Dave Ramsey is a popular financial advisor who says people should avoid debt as a primary financial goal. But is he right?
There are certainly different opinions, as evidenced by a recent video from The Money Guy Show. Certified financial advisors Brian Preston and Bo Hanson help people make everyday financial decisions. With over 40 years of experience, their guidance is worth quite a bit, too.
Preston and Hanson think differently than Ramsey about debt. They view it more as a tool that people should use when a situation calls for it. This article analyzes both perspectives, considering the question of debt’s role in wealth-building.
Check Out: 8 Steps To Take Now If You Owe Significant Interest on Student Loans
Read Next: 6 Subtly Genius Moves All Wealthy People Make With Their Money
Everyday Tips for Dealing With Debt
Before diving into this discussion, it’s worth reviewing some debt basics. These tips are always smart to follow, regardless of how you feel about using debt as a tool for building wealth.
-
Start with a budget: You need to know how much money you can allocate to paying off debt before you create a plan for covering yours.
-
Choose how you’ll repay your debt: There are two main debt repayment strategies, each of which can work. The snowball method involves paying off one debt in full at a time, starting with your smallest. The avalanche method involves paying off your highest-interest-rate debts first.
-
Consider negotiating: Creditors may be willing to discuss improving your terms. You’ll never know until you ask. Doing so could leave you with a lower interest rate or less debt to pay.
Learn More: Mark Cuban’s Best Advice on How To Become Rich
Dave Ramsey’s View on Debt
Ramsey takes an aggressive stance against debt. He says a person’s first financial goal should be to create a $1,000 emergency fund. But after that, Ramsey recommends paying off all debt except a mortgage before saving or investing in your future. This essentially means putting all of your wealth toward getting out of debt until you achieve that goal. Your emergency fund and other savings would remain relatively small until then.
Ramsey’s views on debt are based on the risks it presents and probably his own personal experiences. He went bankrupt 30 years ago — largely because he had too much debt to repay.
The Money Guy Show also highlights Ramsey’s perspective. They say it’s one thing to advise only paying cash when you already have wealth. But it’s an unrealistic standard for people who are still trying to get rich.
The Money Guys’ Debt Take
Money Guy hosts Preston and Hanson say using debt wisely can actually be a key step toward building wealth. For example, many Americans today are unable to own a home without debt. If they only paid cash, they would be barred from the growing housing market and associated opportunities to build wealth.
The pair also say debt can be a tool for making your financial life easier. Preston and Hanson share an example to illustrate that point. Imagine losing your job and choosing between the following two financial situations:
-
You have 98% of your mortgage paid off but no emergency fund or financial cushion to deal with the unexpected loss of income.
-
You have 30% of your mortgage paid off and a large emergency fund covering all your expenses for the next six months.
Option two is a pretty obvious choice. Most of us would rather have the cash we need to survive than a home that’s mostly paid off. There’s also a timing advantage here. You can tap into your home equity with a collateralized loan if you need to. But it could take weeks or months to see those funds in your account. With option two, you’d have the money right away.
This illustrates how debt can be a valuable tool. In scenario two, the person held more debt to give themselves more financial flexibility. This could have a number of other effects, too. For instance, the person in scenario two would likely feel more comfortable taking their time when searching for a new job. They could find a better role as a result.
An Important Clarification
The Money Guy Show discusses using debt to accomplish financial goals. It’s important to recognize they aren’t saying all debt is fine. You should still think critically before opening a new credit card or taking out a personal loan, for example.
Feel free to use those tools if you need them. Just note that you should only do so in service of a bigger financial or personal goal. You won’t get rich using debt in any other way. This isn’t a license to go out and buy your dream car.
Reconciling These Views: Which Is Right for You?
Ramsey and The Money Guys’ views on debt exist on a spectrum. There are also people who are even more aggressive about using debt to build wealth, like Robert Kiyosaki. So, whom do you listen to?
One key consideration will be how you feel about risk. People like Kiyosaki take on a lot of risk by using debt aggressively. That’s because the more debt they have, the more of their monthly income they must pay to service it. However, this form of financial leverage can help you build wealth faster — as long as everything goes right.
On the other end of the spectrum is Ramsey. He says to avoid debt at all costs and delay your financial goals until you’re out of it. This approach carries a different risk. If you spend all your money to pay off debts, you may be ill-equipped to handle unexpected financial situations.
The Money Guys land somewhere in the middle. They say it can be smart to use debt in specific situations — and always with an eye on risk. That may represent a happy medium for you.
Ultimately, personal finances can get complicated — especially when you’re trying to build wealth. If you aren’t sure which debt approach is right for you, it may be best to contact a financial advisor for personalized guidance.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: The Money Guy Show: Is Zero Debt the Path to Wealth?
