Things I Learned About Investing When I Got to Baby Step 4

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Dave Ramsey’s Total Money Makeover is the book we used to learn about personal finance and ultimately get out of $78,000 of debt in less than 2 years.

We followed his system, dubbed “The Baby Steps” almost perfectly (TBH, I don’t think there’s anyone who does the baby steps perfectly.) One of my first posts on Saving with Spunk was explaining the baby steps.

• Baby Step 1: $1000 in an emergency fund
• Baby Step 2: Pay off all debt using the debt snowball method
• Baby Step 3: Save 3-6 months of expenses in an emergency fund
• Baby Step 4: Invest 15% of income into pre-tax retirement
• Baby Step 5: College funding for children
• Baby Step 6: Pay off home early
• Baby Step 7: Build wealth and give generously

Once we finished paying off our debt we built our emergency fund and put it into a high-yield savings account with Synchrony Bank. At the time of writing this they currently offer 1.45% on savings accounts. That means our $10,000 emergency fund will grow by $145 every year.

Now we’re at baby step 4: Invest 15% of your income.

We were starting completely from scratch on this one. My husband, Travis, had a check for $180 that had to go into an IRA and that’s about all we had.

We. Were. Clueless.

And we’re no experts now by any means but we know A LOT more than we did 2 months ago. I think it’s vital for other Baby Steppers to learn the things that Dave doesn’t tell us in his books and radio show.

There’s a strategic method to his madness and it’s not bad but ignorance isn’t bliss when you’re dealing with your future.

Where to Start

We called the guy who led our Financial Peace University class. He’s a newer investment professional who followed the baby step lifestyle and would likely become a SmartVestor Pro one day.

Dave Ramsey’s SmartVestor Pros

SmartVestor is an advertising service for investment professionals, they pay a monthly fee for referrals from Dave Ramsey’s website. They are vetted to the extent that Ramsey Solutions is confident that they adhere to a code of conduct which is basically recommending a lifestyle aligning with the baby steps.

SmartVestor Pros (formerly Investing ELPs) are investment professionals who help their clients pick mutual funds, they make money when you invest in certain mutual funds. They have the heart of a teacher so they’ll go through everything with you to make sure you understand what you’re getting into.

I experienced this first hand. Travis and I sat down with two investment professionals from Principal and they went through everything with us. I was ready to hand them my money and forget about it but I’m so glad they didn’t let me do that.

They sat with us for two hours, for free, explaining things to us and going through the paperwork. Then one of them met us at our house to further explore options to make sure we were getting what we wanted.

Why Dave Recommends Certain Financial Advisors

Remember how the investment advisors we sat with didn’t charge us for those hours? How can they afford to do that? Because they make their money on commissions. Every time you invest money, they get 5% of it before your money ever sees your funds.

Alternatively, you may have heard about “fiduciaries” or the “fiduciary rule” on the news or Facebook. Fiduciaries are legally (keyword: legally) obligated to work in their client’s best interest. They can’t sell any product or fund they get a kickback from or compensation on any sale.

That’s why fiduciaries charge you a fee for their advisement, otherwise, they’d be broke. Fiduciaries are regulated by The National Association of Personal Finance Advisors, NAPFA, so if they ever put their interests over the financial gain of their client, they can actually be sued.

The professionals that Dave recommends are not fiduciaries. They are great people with high morals but they don’t have to put your financial gain over their paycheck. And if I was one I wouldn’t either, we all want to pay our bills and take vacations. You don’t have to be an evil person to want to make an extra buck.

My Experience With a Financial Advisor

I went into those meetings with those financial advisors and I had no clue what I was doing. I just knew “now I have to put 15% of my income toward retirement.”

Being part of the personal finance media community I’d heard a lot about Vanguard funds. I had no clue what they were but early-retirees and everyone loved them. And you can’t be an affiliate for Vanguard so I know they were telling the truth. ;P

Turns out they’re called index funds. You may have heard Dave talk about them. These funds are not actively managed like the ones my advisor was selling me. Index funds are filled with funds to perform at around what the market does and then left alone to grow. They are passively managed. And they typically outperform the market by a slight margin.

For more info on actively managed fund vs passively managed funds check out this article on The Balance.

I asked about the Vanguard funds early on and my advisor was very transparent. He called Vanguard to learn more about them and showed me comparable funds to what he was offering.

But he couldn’t make a commission off of them.

The point of passively managed funds is to keep fees incredibly low. No room for paying people to hock their funds. I realized that if I went with Vanguard funds my advisor would’ve been doing all this work for no pay.

The Truth About 12% Returns

The main way he tried to sway me away from Vanguard and to his company’s funds was a comparison of reutrns.

He compared the 30-year returns on $10,000 in a Vanguard fund vs his actively managed fund. And the actively managed fund made about $10K more than the Vanguard fund.

But he’d already told me about the fees. So I calculated that the upfront fees + quarterly trading fees + annual maintenance fees over 30 years came out to $15K. So I’d have to pay $15K out of pocket to get the results he was showing me.

The Vanguard fund, while having a lower rate of return, had a .16% fee and $30 annual maintenance. So it actually made more than the actively managed fund. When I told him that he paused for a minute and then said “But do you want to do all your investing yourself or with someone who knows what they’re doing?”

He had a point. And it was just $5K to avoid the hassle of doing it myself…

On January 1^st, 2008 mega investor Warren Buffet, someone Dave Ramsey speaks very highly of, started a 10-year challenge between a hedge fund with 5 actively managed funds and a single S&P 500 index fund.

He wanted to show people that you can make more with a passively managed fund when you take into consideration the fees and commissions tacked onto managed funds.

Because it’s not just commissions to your advisor. It’s fees to the fund managers, fees on growth, maintenance fees and fees for actively trading stocks within the fund (usually four times a year.) And the challenge started a mere months before the market crash of 2008.

The challenge concluded at the end of 2017 with the cumulative managed funds gaining 22% and the index fund gaining 85.4%.

The Outcome

In the month it took for them to process our paperwork and get us set up in the system, I had a lot of time to think about investing. It is true that some actively managed funds make 12% but I couldn’t help thinking about all those fees and how it ends up being a 6%-8% return when you’re done.

The day before the bank was scheduled to take money out of my account for that fee-laden actively managed mutual fund, I called and said I couldn’t go through with it.

It felt like calling off a wedding.

I liked my advisors so much and they, unbeknownst to them, are how I figured out that I DO want to do it on my own. Because I want as much of my money to sit in mutual funds as possible. Not in other peoples pockets no matter how much they deserve it.

That night I went onto Vanguard.com and deposited $2000 into my brokerage account. It was so easy; I don’t know why it was taking weeks for the other guys to take my money.

Once I made the leap I asked everyone in financial media, “Where do I put my money!?”

Vanguard has over 100 funds you can invest in and I didn’t know which one was right.

People suggest I start with one of Vanguard’s Target Retirement Funds. It’s an all in one fund that’s diversified and lowers in risk as you get to your target retirement year. The minimum balance to start it is $1000.

If you don’t have $1000 to start you can start investing with Wealthsimple then roll over your investments for no fee when you’re ready. A lot of people suggested this to me before they knew I had the minimum.

WealthSimple’s fees are only .5% and they rebalance your portfolio for you for free. I also love that they only invest in sustainable and ethical companies

Ultimately I feel great about our decision and everyone I talk to (even Baby Steppers) agree and are also going this way.

I didn’t need an investment professional to do this for me because it wasn’t hard. The scariest thing wasn’t that I’d lose money or not make as much as an actively managed fund, it was that I wouldn’t be able to use that money until I’m in my 60’s! That’s so far away!

I don’t think Dave or SmartVestors are inherently wrong, just not right for most people.

If you have a million dollars in assets then most of those high fees are waived. So it makes sense why wealthy people go with actively managed funds, they can legitimately make more there. And Dave is trying to make millionaires.

Why We’re Not Investing 15%

I’m eternally grateful for everything Dave Ramsey has done for us. If it wasn’t for him we wouldn’t have a foundation to figure out this money stuff on. It’s because of his system that we developed the habit of budgeting, hard work, and living frugally. And it’s why we’re not going to invest 15% of our income.

We’re going to invest 50% of our income.

We realize we can reach financial independence in about 13 years through investing half our income. We’re aiming for 15-18 years right now but we’ll see. Financial independence means you can live off the dividends your investments make every year so your net worth stays the same.

We spend about $40K per year so when we get to a million as long as our standard of living doesn’t increase we’ll be making $40K in dividends every year and then we can work whenever we want and do whatever we want.

We’ve made about $100 on our investments so far, I know, ballin. And financial independence is just a dream right now but so many people out there have done it.

• Mr. Money Mustache
• The Frugalwoods
• Our Next Life
• Go Curry Cracker

And they all did it all by keeping their expenses low and investing aggressively in index funds. We’re not going back to how we were living while paying off debt but we’re going to put more toward our investments than our house.

Out of that 50% we’ll be making extra payments on our mortgage to get PMI off and refinance to a 15-year fixed mortgage (holla at ya Dave!) but then we’re going to invest as much as possible.

What About Risk?

I hate risk. That’s why I’m actively working to build streams of passive income. So if we both lose our jobs before we retire, we’ll have enough coming in from this blog, my book sales, and other passive streams to cover our expenses. And we’ll have our emergency fund should we need it but I’m working to make sure we never will.

What do you think about all this? I was surprised how many Dave Ramsey fans were not going with actively managed funds. I’d love to hear from some more of you! Or if you think I’m crazy I’d also love to hear from you!