Dave Ramsey Recommends This 'Boring' but Effective Way of Investing for Your Future

If you're saving for your future, you may want to read this. 

If you want to build wealth and retire with financial security, you are going to need to invest money. You have lots of choices about how to do that though -- and some options are much better than others.

It can be confusing to determine where to put your hard-earned cash to help you build wealth, but finance expert Dave Ramsey has suggested an approach he believes most people should follow.

Here's how Dave Ramsey thinks you should invest

So what does Ramsey recommend when it comes to investing for your future? His approach is simple and begins with saving 15% of your gross household income into a retirement account. That's pre-tax income, as he explained. 

Ramsey also provided insight into exactly where this 15% of your money should go. "Start with your employer's 401(k), if you have one, and invest up to the match," he said. 

A 401(k) is a workplace retirement plan that you can put money into by having it withdrawn directly from your paycheck. Many companies match contributions you make, up to a set percentage of your salary, so this is free money that offers a 100% return. That's why Ramsey correctly urges you to start with your 401(k) when investing. 

Ramsey doesn't believe you should stick with just a 401(k), though. "Move to a Roth IRA and invest the rest of your 15%," he said. "If you max out your Roth IRA contributions and still haven't reached your 15% goal, go back to your 401(k) and contribute more there!"

For those without a 401(k), he instead advises just starting with Roth IRA investing. However, for anyone whose employer offers a Roth 401(k), he says this is the only account you need. "If your employer offers a Roth 401(k) with a match and you like your investment options, things get a lot easier -- you can invest your whole 15% in your workplace plan."

Ramsey is a fan of Roth accounts because these allow you to grow your money tax-free and withdraw it tax-free as a retiree. While you miss out on being able to deduct contributions upfront, deferring your tax savings can sometimes make it more valuable. You can also open a Roth IRA with almost any brokerage firm and will have much more flexibility with what you invest in than with your 401(k). 

Is Ramsey right?

Ramsey is right that you should invest 15% of your income if you can. And he is also 100% correct that a 401(k) is the first place to put your money in order to take advantage of matching contributions.

But, whether you should then opt for a Roth or another account that provides upfront tax breaks is a more difficult question. If you think you are paying higher taxes now and that your tax rate will be lower as a retiree, it's better to claim your tax savings upfront by investing in a traditional 401(k) or IRA. But if the reverse is true, a Roth is right for you. 

Still, it's worth heeding Ramsey's words and making sure you're steadily investing 15% of income in some type of tax-advantaged account because, as he said, "It may sound boring, but it works."