Here's the real deal on Dave Ramsey and debt

This post comes from partner blog The Dough Roller.

As much good as he does, Dave Ramsey drives me nuts with his extreme views on debt.

Ramsey, as he readily admits, did some really stupid things with debt. Leveraged to the hilt on bad real estate deals, he went bust in a way most of us could never imagine. As a real estate investor, my leverage and borrowing comes nowhere near the toxic level Ramsey went to.

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Why? Because Ramsey's personality is one of extremes. Much like an alcoholic, he could not control his use of debt. He got one taste of that leverage, and he was borrowing before noon ever day.

Dave Ramsey is a recovering debtaholic

Now he is a recovering debtaholic. Like a recovering alcoholic, he should never borrow again. Why? He just can't handle it. Put Ramsey and debt together, and something really ugly develops.

OK, fine. But why should that apply to all of us? It's as if a recovering alcoholic were telling the rest of the world never to have a glass of wine. In other words, what works and doesn't work for Ramsey may not apply to everybody else. Of course, there are those who, like Dave, can't control debt and should avoid it just like he does.

But debt, if used wisely, can greatly improve your finances, can increase your financial freedom in the long run, and can greatly improve your balance sheet.

Own vs. lease: There's really no difference

Being debt-free does not automatically mean you've achieved financial freedom. For example, in the world of accounting, there are some intricate rules relating to how a company should account for a lease. Part of the reason for these rules is to prevent a company from appearing to improve its balance sheet when in reality it hasn't. 

For example, suppose a company owns a building and has a $1 million mortgage on the property. The mortgage is reported as a liability on the company's balance sheet. If it wanted to get that mortgage off its balance sheet, but still keep the building, it could sell the property and then lease it back from the buyer under a long-term lease. Is the company any better off? No, it has just changed the legal form of its ownership of the building. It's still obligated to pay for the building each month, but now the payment is called rent rather than a mortgage payment.

We can do the same thing renting a house or leasing a car. You may not have debt, but you do have financial obligations that require monthly payments. And you'll never own outright the thing you're paying for each month. The point is, being debt-free in and of itself won't necessarily get you the financial freedom you're looking for.

The real deal on debt

So here's the deal: Being debt-free is not the holy grail of financial freedom. My wife and I could be debt-free quite easily. We could sell our house, pay off all our debt, and have some money left over. I guess we'd then rent a house or apartment, and I would continue to go to work every day. Would we be more financially free? Nope. I suppose we could move to a less expensive area and perhaps even pay cash for a home. Would we be any more content in life? Nope. In fact, all we'd end up doing is uprooting our family and moving away from a place we love.

Now, the point here is not to run out and start borrowing. But I would suggest considering the following guidelines when it comes to borrowing money:

Avoid borrowing to buy something that's not a long-term hard asset. That means don't borrow to go on vacation or to go out to fancy restaurants or to line your closet with expensive clothes. One of the reasons we are financially free even though we have debt is that we have tangible assets behind the debt (our house, rental properties, a business) that we could sell if we wanted to and be debt-free. Once you take a vacation, you can't sell it to pay off the debt.

Keep total debt payments below 30% of your gross income. I know that for many this will be very difficult, particularly if you live in an expensive area. But I've found that if monthly debt payments exceed 30% of gross income, life gets very uncomfortable. And I should add that as you get older, this percentage should be going down. It should go down because your income should be going up, and it should also go down as you pay off debt.

Borrow wisely. We should all know by now the dangers of variable-rate mortgages. Mortgages should be 15- or 30-year fixed-rate loans. Take advantage of 0% credit card offers when it makes sense to do so. You can check out some 0% balance-transfer credit card offers and my 10 commandments on using 0% credit cards.

Don't spend today what you'll earn tomorrow. This ties into the first guideline above. The point is to control your spending, and don't let easy access to a loan send your spending out of control. There are plenty of free online budgeting tools you can use that will help you track and control your spending. Use whatever works best for you.

Dave Ramsey is entertaining, and I agree with a lot of what he preaches. If you choose to avoid debt as he does, I certainly won't tell you that's a bad decision. But I also believe that responsible borrowing can improve your finances with modest risk. So what do you think -- is Ramsey's approach to debt the right approach for everybody?

Other articles of interest at The Dough Roller:

• How to buy a refurbished iPhone
• Dave Ramsey's Step No. 4: A visual guide to saving 15% for retirement in a Roth 401(k)
• 8 articles to help motivate you to improve your finances