Dave Ramsey is very popular. Chances are you’ve heard of him and his ideas. I even have family members who have followed his method successfully. They are living debt-free and happy.
Ramsey Method in a Nutshell
Dave calls these his 7 baby steps and you can look them up. They are sensible and useful for people who are swimming in debt. He advocates getting rid of all debt and saving money. His target audience is people who have built up a lot of debt in credit cards and other purchases. They have trouble getting out from under this debt because their monthly income barely covers their monthly payments. They are stuck and worried about retirement. There are certainly more details to the 7 baby steps than I’ve covered here, but you get the idea.
It’s All About the Goal
Dave’s goal for these people is security. He wants them to be comfortable in retirement and make sensible plans to get there. His steps are achievable and each one is relatively small. People can do it. It’s helped a lot of them, like my family members. But, what if your plan is for something more in retirement? What if you want to have income comparable to what you make right now, or even more? That will be difficult to do without taking some risk. And Ramsey’s methods try to minimize risk. For instance, you can purchase real estate, but should do it with cash.
Good Debt versus Bad
In real estate we have the notion that there is good debt. At first glance, and to my Ramsey-following family members, debt is a bad thing. You owe something to another person and have an obligation. That debt holds you back from funding your retirement account because you have to pay off that debt first.
Leverage is the term used by investors for good debt. It is the money which allows us to purchase something much larger than we could otherwise. True, it sanitizes the word ‘debt’, but it is an essential component to the plan to build equity fast.
That leverage is good debt. It helps purchase something which produces enough income to pay back the debt as well as build equity. At the end, the owner owns 100% equity and the debt was payed off by the investment itself. That’s good! Bad debt is buying a car on credit. The car only sucks more money away from you. Dave and I are in complete agreement on this type of debt – don’t take it on. But if it is good debt, why doesn’t everyone purchase real estate?
The Thing That Separates Dave from Real Estate Investors
If you could purchase a machine which cost $500 a month to run but produced $1,000 in product every month it would be a no-brainer to buy it. That $500 is like a mortgage on a real estate investment which brings in $1,000 in monthly rent. It’s that simple, so why doesn’t everyone do it? Risk.
Real estate investing carries risk, and that is what scares people. There is the risk that the toilet will break, that the tenant won’t pay, that a fire will happen, that the government will want to build a freeway on it, that a sinkhole will open up under it, and the imagined list just gets crazier.
Investors are willing to take on risk in a calculated and careful fashion. They purchase the right insurance. They enlist third parties to help them. They research and educate themselves. They don’t take on bad debt. They are fundamentally different from 99% of the people Dave Ramsey is looking to help.
Dave is saying the right things – at least for the people to whom he is talking. For the rest of us, there is good debt, sensible investing, and great wealth.
