Dave Ramsey: How To Invest For Beginners

Summary

In this video, the speaker emphasizes the importance of reducing debt to enable investment and wealth-building. He highlights the typical car payment in America and contrasts it with the potential gains from investing in growth stock mutual funds. With a focus on disciplined saving and smart investing strategies, the speaker advises diversifying investments across four mutual fund types: growth and income, growth, aggressive growth, and international funds. He warns against emotional decision-making influenced by external opinions and underscores the necessity of understanding one's investments to avoid pitfalls, ultimately promoting a steady and informed approach to financial growth.

Takeaways

• 😀 The borrower is often enslaved to the lender; managing debt is crucial for financial freedom.
• 💰 Your income is the most powerful wealth-building tool; when freed from debt, you can invest it effectively.
• 📈 Investing just $500 a month from age 30 to 70 could yield over $5 million if placed in a growth stock mutual fund.
• 🔑 Getting out of debt is essential for building wealth and ensuring a dignified retirement.
• 🤑 The financial industry often focuses on investments, neglecting the importance of debt management for average individuals.
• 📊 Diversifying your investments across four types of mutual funds (growth and income, growth, aggressive growth, and international) is recommended.
• 🔍 Look for mutual funds with a strong track record; those that consistently outperform the S&P 500 are ideal.
• 🗓️ Consistent investment and savings are crucial for retirement success; it's more about the savings rate than market timing.
• 📚 Understanding your investments is key; relying on others without knowledge can lead to significant financial losses.
• 👩‍🏫 When choosing a financial advisor, prioritize those who have a teaching mindset rather than a sales-focused approach.

Q & A

What is the main argument about the relationship between borrowers and lenders?

The main argument is that 'the borrower is slave to the lender,' emphasizing that debt restricts income and prevents individuals from investing in their wealth-building potential.

How does the average car payment in America relate to wealth-building?

With the average car payment at $503, the speaker argues that such payments limit available income for investment, hindering wealth accumulation.

What investment outcome is projected if one invests $500 monthly from age 30 to 70?

Investing $500 monthly in a decent growth stock mutual fund could yield over $5 million by age 70, illustrating the power of consistent investing.

What are the four types of mutual funds mentioned, and how do they differ?

The four types are Growth and Income Funds (large, stable companies), Growth Funds (medium-sized companies), Aggressive Growth Funds (small companies with higher risk), and International Funds (overseas companies). Each has a different risk and return profile.

Why is it important to focus on a mutual fund's track record?

A mutual fund's track record is crucial because it indicates past performance and reliability. The speaker advises investing in funds with at least a 10-year track record to ensure stability and potential for returns.

What is the significance of the savings rate in retirement success?

The savings rate, or the consistency of contributions to retirement accounts, accounts for 74% of retirement success, highlighting the importance of regularly investing rather than merely discussing financial plans.

What risks are associated with aggressive growth funds?

Aggressive growth funds, often comprised of small-cap companies, are more volatile and can experience rapid gains and losses. This increased risk is balanced by the potential for higher returns.

How does the speaker differentiate between global and international funds?

International funds invest exclusively in foreign companies, while global funds include both international and U.S. companies, often leading to better performance due to the inclusion of more stable American firms.

What does the speaker say about the importance of personal financial understanding?

Personal financial understanding is essential to avoid being misled by others. The speaker emphasizes that individuals should take charge of their finances, educating themselves to prevent loss through ignorance or bad advice.

What qualities should one look for in a financial advisor?

One should seek a financial advisor who acts as a teacher rather than a salesperson, focusing on education and understanding rather than pushing specific products or services.

Outlines

00:00

💰 The Power of Debt and Wealth Building

In this part, the speaker emphasizes the significant relationship between borrowing and wealth accumulation, arguing that debt makes borrowers 'slaves' to lenders. Highlighting the importance of income as a wealth-building tool, the speaker suggests that by avoiding debt, individuals can invest their income to achieve financial freedom. Using a compelling example, they explain that investing a typical car payment into a growth stock mutual fund could yield over $5 million by retirement. The speaker critiques the financial industry's focus on investment without adequately addressing debt management, sharing insights from their experience helping individuals get out of debt. They stress the value of consistent investing and the importance of choosing high-performing mutual funds, advocating for a diversified portfolio across four types: growth and income, growth, aggressive growth, and international funds. This part underscores the necessity of intentionality in managing finances and investing for a secure future.

05:01

📊 Understanding Mutual Fund Types

This section delves deeper into the different types of mutual funds that the speaker recommends for investing. They categorize mutual funds into four main types: growth and income, growth, aggressive growth, and international. Growth and income funds, also referred to as large-cap or blue-chip funds, are characterized by their stability and lower volatility compared to the broader market. Growth funds represent medium-sized companies and are expected to perform similarly to the market. Aggressive growth funds are linked to small-cap companies and startups, indicating higher volatility and potential for greater returns. The speaker also discusses international funds, which invest in overseas companies and often underperform compared to American firms. By spreading investments across these categories, individuals can achieve a balanced portfolio. The speaker emphasizes that consistent, informed investing is essential for long-term financial success.

10:01

🧠 The Importance of Understanding Your Investments

In this part, the speaker stresses the importance of understanding investments and the risks involved. They caution against trusting others blindly with financial decisions, sharing anecdotes about athletes who have lost substantial wealth due to poor investment choices and a lack of oversight. The speaker emphasizes that individuals must take responsibility for their financial future, comparing managing money to parenting—both require active involvement and education. They advocate for selecting financial advisors who prioritize teaching over selling and recommend that individuals educate themselves about their investments to avoid costly mistakes. The speaker concludes by reiterating that sound financial knowledge is attainable and necessary for successful investing, ensuring that people make informed decisions about their money.

Keywords

💡Debt

Debt refers to the money borrowed by individuals or entities that must be repaid with interest. In the video, the speaker emphasizes that debt can enslave a borrower, restricting their financial freedom and ability to invest. The notion of being a 'slave to the lender' highlights the importance of becoming debt-free to leverage income for wealth-building opportunities.

💡Wealth Building

Wealth building is the process of accumulating financial assets over time through various strategies, including investments. The speaker asserts that one's income is the most powerful tool for wealth creation, and by avoiding unnecessary debt, individuals can use their income to invest wisely. For instance, the speaker mentions the potential to accumulate over $5 million by investing consistently from age 30 to 70.

💡Mutual Funds

Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. The speaker advocates for investing in mutual funds with a strong track record, arguing that they can outperform the S&P 500 index. The script discusses different types of mutual funds, such as growth and income funds, growth funds, aggressive growth funds, and international funds, each serving a unique purpose in an investment strategy.

💡Investment Strategy

An investment strategy is a plan designed to achieve specific financial goals through a structured approach to investing. The speaker emphasizes the importance of a disciplined and diversified investment strategy, advocating for spreading investments across various mutual fund types. This strategy aims to mitigate risk while optimizing potential returns, a concept reinforced by the speaker's emphasis on long-term consistency in investing.

💡Savings Rate

Savings rate refers to the proportion of income that an individual consistently saves and invests over time. In the video, the speaker states that 74% of retirement success is attributed to the savings rate, underscoring the idea that regular contributions to retirement accounts like 401(k)s are crucial for wealth accumulation. This concept highlights that it’s not just about how much you invest, but how consistently you do so.

💡Diversification

Diversification is an investment strategy that involves spreading investments across various assets to reduce risk. The speaker suggests diversifying across four types of mutual funds to mitigate the volatility associated with investing. For example, including growth and income funds alongside aggressive growth funds allows investors to balance risk while seeking potential returns, which aligns with the video’s emphasis on steady, informed investing.

💡Financial Advisors

Financial advisors are professionals who provide advice on managing finances, investments, and retirement planning. The speaker stresses the importance of choosing advisors who possess a teaching mindset rather than a sales-driven approach. This distinction is crucial because it ensures that individuals receive guidance that genuinely prioritizes their financial well-being, rather than just pushing products for commissions.

💡Risk Management

Risk management involves identifying, assessing, and prioritizing risks followed by coordinated efforts to minimize or control their impact. In the video, the speaker shares a personal preference for low-risk investments, explaining that high volatility can lead to significant losses. By discussing the characteristics of different mutual fund types, such as aggressive growth funds being riskier due to their focus on small companies, the speaker illustrates how understanding risk is essential for making informed investment decisions.

💡Long-Term Investment

Long-term investment refers to a strategy focused on holding assets for an extended period, typically years or decades, to achieve substantial growth. The speaker advocates for this approach, explaining that consistent investing over a long period, rather than trying to time the market, is more effective for building wealth. The example of investing $500 monthly until retirement underscores the value of patience and perseverance in wealth accumulation.

💡Financial Literacy

Financial literacy is the ability to understand and effectively manage various financial skills, including budgeting, investing, and understanding financial products. The speaker emphasizes that individuals must take responsibility for their financial education and not blindly trust others with their money. By urging viewers to understand their investments and strategies before committing funds, the speaker highlights that knowledge is a crucial component of achieving financial independence.

Highlights

The borrower is a slave to the lender, as debt restricts income and investment opportunities.

Investing $500 a month from age 30 to 70 could potentially lead to over $5 million.

Getting out of debt is crucial for changing one's financial future and family legacy.

The financial industry primarily focuses on investing while often neglecting debt management.

Many financial advisors and writers lack personal wealth and practical investment success.

Investing in mutual funds can outperform the S&P 500 if chosen wisely.

Diversifying investments across four types of mutual funds is essential: growth and income, growth, aggressive growth, and international funds.

A significant 74% of retirement success is attributed to consistent saving habits.

Selecting mutual funds based on their historical performance is vital for investment success.

Growth and income funds are generally more stable and less volatile compared to the stock market.

Aggressive growth funds, while riskier, can offer higher returns through investments in small-cap companies.

International funds may underperform compared to American companies but offer necessary diversification.

It's important to understand what you're investing in and not rely solely on others' advice.

Financial education is essential for making informed investment decisions.

Avoiding high-risk investments that lack understanding can prevent significant financial losses.

Having a financial advisor with a teaching mentality is crucial for effective wealth management.

Transcripts

you guys know by now that i'm a firm

believer that the borrower is slave to

the lender because your most powerful

wealth building tool is your income and

when you haven't committed your income

in the form of payments to everybody

else you can invest it and become

wealthy really the average car payment

in america today is 503

dollars that's just cray-cray that's

nutty if you invest 500 in a decent

growth stock mutual fund from age 30 to

age 70 you'll have over 5 million

dollars that one thing will make you

worth 5 million

isn't that amazing and so i've become

known for getting people out of debt and

it changes your life it changes your

family tree it changes your retirement

you retire with dignity you don't have

to buy that cookbook 72 ways to prepare

alpo and love it but you have to do it

on purpose and getting out of debt in

order to invest is the shortest way and

what is amazing to me is that almost the

entire financial industry focuses on one

part of the equation and that's the

investing part of the equation and they

all have a bunch of theories now i've

had all the letters and licenses after

my name i have a degree in finance i've

had all the licenses in the business it

is amazing the number of people in the

financial world whether they're

financial advisors writers bloggers

whatever they do that have opinions

about money that don't have any money

and whose track record on teaching

people to invest in getting them to

invest sucks

three percent of the public is where all

of those people make their money off

wealthy people they make all their money

off wealthy people and most of the

advisors out there won't fool with you

if you don't have some money they don't

want to sit down and talk to you and so

we start teaching people of course all

these years ago how we invest and then

as we've met with many many many

thousands of millionaires over the years

how did they invest what are they doing

well we suggest and i personally invest

in good growth stock mutual funds i

spread it across four types growth and

income growth aggressive growth and

international and i buy mutual funds

that have at least a 10-year track

record well dave shouldn't you just buy

index funds well you can if you want

index funds basically an s p 500 fund

mirrors the market that basically is the

stock market and so you're going to do

exactly what the stock market does good

or bad the mutual funds that i buy

outperform the s p 500 and they're

really not that hard to find a lot of

mutual funds don't outperform the s p

500 so if you're going to buy that well

that'd be dumb just buy an s p 500 but i

buy mutual funds that outperform the s p

500 and my portfolio mix that i just

outlined as pretty much always beats the

market because i buy funds that

outperform the market it's not that hard

to do you open up the prospectus and

there's two little lines on the graph

one of them is the s p 500 if the mutual

fund you're looking at if that line is

below that s p 500 line don't buy that

bun

this is hard really not that much to

this but dave you just tell people buy

those loaded funds yeah they'll pay a

commission that's fine have somebody in

your life helping you do the investing

all the data says that you'll continue

to invest doing that but when you out

there by yourself with all your theories

and some idiot newscaster comes on the

evening news predicting the end of the

world what do you do you cash out all

your mutual funds at exactly the wrong

time because you don't have anybody in

your corner saying don't jump don't jump

instead you're just out there with your

own emotions in the newscaster and

that's how you pick out when you jump in

or out of the market and that's just

dumb so all the data says a decent

portfolio of good performing mutual

funds wins and the big thing is actually

putting money into the mutual funds

actually investing one piece of research

shows that 74 of the reason of

retirement success is doing it it's

called savings rate the number of you

that put money in versus talk about it

and continually put money in year after

year year after year year after year

month after month week after week out of

your check into your 401k over and over

and over and over and over again this is

how you get wealthy it's ludicrous i

know a lot about mutual funds and let me

tell you i pick mutual funds about 80

percent of the choice on my mutual fund

85

is based on its rate of return its track

record if the track record's tied and

i'm trying to look i look for the

longest track record who's been doing it

a long time i like neighborhoods with

big oak trees when i'm buying real

estate you see what i'm saying i like a

long track record something stable i

don't like risk i like to make money

risk equals not making money for me big

risk anyway we said spread it across

four types growth and income growth

aggressive growth and international

let's talk about those for a second

because there's all kinds of names for

mutual funds and the name of the mutual

fund tells you what is in the fund okay

a growth and income fund is also called

a large cap fund sometimes also called a

blue chip fund now the blue chip is the

most expensive chip on the poker table

so that means these are big companies in

this large cap is short for large

capitalization large capitalization

means these are large companies and so

your growth and income funds are large

companies boring of the four types of

mutual funds that i put money into and i

recommend this is the calmest if you

were to chart this volatility on this

fund versus the stock market you would

see it's a lot calmer than the market

and so it's your friend when things are

going down in other words it's your

stable it's the big old dinosaur

companies they're boring when things are

going up by the way it's also boring

it's not exciting when things are going

up it's a downer you look at that thing

going why is it not doing well when the

rest of the market's going up because it

goes slower than the market up and

slower than the market down because it's

a stable land a growth fund is right in

the middle the s p 500 index fund would

be considered a growth fund a growth

fund is companies that are growing

they're kind of medium-sized companies

so you might hear it call mid cap fund

these are just standard growth stock

mutual funds there's a whole lot of

these out there ton of funds that fall

in this area the idea is pretty simple

the growth fund that's kind of right

there in the middle you want something

in the middle it's pretty much going to

do about what the market does in terms

of volatility but you can get mutual

funds that are growth stock mutual funds

that outperform the s p 500 you can even

get growth in income funds even though

they're not as volatile that outperform

the s p 500 then there's the aggressive

growth fund this is the wild brother

okay it's the crazy one and so you might

guess it's going to be also called a

small cap funds these are the small

companies the startups a lot of tech

companies would fall into there very

crazy all the fun weird stuff is in

there and that means some of it fails

and goes to zero and so it's a crazier

mix it's gonna be much more volatile

than the stock market is so it's gonna

go up faster than the market goes up but

it's going to go down faster than the

market goes down small cap aggressive

growth stock mutual funds also known in

there as a merging market you would call

it that too as well international funds

means that the stocks in it are overseas

companies they're not american companies

it has a kissing cousin called a global

fund if you think of a globe what is it

it's everything so that would have

international and u.s companies in a

global fund and it would be a cousin to

an international by the way american

companies generally outperform other

international companies by and large as

a group and so your international fund

will be your worst performing of the

four over the last several decades and a

global fund will outperform an

international fund because you put some

spice in there you put some american

companies in there usually and so

they're a little bit better but at least

you got some stuff overseas you're not a

hundred percent betting on the american

economy not that i'm anti-american i am

not this is not a patriotic thing this

is a diversification thing and so you

know you want to have some bmw and some

mercedes in there you want to have some

lg and some other stuff even though some

of those things are made stateside those

are foreign companies and so you look

for companies that are overseas based

could be a french company could be

whatever that are in an international

fund and then you spread your investing

across those four types very simple here

the thing is do it

that's the thing everybody talks and

talks and talks and talks and talks

about investing the problem is nobody

does it people we talk to on the

millionaire theme hour that are

millionaires you know they got to be

millionaires they did it and they never

want to ask them how they became

millionaires they never say oh man i hit

the home run they never say that because

it never happens oh dave i hit the home

run i got this mutual fund that went

straight up and i made all my money and

one goodbye you know my golfing buddy

gave me a stock tip i don't meet

millionaires that did that i hear

stories about it but a golfing buddy

with a stock tip is like a golfing buddy

with a fishing story the one that got

away i mean it's just everybody's got an

opinion and it's all a bunch of crap and

so you just have to really stop and go

slow and steady actually investing is

the way it's the way it's the only way

to go so growth and income growth

aggressive growth international don't

chase the returns do not invest money in

things you do not understand people get

ripped off when they invest money in

things that someone told them is good

and they trusted the person instead of

knowing what the flip they were doing

you know all these athletes you read

about the nfl stars and they lost 10

million dollars or they made 100 million

dollars and it's all gone and you know

you know how they lose their money

because they give it to someone else to

handle and they don't even look at it

and then they're shocked to find out

that person was a crook that's how you

lose your money it's your money it's

like it's your kids which means you have

to make it behave it's like you have to

make your kids behave you have to do

that if you want good kids that's how

it's going to happen if you want money

that's how it's going to happen

you have to understand it now you don't

have to have a master's degree in

finance this stuff is not rocket science

it is really not that difficult you

really really seriously have to do this

and you have to understand what the

money is going into do not put money in

that's why when you're buying insurance

when you're getting a mortgage doing

your investing in mutual funds that's

why when you do all of that that you

have to understand what you're doing and

the only way you're going to do that is

when you're picking someone to help you

in one of those areas you're doing your

estate plan if it's complicated you're

doing your taxes if they're complicated

that kind of thing you need someone

sitting on the other side of the table

that is not a salesperson but they have

the heart of a teacher not the heart of

a salesperson i'm an easy sale once i

understand something but until i

understand it i'm not putting a dime in

it i'm not going forward with this it's

that simple