, but also higher risk.
He advises against individual stocks, bonds, annuities, and whole life insurance as primary investment vehicles, favoring the diversification and professional management offered by mutual funds.
The Power of Compound Interest
A key principle behind Ramsey's investment advice is the power of compound interest. By consistently investing 15% of your income over many years, your money earns returns, and those returns then earn their own returns, leading to exponential growth. This calculator demonstrates this principle by projecting your future wealth based on a consistent investment strategy and an assumed annual growth rate.
Ramsey often cites historical stock market returns, suggesting that a diversified portfolio of growth stock mutual funds can achieve an average annual return of 10-12% over the long term. While past performance is not indicative of future results, this historical average forms the basis for many of his projections and is used as the default in our calculator.
How This Calculator Helps You
This Dave Ramsey Investment Growth Calculator allows you to visualize the potential impact of following Baby Step 4. By inputting your current age, desired retirement age, annual household income, any existing savings, and an expected growth rate, you can see:
The total number of years you'll be investing.
Your estimated annual investment amount (15% of your income).
The total amount you would have contributed over your investing lifetime.
The significant portion of your wealth that comes from investment growth (compound interest).
Your projected total investment value at retirement.
Remember, these calculations are estimates based on the inputs provided and an assumed consistent growth rate. Actual investment returns can vary significantly. However, this tool provides a powerful illustration of how consistent investing, as advocated by Dave Ramsey, can lead to substantial wealth accumulation over time.