Baby Step Four – Invest for Retirement

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Today, we’ll examine Baby Step Four.

Baby Step 4 – 15% Earnings Invested for Retirement

I like to think that when you engage Step 4, you are finally able to deploy your money against your best future.  Sure, playing off debt is a positive action but in Step Two you are simply admitting and owning up to previous mistakes.  Your money is still being used for the enrichment of others. 

In Step 3 you are at least retaining your money, but it is being stacked as defense against an unknown future.

However, when you start socking away 15% of your income against retirement… well, now you’re thinking, planning, and acting with the future in mind.

But Investing is different from Saving.  Money market accounts or even CDs are fine instruments for saving your money – perhaps your emergency fund.  In these accounts you are assuming no risk and ensured only a small return.  These accounts are solely intended to preserve the principle, which make them perfect places to store the money you expect to need within a short time horizon.

Investing is different in that it does assume some risk and more frequently offers a larger return – the stock market is the classic example of investing money.

Now let’s be honest.  I’m not an investing guru and I won’t play one on this site.  However, I will provide some guidelines I use to help plan my investing activity.  Since we’re talking retirement here, I’ll lean in that direction:

  • Start with your employer 401k match, if this is an option for you.  Free money is rarely a bad place to start and with many employers matching at least 50 cents per dollars, you’re starting with a 50% gain.  That’s a smart return even before you really start investing.
  • Select a Roth 401k if offered by your employer.  If this is not an option, then contribute to the traditional 401k until you max the employer match. 
  • If you’ve maxed your employer match but not your 15% target, then direct the balance into a Roth IRA.

“Roth” products – 401k or IRA are beautiful in that they grow tax free, whereas, a Traditional 401k or IRA is simply tax deferred. 

The difference is initially subtle – Roths are funded with after tax dollars while Traditionals are funded with pre-tax dollars.  Those characteristics then trail the life of the product.  Monies accumulated in a Roth are not taxed on the way out because your contributions were taxed on the way in.  Contributions to Traditionals were not taxed on the way in so they are subject to taxation on the way out.

Stated another way, imagine you’re 65 and have a 401k worth $1,000,000.  Would you rather have already paid taxes on your income years and years ago when you were making a modest living (Roth), or would you rather be faced with a tax bill on the cool million – your contributions and growth?

Once you’ve selected your investment tools or structure, now you must consider the investments themselves.  I’ll resume the bullet list here with the same caveat, I’m no Buffet.

  • Diversify your holdings – stocks or bonds are fair starting points but I tend to shy away from bonds and individual stocks.  Rather, I prefer to diversify across different types of stock by purchasing different types of mutual funds – Large Cap, Small Cap, International, Value
  • Know the fund – pick a fund or fund family with a long track record of success relative to its peers
  • Watch out for fees – many funds or managed accounts add significant fees which can significantly impact your overall return.
  • Know what you’re doing – invest in what you understand, you may never be a stock market expert but you should never follow someone’s advice on blind faith.  Do a little homework, read the literature, and be an informed investor.
  • Set it and forget it – Investing is a long term game.  I personally almost never review my investment statements.  Lately with the high market volatility I could not help but notice the decline and recent increases but they’re only numbers on a page and do little to impact my day to day.  I know I won’t need this money for many years so what happens day over day or even month over month is of little consequence to me.

And that’s the key to Step Four – use a portion of today’s money to fund a wealthy tomorrow.  It’s what smart people do, it’s what rich people do, and that should be enough to validate that it’s what you should do too.


Stay tuned for upcoming installments in this series:

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Baby Step 6 – Pay-Off the House

Baby Step 7 – Save, Invest, and Get Rich


Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 4 

Enemy of Debt – step 4

DoughRoller – step 4

Dave Ramsey – step 4