Debt Free or Bust

Article on MSN Money About Dave Ramsey

I just read an interesting article on MSN Money written by The Dough Roller entitled Here’s the real deal on Dave Ramsey. The author equates Dave Ramsey and debt to an alcoholic and alcohol, calling him a recovering debtoholic. I disagree.

I don’t believe Dave’s extremism about getting out of debt stems at all from his inability to control debt. I see it as Dave was scared to death and got a real feel for debt risk on a large scale. He was very young with a wife and babies to support when he went broke. He looked at his family who looked to him for their support and he was terrified. That fear was quite justified. He looked at his family and wondered how he was going to feed, clothe and house them.

I believe Dave was so scared that he will never put himself in a position where he would have to face a similar situation ever again. It’s not an addiction to debt, it’s a fear of the risk debt has associated with it that the article author doesn’t see or ever discuss.

Here’s an interesting quote from the article:

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.

Apparently, this guy doesn’t see that a mortgage ever gets paid off and you no longer have a house payment. No house payment in my life would be an extra $700/mo. Dave doesn’t say you can’t have a mortgage, nor does he condone selling your house to pay off all your debts unless you simply can’t afford your house, in debt or not.

Here’s another quote:

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.

This basically covers the amount you shouldn’t exceed with the first mortgage on your house. There is no room to borrow anything more if you stick strictly to the 30% of gross income figure. This guy must have a low mortgage payment and lots of equity built up in his house. He tells us that he is a real estate investor, so I take it his debt is tied up with his investments. He could sell a house if a deal doesn’t pan out, if the market doesn’t crash on him.

What he never discusses is what happens on the down side. Where is the risk factor? What happens when his real estate investments don’t pan out? What happens if he loses his business or his job? He doesn’t discuss the risk associated with debt, and risk is the biggest reason to get out of debt and stay out.

The author goes on to promote budgeting and not buying things of no tangible value. Why have a credit card if you don’t spend money you don’t have? You don’t need a credit card. He’s putting down Dave Ramsey and then turning around and preaching the same thing Dave teaches, except he borrows on his real estate deals.

The article author finishes as follows:

Dave 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.

The author vaguely defines responsible borrowing to mean borrowing your first mortgage at a fixed rate and investing “wisely” in real estate. What is wise borrowing in real estate investment? He never tells us. Dave teaches that it’s okay to borrow to buy your house. Where does responsible borrowing come into play on anything else? I see no argument in this article that justifies using credit cards and spending beyond your means.

I believe Dave is more extreme in his own house than he is to the world because of his own experience. I also believe a lot of the extremism comes from Dave’s fans. Many take what he teaches and really go out on a limb with it. Some fans reinterpret Dave’s teachings into things I have heard him recommend against on his radio show.

Some people go overboard with the self-help stuff and start believing that because they did something by their interpretation of Dave’s books that it should apply to everyone else. I’m a member of the MyTMMO.com site and the forums get really extreme. I see things I can’t believe the moderators haven’t removed. They certainly don’t fit with anything I’ve read in Financial Peace Revisited or The Total Money Makeover.

I’ll ask the same question the author asks:

Is Dave Ramsey’s approach to debt the right approach for everybody?

I think the answer is yes and no. Being debt free is the key to financial freedom. Ask wealthy people if you don’t believe it. However, you have to gauge where you are on the debt-to-income spectrum when you approach getting out of debt. If you don’t fit The Total Money Makeover you shouldn’t use it. You should read and apply the principles in Financial Peace Revisited or take Financial Peace University because you are in a different risk category than those with a good income who spend more than they make. Financial Peace Revisited explains what to do and why you should do it when you’re truly broke and in desperate trouble. TMMO is the how on becoming debt free and building wealth. In my opinion from being a long-time listener of Dave’s radio show and reading both of the above books, he doesn’t intend for the how to supersede the why.

How would you answer the above question? Please speak your mind in the comments.

Technorati Tags: Dave Ramsey, debtoholic, Dough Roller, extremist, Financial Peace, MSN Money, personal finance

May 12th, 2008 Posted by joubess | Debt Reduction | 11 comments