Sell off investments
The crown jewel in Heather’s investment portfolio is a stake in Apple that’s worth around $21,000. She claims to have held the stock for years and the amount she invested has tripled over that time.
Apple stock has been among the best in terms of growth in recent decades. The stock is up well over 800% in the past 10 years alone, which makes Heather’s performance with it surprising.
However, Ramsey wants her to offload this stake and pay down her auto loans. Heather and her husband have two car loans worth $16,000 and $18,000.
“This is going to jar your system,” he said. “I’m cashing in the Apple stock and the $20,000 and paying off my cars today.”
After paying off the debt, Ramsey wants Heather to rebuild her savings as an emergency fund.
“It’s not supposed to make any money,” he said. “It’s supposed to sit there and keep life off of your head, beause life is going to come and land on your head, and you’ll need a helmet.”
This strategy, Ramsey believes, should reduce the couple’s interest payments and free up more cash to invest going forward.
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Invest excess income
Heather says her combined household income is roughly $100,000 a year. That’s higher than the median family income of $74,580, according to the St. Louis Federal Reserve.
With the car payments eliminated, Ramsey believes the couple can dedicate a fixed monthly amount into investments instead. He recommends putting 15% of their annual income or roughly $1,250 in monthly investments in “good mutual funds.”
Academics call this strategy “dollar-cost averaging.” Investing a fixed dollar amount into the stock market on a regular schedule has several advantages, according to Morgan Stanley. It helps investors ride out the volatility of stocks, avoid the temptation to time the market and stay consistent with their investment plans.
Assuming Heather and her husband can deploy $1,250 a month into mutual funds that deliver an average annual return of 10.8% — based on the S&P 500’s track record over the last 50 years — they could accumulate $97,566 in total capital in five years. That’s significantly higher than their Apple stake’s current market value.
The best part? They don’t need to find another legendary tech stock or pick the winners in any emerging industry for this strategy to work. Investing in an index fund, such as one that tracks the S&P 500, can have long-term advantages.
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