How to Use Dave Ramsey's System to Invest in 401K and Roth IRA

Dave Ramsey is a financial guru that has helped many people to get out of debt with his Total Money Makeover System. In addition to giving advice on getting out of debt, Dave offers ideas on how to invest your money. He believes in following simple steps to meet financial goals. Use these tips to invest in a 401K retirement plan and Roth IRA using Dave Ramsey's system - Baby Step Four.

Instructions

1. Set aside 15% of your income to build a retirement investment portfolio made up of a 401K plan and a Roth IRA. This percentage is income before you pay any taxes. Not all the money will go into a 401k plan, but Dave suggests starting with a 401k retirement plan when your company provides a match. For example if your salary is $100,000 a year, invest a total of $15,000 in retirement assets.

2. Fund a 401k plan with enough money to maximize your company's match. If your employer contributes towards the 401k with a percentage match, you should find out what that percentage is and invest in the same proportion.

   For example, if the company contributes 5% of your pre tax salary, you should then contribute 5% of your income in the 401K. In our example this is equal to $5,000 a year (divide by 52 to get a weekly contribution amount).

3. 

   Invest in Roth IRA accounts to the maximum amount allowed. The Roth offers tax free asset growth - you pay taxes now on the income, but don't pay taxes later. Dave suggests after matching your company contribution on a 401k to maximize a Roth IRA.

   In our example you got $10,000 left ($15,000 minus $5,000). Depending on your tax situation if you are allowed to invest $5,000 on a Roth IRA, then you will have $5,000 left ($10,000 minus $5,000).

4. Go back and invest the $5,000 left over in the 401k plan. This allocation of assets allows you to maximize the 401k first up to the company's match. Then take advantage of a Roth IRA - maximizing it, and the left over money gets invested in the 401k.

5. If your company does not match

   Start the investment process first with the Roth IRA up to the maximum allowed when your company doesn't match the 401k contributions. Then invest the leftover funds in the 401k plan.

6. David Ramsey's advice is to select plain and basic funds to invest in 401k and Roth IRA accounts.

Resources

• Dave Ramsey's Financial Fitness - book