What is "Dollar Cost Averaging"?

This episode is sponsored by SmartVester. Connect with an investing pro for free at ramsysolutions.com slash invest. You're listening to Ramsey Everyday Millionaires, where we talk investing, retirement, building wealth, and outrageous generosity.

George! It's time, Jade, for our long-running segment, Talk Nerdy to Me. Hit me with that jingle. Here is the nerd topic of the day that I'm going to break down in less than two minutes to help people out there understand it. These $10 words out there that bother me when they're thrown out like jargon, but they're important, all right? Today's word or phrase, dollar cost averaging. You'll DCA as they call it in the biz. No one calls it that but nerds, I just want you to know that. Yeah, Instagram nerds.

This is dollar cost averaging is an investment strategy to save for retirement. It's this simple. It means you're making regular investments over time regardless of what the stock market is doing. I don't feel like it even needs a term, but there is a fancy name for that. It's focused on the consistent dollar amount you invest.

as opposed to dropping a lump sum every once in a while. Yeah, a regular amounts or a lump sum once a year. So we recommend dollar cost averaging for your long-term investing because the longer your money stays in one place, the more it's going to grow and investing consistently over time in one place. That's how you beat the market fluctuations. So if you're scared of the roller coaster, this one's for you.

I also think it helps build a nice habit, right? You're building the habit of investing when you say, okay, every month, this is automatically coming out. I know what the amount is. I mean, we say 50%. And then you live, you live on less. When you know 500 bucks is going out of your account, you just tend to live. After a while, you don't think about it. Yeah, exactly. Add a side out of mind.

So if you put, let's say, 500 bucks a month into your 401k or an IRA every month, you're essentially buying shares of the mutual funds. That's what you're doing with that 500 bucks. But remember, the value of those funds could go up or down each month. So some times, some months, that 500 bucks goes a long way. It goes farther because the prices are down. Stock goes down, that means you're buying it on sale. Think of it that way. Price goes up, you're buying it at a more expensive rate.

But again, your dollar costs averaging. So think of it like your gas tank. Some months, your 200 bucks, your budget for fuel gets you 60 gallons. But the price per gallon drops the same 200 stretches further. You get an extra 10 gallons, you get 70. And so if the price goes up, that's great too because your shares are worth more. So it's very glass half full kind of mentality here. And look at the numbers here. 40 years of investing 500 a month at a 10% average rate of return.

It would have grown over to over 2.6 million thanks to compound interest. Yeah, wow. And of that amount, get this. You only contributed. You only put your own money, 240 grand is what you put in. It turned into 2.6 million. The power of time. So it over-entrissed. You made over 2.4 million of free money because of the power of compound growth, because you did dollar cost averaging. And here's the great news for you. We surveyed millionaires, over 10,000 of them. Investment consistency was one of the most important factors in building their million dollar portfolio.

They were actually average investors. They weren't great. They weren't prodigies. They just put the same amount away every single month for a long time. I love that. So if you want to learn more, go to ramsysolutions.com slash invest. We've got a free complete guide to investing, or you can click the link in the description if you're listening on YouTube or podcast. This guide is going to teach you everything you need to know, including how to develop a personal investing strategy, how to pick the right investments using the Ramsey principles. I love that. There we go. It was painful, Jade.

Painless. Oh, you're right. I don't know why it was painful for me. Was it? Yeah. Well, let's take it a step further. So I mean, somebody out here is like, yes, George, thank you for that because I didn't know. But how do they know when they're ready to start dollar cost averaging their way to millionaire status? Oh, good question. A lot of people got I want to start now.

There's a time and place for that now. And it's when you are out of consumer debt, you have three to six months of expenses saved in that emergency fund. And that really becomes your never going to debt again insurance. Yeah. Now we're ready to invest because we have our income back in our hands before we were giving it out to lenders every month.

There you go. And the big question there is, George, why do I need to wait? It would be nice to wait until I get out of bed. You're saying it's so important to start early. Yeah. Why wouldn't I want to start now? Tell us more. Well, because when you do 17 things at once, you never really get anywhere. And that's most of America. If you've heard the calls, they go, well, I'm broke. And I go, why?

You make a great income. Well, we were trying to pay off debt, trying to save for the kids college, trying to go on vacation. And that's why the baby steps are so powerful. It's focused intensity for the one through three, getting out of debt, getting emergency fund, focus intensity. Then we move toward intentionality in four through seven.

Yeah, because if you're investing the amount that we suggest 15%, if you have debt, most people would not have that kind of income at their disposal until they paid off their debt, which is- That's the other thing I get in the comments section. Where's this guy think we're going to be able to invest 15% of our income? And I go, hey, what's your car payment? Well, that's 600 bucks. What's your student loan payment? Well, that's 400 bucks. Well, that looks oddly like 1,000 bucks that you could be invested. Right. Right.

There it is right there. Which is 15% of an $80,000 salary, which is the household median income now. Okay. So it's possible, but you gotta decide, is our debt payment's gonna be normal, or is debt-free living and investing for the future gonna be normal? Okay, so now you've convinced the person with debt to pay off their debt.

And before they begin this journey, what about the person who's like, OK, I paid off my debt. Why do I need to save up three to six months before I start? That's the kicker. Because you get thrown off the horse at every little ankle bite or emergency. You go, well, I kept my savings low because I want to invest. Well, the problem is life's going to happen in the meantime. And the goal is we don't touch the emergency fund unless we need to.

Yeah, and if you don't have an emergency fund, if you don't have an emergency fund, your investments become your emergency fund. Or capital one's credit card becomes your emergency fund at 25% APR. Yeah, how can you really build wealth when you've got that counteracting anything you might be building? It's dragging you down. Okay, so what you're telling us, George, is there's method to the madness. You got me all riled up. I'm sorry, I like when I get George's nerdy wheels turning. George is one of the smartest people I know.

You need to hang out with more people, Jason. Well, no. But thank you. You're welcome, George. Thanks for listening to Ramsey Everyday Millionaires. Need help with your investments? Connect with a SmartVester Pro at RamseySolutions.com slash Invest, or click the link in the show notes. RamseySolutions is a paid non-client promoter of participating pros. Learn more at RamseySolutions.com slash SmartVester.