Here's the real deal on Dave Ramsey and debt
His view on borrowing doesn't sit well with this blogger.
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.
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.
- Bing: More on Dave Ramsey
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
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.
if used wisely, can greatly improve your finances, can increase your
financial freedom in the long run, and can greatly improve your balance
Own vs. lease: There's really no difference
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.
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
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
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.
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
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