By Jeff Headrick, Financial Planner
I have heard many debates over the years about Dave Ramsey and the twelve percent investment. While most of these discussions were among my professional colleagues, many were among clients or prospective clients.
Instead of focusing on optimal asset allocation, budgeting, or the importance of working with a financial professional, we seem to have become preoccupied with things that we have little control over—aka market returns.
Truth be told an investment that can average twelve percent per year over the long haul is a hard thing to come by. Sorry to burst your bubble so early. But please read on.
The Bigger Question
Instead of debating about Dave Ramsey and the twelve percent investment, let me ask you another question. How much additional surplus income do you have at the end of the month to put towards your retirement?
The majority of people that I have asked this question to recently cannot answer this question very easily either. In my opinion, if we focus on cash flow first and force ourselves to save more now, then we can dig into the technical aspects of performance later.
Know Your Cash Flow
For example, if I invest $5,000 at the beginning of every year and it earns 10% per year for 20 years, I’ll end up with about $315,012.50. However, let’s say upon examining my current monthly budget I realize that I have another $300 a month ($3,600 per year) that I could comfortably put towards my retirement. In doing so I would then be leveraging about $8,600 per year into retirement versus my $5,000 previously. Based on my calculations this adjustment would earn me an additional $226,809.00 for a new total of $541,821.50 in 20 years.
Are You Asking the Right Question?
Based on what I have seen, most people would rather talk about Dave Ramsey and the twelve percent investment instead of discussing their surplus cash flow. Let’s face it, it’s just a more fun conversation.
But if we turn a blind eye to cash flow and stick with their original $5000 per year investment, let’s see what kind of a difference that twelve percent investment might make.
Most investors that I know are making nowhere near twelve percent per year. However, if they could defy the odds and average twelve percent year, would you like to guess how much money they would have at the end of 20 years? (assuming the $5000 investment at the beginning of every year)
Don’t worry, I have done the math for you. If they could find this ideal Dave Ramsey twelve percent investment they would have $403,493.68 at the end of the a 20 year time period. That’s $138,327.82 less than if they had focused on their cash flow. So much for focusing on performance instead of cash flow and contributions.
What Would Benjamin Franklin Do?
Benjamin Franklin was once asked how to build wealth. He said that there are two ways to build wealth. One way is to find the best investments in which to invest. The second way is to live frugally and save as much money as you can. But then he added, “If you are wise you will learn to do both at the same time.”
Dave Ramsey’s Twelve Percent Investment
There are a few investments on my radar that may fit Dave Ramsey’s twelve percent assumptions. One is an investment called the Growth Fund of America (GFFFX). With an inception date of December 1, 1973, this fund has a lifetime average of 13.78%*. This is an F-2 Share Class fund that is very difficult to find unless you are utilizing the services of a professional financial advisor.
If you are out there trying to do all of this research and portfolio building on your own, you may want to consider working with a trained and licensed financial advisor. If you need help learning where to start feel free to read the article: The Financial Planning Revolution: A Beginner’s Guide to Working with a Financial Planner.
I hope this month’s post has got you asking the right questions, and that you now know that there are still some investments that hit that twelve percent metric Dave Ramsey has mentioned in the past.
As always, thanks for reading-- and please check back once a month for more on the world of financial planning and investments from Inspire Financial Planning.
*Source: American Funds
About the Author
Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.
This left his family at a tough financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.
Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.
Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only.
Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.
You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.