This is the fourth installment of our Get Out of Debt series based on Dave Ramsey’s bestselling book “The Total Money Makeover Workbook.” If you’ve followed the first three steps, then at this point you are debt free except for your house and you have three to six months of expenses stashed away in an emergency fund. You attacked your debt and built up your emergency fund. The money you budgeted toward those two goals is now yours to invest.

You should now begin investing 15 percent of your before tax gross income into retirement accounts. Why 15% you ask? Because Dave and numerous other financial gurus say so. You want money investing early because of the way retirement accounts work. The longer you leave the money in them, the better they do. $100 per month invested at 12% for 25 years nets you $187,885, which is nice, but that same $100 per month invested at 12% for 40 years nets you $1,176,477. Longer is better, got it?

So why only 15% when 20% or higher would plainly be better? Because you aren’t ready to do that yet. There are other goals still, which will be discussed in the next few articles, that need to be accomplished first. Remember, Dave Ramsey calls these baby steps.

You are becoming financially fit, but your not ready for marathons or iron mans just yet. Over-investing before finishing steps 5 & 6 will actually slow down your wealth building potential. So for now, 15% or as close to it as you can manage. If you can only do 5%, start there and build up to 15% over time. Also, company matching does NOT count toward your percentage, that’s bonus money.

So, what do you invest in? Look at your company’s 401k program and find out if they have a matching program. If they do match, say 4%, then you should definitely invest 4%. This is essentially doubling your investing power instantly and is basically free money, so take advantage of it. Don’t invest your full 15% here though, because there are other financial vehicles that need to be invested in first.

Over time tax laws change, but you need to be on the lookout for programs with tax advantages. Right now the best place to invest is in Roth IRA’s because money invested here grows tax-free. Not everybody can use a Roth IRA due to income and situation restrictions, but if you can, you should. If you invest $3000 a year in an IRA from ages 35 to 65 and it averages 12% growth over the long haul, you will have $873,000 tax-free at age 65. You will have put in $90,000 of that money, the other $783,000 is tax-free growth. Tax-free, as in all yours, do not pay the government, you actually get to keep it all, tax-free.

With Roth IRA’s you put the money where you want, so look for a good growth-stock mutual fund. When deciding, look at the long haul (10 year or more) track records, to see how it has preformed over longer periods of time. Short 1-5 year fluctuations don’t matter much, your looking to invest for 30 years for steady gains. Every financial analyst has their own ideas on how to spread out your investments. Dave Ramsey’s strategy is a 4 part division of equal percentages. Invest 25% in Growth and Income (large-cap, blue chip), 25% in Growth (mid-cap, equity, S&P index), 25% in International (foreign, overseas) and you guessed it, 25% in Aggressive-Growth (small-cap, emerging market).

OK, that’s a lot of numbers and percent signs. Lets go through an example to help this make more sense.

Husband Earns: $47,000/year
Wife Earns: $38,000/year

Sorry ladies, I’m not sexist, those are adjusted national average salaries for each sex. That’s an annual total income of $85,000. Take that $85,000 and multiply it by .15 (15%) to get a total investment goal of $12,750.

The husband’s company matches 3.5% in his 401k, which is $1,645, that gets invested in the 401k. $12,750 – $1,645 leaves $11,105 to invest. The current (2010) Roth IRA limit is $5000 per person, so $10,000 gets invested in a Roth IRA, leaving $1,105 to invest. If the husband then turns his 401k up from 3.5% to 6% he will be investing a total of $2,820 in the 401k. This takes their total investment up to $12,820. That’s just over 15%.

This is your goal. Figure out what your 15% is, and then work towards investing it.

Assuming you’ve completed baby steps 1-3, then when is the right time to start investing? Now. When it comes to investing, time really is money. The longer you have to invest before retiring, the more money you will have when you retire. It really is that simple.

For a more detailed analysis, more examples, and some fantastic retirement worksheets like the retirement investment calculator, the retirement kitty calculator, and the investment breakdown calculator, pick up a copy of Dave Ramsey’s excellent book, “The Total Money Makeover Workbook” from the link below.