If you've spent some time listening to Dave Ramsey's financial advice, you've probably heard him talk about "growth stock mutual funds." If you're not familiar with the financial industry, this may sound like jargon to you. While you've probably heard of mutual funds, you may not have been aware that these investment vehicles come in many different shapes and sizes. In fact, mutual funds are one of the most diverse investment classes in existence. Virtually every investor can use mutual funds as part of a balanced long-term investment strategy.
All mutual funds are professionally-managed baskets of equities, commodities and other financial instruments. While they typically carry some upfront or back-end investment fees, they generally produce solid returns over long periods of time. When Dave Ramsey talks about "growth stock mutual funds," he's talking about funds that invest in young companies in rapidly-expanding industries. These companies often experience impressive year-on-year earnings growth and constantly add employees. They typically operate in dynamic sectors of the economy, including technology, pharmaceuticals and global financial services.
It's important to note that Mr. Ramsey advises against investing any earnings that you should be saving. In other words, building an "emergency fund" that can mitigate the financial effects of a lost job or unanticipated injury takes precedence over saving for the future. In his estimation, you should have an emergency savings reserve of at least $1,000 and make a long-term goal of stocking your savings account with enough money to fund your daily activities for three to six months.
It's also important to note that retirement savings plans offer far better rates of return than traditional brokerage accounts. First, be sure to contribute the annual maximum to your IRA. If your spouse also has an IRA, do the same for that account as well. Next, move on to your 401(k). Max out your contributions to this savings vehicle and take advantage of any potential matching contributions from your employer. In many cases, your employer will offer to double a certain amount of the contributions that you make into your 401(k).
Whether you're funding your IRA or your 401(k), it's perfectly acceptable for you to use these tax-protected accounts to invest in mutual funds. Since your mutual funds may carry fees and expenses that may eat into your margins, it makes sense to boost their returns by keeping them in some type of retirement account.