We are finally to the 4th step in my run through of Dave Ramsey’s Total Money Makeover. I love these steps and I am currently on step 3 which is Finishing off my Emergency Fund. I believe in being healthy and fit in all areas of my life–and that includes financially.

Through this plan, I am currently debt free and spend only on cash which has me incredibly.

If you are a new reader and haven’t read my other posts in this series, then look no further and click below…

• Step 1: Building a base emergency fund
• Step 2: The Debt Snowball (getting out of debt)
• Step 3: Finish Building your emergency fund

Step 4: Maximize Retirement Savings

Have you gone through and gotten your base emergency fund of $1,000? Have you paid off all of your debt (minus house payment) using the Debt Snowball plan? Have you saved 3-6 months worth of income? If not, then you are not ready for step 4. That doesn’t mean it’s not good knowledge to have though. If you have, then pay extra close attention.

USA Today reported that 56 percent of Americans do not systematically prepare for retirement age by investing.

USA Today also reports that out of 100 people age 65, 97% of them can’t write a check for $600, fifty-four are still working, and three are financially secure. In addition, bankruptcies among those age 65 and older have gone up 164% in the last 8 years.

Getting older IS going to happen. You must start investing now if you want to spend your golden age in dignity and comfortable. There’s also the chance Social Security won’t be around by the time we retire, so that’s even more reason to start saving and investing now.

Baby Step 4: Invest 15% of your income in retirement

This is step when you really get serious about your wealth building.

Remember, when you reach this step, you don’t have any payments but a house payment and you have three to six months worth of expenses in savings, which is thousands of dollars.

This next rule is simple: Invest 15% of before-tax gross income annually toward retirement. Why not more? You need some of your income left to do the next two steps which is saving for college (if you have children) and paying down your home.

What should you invest your money in??

• Growth-Stock Mutual Funds: The stock market has averaged just below 12 percent return on investments throughout its history. They are EXCELLENT long-term investments when leaving the money in longer than 5 years. Research has said that 97% of the five-year periods and 100% of the ten-year periods in the stock market’s history have made money.

Ramsey suggests selecting mutual funds that have had a good track record for more than five years, preferably 10 years. He suggests spreading retirement investing evenly across four types of funds. Growth and Income funds should get 25% of my investment (They are sometimes called Large Cap or Blue Chip Funds). Another 25% will go into Growth Funds (also called Mid Cap or Equity Funds; an S & P Index Fund would also qualify). International Funds get another 25 percent (also called Foreign or Overseas Funds) and lastly, aggressive Growth funds get the last 25 percent.

The invested 15 percent of your income should take advantage of all the matching and tax advantages available to you.

• Always start where you have a match. If your company will give you free money, take it. If your 401k matches the first 3%, the 3 percent you put in will be the first 3% of your 15% invested.
• If you don’t have a match, or after you have invested through the match, you should next fund Roth IRA’s.

Roth IRA’s will allow you to invest $3,000-$5,000 per year, per person. The Roth grows TAX-FREE. So, if you were to invest $3,000 per year from age 35 to age 65, and your mutual funds average 12 %, you will have $873,000 tax-FREE at age 65. You have invested only $90,000 and the rest was growth and you pay no taxes.

So, here’s a nice little example of what all this means:

Household income: $47,000
Husband: $27,000
Wife: $20,000

Husband’s 401k matches first 3%.
3% of 27,000 ($810) goes into the 401k.

Two Roth IRA’s are next, totalling $6,000.

The goal is 15% of 47,000, which is $7,050.

You have $6,810 going in. So now you bump the husbands 401k to 4%, making the total invested $7,080.

Hope that little scenario allowed it to make more sense.

Here’s another scenario to make you realize that it IS possible to have a nice retirement fund built for you someday.

Let’s take a 27-year-old couple making an average income. They invest 15% of their income in 4 types of growth-stock mutual funds with 5 to 10 year track records. The average household income is $40,816 per year, according the Census Bureau. They would invest $6,000 (15%) per year or $500 dollars per month. If you make $40,000 per year and have no payments except the house mortage and live on a budget, can you invest $500 a month? If they invest $500 per month with no match into Roth IRAs from age 3o to 70, they will have $5,882,386 tax-free. If they manage to do only half that, they end up 3 million. Pretty crazy huh? It CAN be done.

I know all of this seems SO FAR in the future, but these are the things we need to start thinking about if we wish to be financially fit and secure one of these days. I know this post was a bit boring, but I happen to find money, savings, and investing to be fascinating. I love knowing that little by little, my money can add up to something big. I also love that I am starting young and thinking about my money choices NOW. I know that will help me for the future.

Is retirement something you even care about now? Are you actively saving for retirement? I think about saving and investing for retirement and I have a game plan when it’s time. I have money taken out of my pay check automatically from work, but as of now, that’s all I’m doing. Right now, I’m focusing on saving 6 months worth of expenses. Then, I will worry more about retirement.

*If this post was a little much for you…in terms of boringness, money jargon, etc then have no fear. I plan on doing a post on how I do my monthly budget and how I save money in the near future.*