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- [00:00]
Dave Ramsey
Foreign.
- [00:06]
George Kamel
This episode is brought to you by SmartVestor. Connect with an investing pro near you at RamseySolutions.com SmartVestor we got a great question here from Dylan. Said, I've heard Dave's advice to contribute 15% to retirement accounts in Baby Step 4. In Seasons, I've been tempted to back it down and others to ramp it up and save more like 20%. Can you explain why you landed on 15%? And does it ever make sense to back it down or raise it up? It's a good question. And there is no magic to this, from my understanding. This is sort of a standard financial planning principle. And the idea is that if you do it too much, you're not gonna have enough money to throw at baby step five for college, baby step six for the house. And if you don't do enough, you're not gonna retire with a big enough nest egg.
- [00:52]
Dave Ramsey
Yeah. And there's no magic to 15. I mean, you could call it 16, you call it 17, you call it 14, you can call it 20. I mean, you can call it that. But I ran the numbers in the early days of Financial Peace University on someone barely making it at the poverty level. In those days, I used $20,000 a year income. And I ran the numbers up to about $250,000 in income. And I just kind of did break points every 40, $50,000 along there. I did some break points, said, okay, if this happened and if you. And I just said, if you never got a raise, which is unrealistic, okay, would you have enough? Because. And then you look at those. What is the disposable income left over after you put that percentage into retirement? Because disposable income is the income leftover to enjoy, to be generous, and to pay down the house. Cause I wanted to try to get the house paid off in seven to 10 years. And that's what's ended up happening, by the way. If you put more in, the house doesn't end up getting paid off on average. And if you put less in, you don't end up with what you should have ended up with. Cause you miss out on the compound interest and the market growth. But because here's the deal. If you start this stuff and you invest, you know this, George, for. Let's say you invest for 25 years or more. Somewhere around 95 to 97% of the money in your 401k is growth, not your contributions. It's not your contributions, but the growth comes due to the contributions. So when you say, I'm gonna put in 13% instead of 15. You don't just reduce the results by 2%, you reduce them exponentially. And the same would be true if you went from 15 to 20, though. But when you go to 15 to 20, you reduce the results on getting the home paid off exponentially. So you slow down this burst of mathematics that occurs when the house gets paid off to see what happens when you clear baby step seven with the house paid off. Now we're not putting 15% away. Now we can put away just about whatever we want. You put 15% plus your old house payment at a minimum, which probably ratchets.
- [03:12]
George Kamel
It up to 20, 25, 30, maybe even more.
- [03:14]
Dave Ramsey
You max out, you end up maxing out all the other stuff. And so then what happens is all of a sudden your wealth building goes into overdrive. And so where you were aiming at maybe a million or 2 million, now you're aiming at 5 to 10 million. And depending on where you are and what the time scope is on the compound interest. But that's mathematically what happened when I ran these case studies out and said, okay, if you're, if you, you know, you're $20,000 a year and you never get a raise and you say 15% that came out, if I remember something like 200 and something thousand dollars, you'd have, make a $20,000 for poverty level. Yeah. You know, from 25 to 65. Right. And so from 25 to 65, if you made 50,000, what would you have? Well, you know, you'd have a house. What would the price range of the house be? We estimated that and say, and most of that's mortgaged. So we got to get that mortgage paid off and we use that amount said, okay, can we do that with the leftover money? Well, it's very hard to do if you kick it up to 20. And so when you screw around with the formula, Dylan, what ends up happening is you don't get the house paid off fast enough or you don't have enough going in over here in the 401k, you're starving it or you're starving the house payoff, one of the two. And this just seemed to be a real good middle line. But what you said, it's not, it's, it's not even a financial planning principle. I made it up and then I just tested it. I stress tested my idea against a spectrum of incomes by running the case studies out, running the math out, and that's how I did it. So it's not, I Mean, I'm not a genius or anything, so you can do whatever you want to do. The trick is, now that we've got the social proof that 10 million people have done this with success and literally millions and millions of millionaires, and so why screw with it? Just do it.
- [05:02]
George Kamel
It's not broken.
- [05:03]
Dave Ramsey
Just, you know, why mess with it? You can if you want. If you want to make up your own program, you're welcome to do whatever you want to do. You're like grownups out there and stuff. But, you know, it's like if you've got someone that 10 million people have lost weight using this particular calorie count diet type of thing, not just a theory. It's not just looking at calorie burn. It's not looking at that. It's an actual. There's social proof of 10 million people doing this. And a million of them have lost substantial weight. And now you decided that you're overweight while you're overweight, that you're gonna figure out how to fix this. Why?
- [05:47]
George Kamel
I guess just you feel like you're intellectually above it. You go, oh, my plan's gonna be better. It's usually justification.
- [05:53]
Dave Ramsey
It's a good question. I'm not picking on you, Dylan. But it is interesting to me that we human beings, particularly we Americans. Me too. I don't automatically submit myself to a system, but if I'm going to, it needs to be something that has significant social proof that the data is in on it. It's not someone's best guess or theory. Now, when I originally came up with 15, it was my best guess or theory based on running spreadsheets out, running out case studies. That's where I came up with it. But that's an interesting thing to unpack for everybody out there. So here's the baby steps are not in the Bible. I made them up and then I changed them and adjusted them in the early days to get them to work to give you a clear path to implement biblical principles. The biblical principles, you can't argue with those. You're just arguing with God. And that's dumb. Okay, bad idea, bad idea.
- [06:50]
George Kamel
But borrower, a slave to the lender. Okay, let's get out of debt.
- [06:53]
Dave Ramsey
Period. Yeah. A foolish man devours all he has. You spend everything they make. You're a fool. Live on less than you make. You know, in the house of the wise are stores of choice, food and oil. Save money, it's wise. But then, you know, what we did was try to give you a path, a clear path to run on. And that's how the baby steps evolved. And, you know, one of the places I heard this was actually John Wesley, the famous evangelist from one of the great revivals in the early days of America, in the frontier days of America, the Methodist revival. And he said, make all you can, give all you can, save all you can. And he also said, save 10%, give 10%, live on 80%, and you'll always have money. And that's not a bad formula. Principles, not a bad formula. It stands the test of time if you. Actually, I ran that out, too. I thought, well, maybe that's the thing to do, and I ran that out. But I kept running into stuff like, you know, the things that Wesley didn't have, which would be employer match on a 401k. And 79% of the companies right now in America that have a 401k, 8 out of 10 have some kind of employer match and have a Roth option. And so you know that that's not something that's advancements, not something that comes into that formula at all.
- [08:13]
George Kamel
And we've democratized investing. Back in those days, there was less options.
- [08:17]
Dave Ramsey
There was no investing. But he was right. If you save some and give some and live on some, you're going to be okay. And that's not. You're talking about the tithe, 10% of your income. Right. Giving 10 and saving 10. So all of that has kind of gone into the background on the baby steps 30 years ago when we put this stuff together, but now, not because it's biblical, but because 10 million people have done it successfully. I know some of you immature children that live in your mother's basement say we're snake oil salesmen, but we're not. We might have been in the early days. You could have accused us of that. But the problem is now the snake oil worked. Dang it.
- [09:00]
George Kamel
Now we're bottling it.
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Dave Ramsey
Yeah. And so the scam is out. It worked.
- [09:04]
George Kamel
And the show is free, by the way, we're not great salesmen at that point.
- [09:08]
Dave Ramsey
Yeah, that's true. But you know, you can do this, folks. That's the bottom line. So, no, Dylan, I wouldn't change it. That's why it's a good discussion.