Thanks for joining me for my third post bashing Dave Ramsey’s principals. OK, so these posts are a bit rude. The truth is, Ramsey has a butt load of followers that follow everything he says religiously. Although without reading between the lines, his plan does seem fundamentally sound.
However, when you consider the fact that no one plan can work for everyone, it’s easy to see how Ramsey’s repetitive lessons could be leading you down the wrong financial path. Today, we’re going to talk about Dave’s stance on debt and why I believe that the stance is wrong!
Dave Ramsey’s Views on Debt
Ramsey absolutely hates debt. He’s got a strong stance that all debt is bad. He believes that if you have debt, it’s better to put aside savings and investing and tackle that debt full force. He wants his followers to get out of debt at all because for him, it is the only way to achieve financial peace.
There’s Only One Major Problem with This Idea
Not all debt is necessarily bad debt. The idea that every debt you ever accumulate is a bad thing is absolutely absurd. As a matter of fact, you can use debt to help your money make more money for you. I know that sounds strange, and it doesn’t come packaged in a neat memorable phrase, but it’s true. So, today, I’m going to give you a few examples of what types of debt are good debts and why.
Recommended Debt Posts:
Good Debts
Mortgage – A mortgage is a good debt to have for 2 reasons. First off, you could either be paying rent on a property that you don’t own, or paying a mortgage on a property that you will own in the future. Aside from the fact that when you have a mortgage, you’re not just dumping rent money down the drain, it’s also a debt that can help you make your money work for you.
These days, mortgage rates are incredibly low. So, if you’ve got an outdated mortgage, you can most likely refinance at a much lower rate. As a matter of fact, the average mortgage rate is lower than the average rate of return on my investments. I bet it could be the same for you.
By paying the minimum payment on your low interest mortgage, you’ll have more money to use for Motley Fool investing. As the value of those investments grow faster than the interest on your mortgage, you’ll see why mortgage debt really isn’t all that bad!
Business Debt – I’m a business owner. Running a business is not cheap. Startup often times takes tens of thousands of dollars. When I first got into business, I tried to do it without getting into debt. Unfortunately, that just wasn’t possible. However, that debt gave me the ability to turn my business into what it is today. Because I got a business loan (I created a debt), I am now more financially free than I have ever been in my life. I’ve paid the debt off, but I’m still grateful that the option was there!
Final Thoughts
If you’re overwhelmed by debt and absolutely lost financially, Dave Ramsey’s ideas may be a good start to your financial recovery. However, if you’re like more than 80% of people out there, chances are following in Ramsey’s footsteps will lead to you missing out on profitable ventures…brought to you by debt!
When I started reading your post I was jumping up and down on the coach shouting no no no. But by the end you had me on your side. I think that most debt is bad. But if you can get a higher return than you are paying in interest, then borrowing makes sense. The problem is, there are few places where you can do that (aside from your examples) and I worry that many may take cash advances on their credit cards to finance risky flings in the equity markets. Maybe age makes me worry too much.
I agree! Someone should tell him that there are two kinds of debt: the good and the bad.
This is a great post! Although I like what Dave Ramsey is doing, it is true, there is always good debt and bad debt. Unfortunately most people don’t know that.
I agree that sometimes debt is unavoidable. Dave Ramsey frequently mentions if you have to go in debt it would be mortgage debt. However he goes against leverage in any way, which is usually when talk about low interest rates comes up.
My personal views are yes I have mortgage debt, but I don’t want that thing hanging around for 30 years and Small business debt I really believe you can build it slowly with cash a la Dave Ramsey. I’m not starting a construction company overnight or anything so Cash is King for me.
I agree with you – Dave Ramsey really should address the fact that some “debt” is actually more of an investment (like a mortgage and Business debt) and isn’t some horrible thing to be avoided at all costs. He really should specify that what he’s referring to is “consumer debt”.
It’s hard for many to differentiate what is really good debt or bad debt so it’s easier to just say all debt is bad. I don’t even think of a primary home as investment.
It’s a matter of favorable debt because I rather own the home after contributing a vast amount of my resources to it.
A mortgage is a better kind of debt to me. Still one I would love to pay off eventually but at least I get tax write-offs in the meantime as I pay butt-loads of interest on it. I’d be much happier to pay off my mortgage earlier and an currently on track for 22 years instead of 30. Plus investments too:P All balanced.
You are wrong, wrong, wrong, wrong, WRONG! Debt is debt and there is no “good” debt or “bad” debt. Just saying – been there, done that and in the end, Dave Ramsey is right about debt (although I do agree that he’s not the best “investment” adviser out there).
Guys, I have had what you would characterize as good and bad debt – good being a mortgage, student loans, bad being credit card debt, etc. but I’m telling you what you think of as “good” debt (school loans/mortgage) is only “good” if you can pay it off really, really, really fast. I don’t care if your interest rate is low, it’s still debt. Get rid of it as fast as you can.
If, by “good” debt you mean an education you couldn’t otherwise finance, I agree – to a point, ditto with a mortgage, BUT it’s still debt so lose it and don’t get greedy and try to leverage it. Get it out of yours and your childrens’ lives asap.
I consider mortgage debt okay as long as you pay it off within 10 years, maximum 15. Otherwise you bought too much house! Same for student debt, 2 – 3 years, maximum 5. Otherwise you’re too (book) smart for your own good!
I agree 100%! If you have to take out a 30 year mortgage, you can’t afford that house.
I agree that a blanket statement like ‘all debt is bad’ isn’t really right. But Dave Ramsay does seem to like making hard rules that are really intended to stop people from doing stupid things, and for a huge chunk of his readers, it probably does help.
There’s a lot of debate about good vs bad debt, but I think what differentiates it is the characteristics of the person behind the debt, their specific circumstances, how they use it, and whether they fully understand all the possible consequences. A super-fast car might be a great way to get somewhere much quicker for a formula 1 racer, but putting an average person behind the wheel probably wouldn’t end well. But it doesn’t mean a fast car is a ‘bad’ form of transport – just that many people aren’t equipped to handle it, and should stick to something safer.
Great points. No financial philosophy is one-size-fits-all, since there’s far too much variety among individual circumstances.
I recently got serious about paying off consumer debt, and I started by reading four Dave Ramsey books. (Lesson learned: one is enough.) His message is positive and hopeful, which is very appealing. But I don’t believe that one must apply it exactly how he preaches it to have success.
First of all debt is borrowing to pay for something you cant afford…period. Its really nice that so many of us want to give all these excuses on why certain types of debt are ok, but the reality is 8 out of 10 Americans are 2 paychecks away from financial ruin.
The idea that we all find so much value in our credit score which is just something that has been marketed to us as “essential” is really just sad… Congratulations your very good at borrowing money for things you can’t afford and paying that money back with to someone with huge amounts of interest.
My father always told me there are two kinds of people in this world ” Those who earn compound interest, and those who pay it”! It can be a firestorm in either direction, and I think its great that someone like Dave Ramsey has the brass tacks to call debt what it really is…a bad idea for most people.
By the way, Dave Ramsey seems to concede to the fact that if you are completely debt free, have a cash emergency fund so you don’t end up “financing” emergencies (stupid) and can afford a mortgage that can be paid off in 15 years, than go for it.
James,
You make a good point. I like that you said “…all debt is borrowing to pay for something you cant afford…period”. Very true, sir.
Debt is debt and it’s bad. Dave Ramsey does say that having a mortgage is okay because most people won’t/can’t save up to pay cash for a house, but he has the stipulations of 1) it be 25% or less of your monthly income 2) put 20% down 3) have a 15 year mortgage and then work your tail off to pay it off…so while I agree, buying is better investment than renting, it is ONLY if you can afford it. We follow DR’s teaching and have been debt free (except the mortgage) for 5 years AND we’re almost done paying off the house. I guess we’re the losers, following his teaching and living like no one else now so we can live like no one else later. I enjoy being an alien in a debt, now, now, now world.
Josh, I like your writing, but in this case, most people have either made up their minds and will not accept the other side’s view.
I agree with the David that financing your couch with 18% interest is bad. My 3.5% mortgage? Not so much. Money saved pre-tax was funded at 72 cents on the dollar. So given the choice, I could either have paid off my mortgage (just under $250K right now) faster, or have deposited nearly $350K into our pretax accounts. Was 2008-09 a bit scary? Of course. But over the last 10 years 2003-13 the market CAGR was 7.36% and the David average return was 9.19%. So the deposits have grown to over $450K over that time. The worst recession since the depression, and I am happy. My ‘number’ included the mortgage payment, and just as we hit our number, my wife and I were let go in a layoff (note to readers, don’t work in the same company as your spouse, now that’s risky) and in hindsight, I’d have done nothing differently. Every year that passes the debt is eaten away by inflation, we may never see rates this low again.
It would have been an expensive mistake to have accelerated the mortgage payments. What I find most crazy about the David’s advice is the fact that he sticks with his proclamation that the S&P return is 12%, yet he’d suggest paying off a low rate loan fast as you can. Do the math, that wide a margin and a bit of patience says to stay the course and stay invested. I’m glad I’ve not followed any of his advice and also glad that those that do are not people who want to actually do the math to see what it really cost them.
This has kind of been mentioned in some of these comments, but I’ll go ahead and add my 2 cents. lol
First off, good post! You make some great points. My personal opinion is that Dave is great, one of the best actually, for people who are trapped in debt. He is one of the best starting points.
I don’t think it should end with him. He is more for the “you got yourself into a bunch of stupid debt and you need to get rid of that first” kind of crowd. I always recommend people like that read The Total Money Makeover, then go from there. It’s just a good foundation to start with.
As far as the debt, he does realize that most people have mortgage debt. He is mostly concerned about paying off the high-interest credit card and loan debt. As far as business debt, he recognizes that, while running a debt free company is ideal, businesses will have debt. He doesn’t always tell people to pay off their business debt.
Overall, I think Dave’s principles are great for the average person who is in debt. When he talks about hating debt, he is primarily referring to credit card debt, with not as much emphasis on mortgage or business debt. Everyone can learn from everyone else, so Dave has a lot to teach people. There are a few things I disagree with, but I am still able to learn a lot from him.
I also agree with Joe, people have probably made up their mind already.
Thanks for the article!