Let me ask you a question: what’s good about Dave Ramsey’s advice?
I’m a positive person so I want to find the positive lessons we can derive from Dave’s teaching and many of my own clients have appreciated his advice over the years. So what can we learn from Dave Ramsey?
Well, there’s a couple of things I really do appreciate. First, Dave really pushes people to be givers. As citizens of God’s kingdom, we should put a high priority on giving and being a blessing. He also believes in an emergency fund. This topic is step one in achieving financial independence to develop an emergency fund or a short-term reserve.
At Lord and Richards, we help our clients through the financial independence review process to determine if you’re ready to retire financially independent without worry. We always make sure you have three to six months reserve or more if you have a big event coming up in your life like a wedding or car purchase.
Third, I appreciate that Dave doesn’t like debt. I think he makes that clear, right? When you ring a bell on the show, it means you’re out of debt. What I do have a problem with is that Dave believes that all debt is bad. We focus on those who use debt for expansion, growth and capital. It doesn’t mean it’s a risk-free situation, but there may be a calculated risk involved with certain kinds of debt.
||"We help our clients through the financial independence review process."
First, I agree with what Dave says about getting out of unsecured or consumer debt. If there’s a big pile of debt, you’ve got tackle it properly. What I don’t agree with is Dave’s focus on putting a priority on closing out small accounts and then bigger accounts. It’s better to work on your high interest debt first.
I also agree that it’s good to get out of debt on depreciating items. Using cash may not always be in your best interest. It’s certainly wise to have cash on hand in case of emergencies, but some things go beyond an emergency fund.
Think about a car, right? If you borrow money for a car at a very low rate, what you’re actually doing is exercising the principle we call it at Lord and Richards, OPM: other people’s money.
You might say “I thought all debt was bad.” If you’re taking money that you could be investing and potentially earn a higher rate of return and use it to pay off money you could borrow at a very low rate of return, then you’re missing out on an opportunity or arbitrage.
Also, on appreciating items like real estate, it may be in your best interest to borrow at a low reasonable rate with a fixed payment schedule that’s defined, and that allows you to pay it off over a certain number of years. A good real estate purchase, like a home will appreciate faster than the interest rate increasing your net worth.
This is where guys like Dave, get it wrong; they take the focus off your net worth, and put it on simply having no debt, right? There needs to be a balance. He tells folks to pay off their mortgage early, so I’m not excited about that aspect of his advice.
|| "There are times where you need good credit to participate
in the marketplace."
If you have a good rate, you’re getting positive arbitrage. Dave believes you can get 12% in the market. If he does, why would he be telling you to pay off a 4% loan when that cash could be used to get a 12% rate?
Dave also doesn’t care about your credit score. When it comes to debt, he feels like it’s useless, pointless and you’re going to live by cash. You know, there are times where you need good credit to participate in the marketplace, where you’re borrowing or not. If you want to get a lease, if you own a business, very often your credit comes into play.
If you use your credit card wisely, it will allow you to accrue points, miles and benefits that can be incredibly valuable, especially if used for business where they can accrue thousands of dollars’ worth of benefits. He seems to imply that you won’t have the self-discipline to avoid having a balance on that card.
But that’s not what I see with my clients. I see my clients exercising great care and discipline. Dave thinks you should get rid of every kind of debt except your home before you even start saving for retirement, pay off your car, student debt, anything else.
The problem with that is that you’re missing out on something that Einstein even committed called compound interest, which he called the either wonder of the world.
If you can begin early saving and set aside for the long term as well as having a short-term reserve, then you’re going to be way ahead and missing out on that you can have in your early years.
You may be thinking “wow, Colin, you’re sounding pretty negative.” I did have a few positive things to say about Dave but in the next blog, we are going to drill down the things I don’t like about Dave’s advice and what’s wrong with his advice. I want to make sure you read that post as well.
If you’re at a point where you’re out of debt and ready to work towards your financial future, save and build a nest egg, then it’s time to develop a plan for financial independence. Our team would love to talk with you today! Visit us online at lordandrichards.com.