Dave Ramsey says “Debt is Dumb & Cash is King”. Robert Kiyosaki says there’s “good debt” and there’s “bad debt”. But they BOTH miss the mark… Listen in to find out how!
Last night, my lovely bride, Carole, and I attended the Georgia Real Estate Investors Association meeting. The speaker, John Adams is a well-known real estate investor in the Atlanta area because he's had a radio show that he's hosted here for many years. I don't know John Adams, but I've always enjoyed his shows and I respect his reputation. When he raised the topic of disagreeing with Dave Ramsey on the issue of the use of debt, he got my attention. After all, I truly respect Dave Ramsey, the rather famous radio host and TV personality. You can love him or hate him, but one thing is for sure. Nobody gets in trouble by following Ramsey's financial advice, which boils down to eliminate all debt, have a stash for emergencies, and then save, save, save with some prudent charitable giving mixed in. It's a formula that works, but is that formula right for you? My friends, the answer is probably or probably not. Let's dig in a bit, shall we?
John Adams gave a great example last night. His criticism of Ramsey's anti-debt stance is to concede that, yes, debt can certainly be dangerous, but electricity is very dangerous, too, and even though there's more than enough electricity flowing through the buildings where you live and work each day to totally fry you to a crisp, we still use it and you probably don't know a single person who's ever been electrocuted, so who's right? Adams has a point, but it's a weak one. Here's the thing. The probability that you could find someone who has been damaged by the existence of electricity is very, very low while the probability that you could find or even personally know somebody who has been damaged by unwise debt is very, very high. Yet still, I agree with Adams. There is a place for debt in the portfolio of the wise investor, but not all circumstances are the same.
It hurts me to be saying this because I actually have such a huge degree of respect for Dave Ramsey. I love that his advice is so simple and so reliable. It's the type of advice that's fundamentally sound and that your grandmother would give to you. Here's the reality, why there's a difference between what Ramsey says and what may be right for you. You, my friends, are demographically and financially different from the typical listener to Ramsey's show. This is in no way a slight against his audience, but the typical listener to my show is in their 50s or 60s and is already rather successful financially with several hundred thousand or multiple millions of dollars in your investment portfolios.
Ramsey's show appeals to a much wider audience to be sure, and I'm sure there are many of you who listen to Ramsey, just like I do, but here's the thing. The broadest group of Ramsey's listeners are people for whom the fundamentally wise concepts of save money and limit your debt are new ideas. In other words, most of them are people who are near the beginning of their financial maturation process regardless of their age. You know what? I applaud those people who call up to Ramsey's show to scream out, “I'm debt free.” That's a beautiful, wonderful, liberating thing, but there's just more to the story.
Another well-known person in the investing world is Robert Kiyosaki. I respect some of the things Kiyosaki has achieved, and I was very positively influenced by his book, Rich Dad Poor Dad, but I've got to admit, I don't have a particularly high regard overall for Kiyosaki. I just get the wrong vibe from him entirely. Where debt is concerned, Kiyosaki likes to make the argument that there are two types of debt, good debt and bad debt. Apparently, for Kiyosaki, the difference is that one leads to profit, and the other leads to loss. Consumer debt pretty much always goes in the loss column.
Here's where I come down on this issue with the final word. If you have to pick one approach, go with Ramsey's absolute prohibition against debt. The fact is that you'll never, ever get in trouble that way. Period, but there is nuance to this issue. Kiyosaki is wrong. There's no such thing as good debt and bad debt, but there are wise debtors and foolish debtors. Yes, I could use the word borrower rather than debtor, but I think the word, debtor, helps us to keep focused on the risk potential. What is the difference between a wise debtor and a foolish debtor? I'll give you some ideas to help make this judgment, but here's the thing. You already know which one you are. There's a good chance that your credit profile accurately reflects the type of debtor that you are. While your FICO score isn't the last word on that topic, it's a darn good indicator. In your heart, you know if you're a wise debtor or a foolish debtor already, but here's a good practical way to know the difference for you.
If, when you're considering debt for an investment opportunity, you agree with your lender about the parameters that make the loan safe for everyone, then you're probably being wise. A specific example, if you're getting a loan to fund a fix and flip renovation deal, then frankly, you should expect the lender to only offer a relatively small loan to you versus the value of the property, probably no more than 65 or 70% of the value. Why? The lender has to keep his money safe, and if he gets your fix and flip house as collateral and if there's a large equity cushion above his loan amount, then his money is safe. It's simple logic, but here's the thing. That makes it safer for you, too, because if your deal isn't good enough to be compatible with high standards like that, then it really isn't safe enough to involve debt in the deal to begin with. If somehow your deal was to go south, the fact that there's a large equity cushion means that it's highly probable that the collateral will fully extinguish your debt to that lender. Those rigid standards protect you, too.
If you're a wise debtor, you'll understand that. If you're a foolish debtor, you'll be inclined to think that the lenders are just being unreasonable and that you should keep on looking for another lender with looser standards.
My friends, it's not about debt versus no debt. It's not even about good debt versus bad debt. It's about wise debtors versus foolish debtors, and I hate to say it, but whichever one you are right now, you're likely to be that for your entire life. Wise debtors, use debt wisely. You know who you are. Foolish debtors, it's okay that using debt isn't your strong suit. You should avoid the use of debt and always be aware of the beautiful side of that situation. By avoiding debt, you get to sleep well every single night and never, ever, ever think about how you'll make your next payment. If you're a foolish debtor, you should follow Dave Ramsey's plan, and you'll be financially solid every day of your life as a result.
Thank you for listening, my friends. Please be sure to join our free email-based discussion group by texting the word SDIRadio with no spaces or periods to 33444. Today, folks, remember this. Invest wisely today and live well forever.
Links & Resources
- Dave Ramsey – I’m a big fan of his no-nonsense advice on debt
- Robert Kiyosaki – His book Rich Dad, Poor Dad changed my thinking, and the followup Cashflow Quadrant was also powerful. Later work is less impressive, and has made some questionable business decisions
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