The young woman was thrilled to speak with America’s best-known financial expert on his syndicated talk radio show, and she was eager to discuss her situation.
“I make about $70,000 a year, “ she said, “and I’ve managed to pay off all my debt,” she added with a hint of pride in her voice.
“And now I want to buy a home.”
“Okay,” Dave Ramsey and his co-host replied.
“My only question is about my car,” she said, explaining that she owed about $27,000. “I’m about $5,000 upside down on it and I’m wondering if I need to worry about that.”
I started to answer her question in my mind as I listened, since I’m a debt-recovery author and coach myself, but didn’t get very far before Ramsey’s co-host sprang into action.
“Oh yeah,” he replied decisively. “You should definitely get that car paid off before you buy a home,” he said, as Ramsey concurred in the background.
“Uh, okay…” The woman said, as she processed his answer.
“Definitely,” Ramsey’s sidekick reinforced his position. “Take care of the car, then you can go ahead with the house. Okay?”
They traded a few pleasantries and then it was time for a commercial break.
With All Due Respect
I couldn’t believe what I heard that day after stumbling across their show on a YouTube video recording, and I’ve been shaking my head ever since, for almost a year now. “What terrible advice!” I have said out loud more than once.
Now don’t get me wrong, I realize Dave Ramsey has helped millions of people. I know he offers dozens of courses, has a thousand employees and generates $150 million of annual revenue.
And as a former church pastor I understand Ramsey’s principles and appreciate his desire to educate people, frequently through church-based courses.
But this was a really bad day for him at the office – or at his radio studio – for a handful of reasons I will outline here.
Where They Went Wrong
1.) First, when someone says they’ve paid off their debt, don’t ignore it. Applaud their achievement, lest any listener take the feat for granted or discount its importance. It’s definitely worth a quick high-five or chat about how they did it.
2.) When a person says he or she wants to buy a home, don’t dismiss the idea at the drop of a hat. Take a minute to learn more. What kind of property, how much and why now? Maybe the caller wants to help care for her mother who will help pay the mortgage or she plans to rent a room to a friend or rent the place profitably as an Airbnb. Maybe she’s found her dream home, she’s crunched the numbers, knows she can afford it and just wants to buy it!
3.) It never hurts to review the benefits of home ownership, such as the immediate tax advantages, the pride of ownership and the historically reliable equity growth. Right? Hello?? And since this Ramsey show advice was given a year or so ago it may have kept the caller from buying a home right when interest rates were historically low and right before buyer demand (and prices) spiked beyond reason, instead of leaving her out in the cold while she kept working to pay off her car. That advice could have cost her the opportunity of a lifetime.
4.) Now let’s talk about the car. 5K of negative equity is NOT a good reason to delay a home purchase. Why not? Because most negative equity in cars is just a temporary result of depreciation that corrects itself over time, as the gap between the loan balance and the resale value disappears as you pay down the loan, usually leading to a net positive result. And in today’s hot market, the woman’s vehicle is probably worth $5-10K more than it was when she called, thus eliminating her negative equity altogether. In truth, car loans are considered low-interest overhead expenses for most people, so if they fit in your monthly budget and don’t bother your mortgage lender they shouldn’t kill or delay your home purchase.
5.) The last problem here is the dogma behind the co-host’s answer.
Good Debt, Bad Debt & Really Bad Dogma
When discussing debt, I always try to explain the difference between good debt and bad. What’s the difference? Here’s a quick summary.
Good Debt: This is credit you acquire at a low interest rate to invest in tax-advantaged, income-generating or appreciating assets – like a home or other property. Or to acquire other potential assets, such as vehicles, equipment, or inventory to expand a business. Wealthy people use good debt to leverage their existing assets to acquire other appreciating assets to build their net worth, with minimal risk or expense.
Bad Debt: This is high-interest credit we spend on unexpected or unnecessary expenses, depreciating assets or just to survive. This kind of debt can grow to dangerous and overwhelming levels as a result of careless spending or other bad habits. It can also result from facing common life challenges such as retirement, job loss, illness, disability, divorce, student loans or unforeseen events like recessions, hurricanes and pandemics.
Credit card interest rates can easily climb to 30%, leading to never-ending ‘hamster wheel’ payments and long-term distress for debtors, with predatory lenders offering payday and/or title loans to really distressed borrowers at 50% interest or more. That’s what you call really bad debt. And like all bad debt it’s to be avoided at all costs!
Really Bad Dogma: Dogma is a principle or set of principles laid down by an authority as incontrovertibly true. In Ramsey’s case, his principle of paying cash rather than using credit isn’t always realistic or advisable, and the idea of paying off every debt (such as a car loan) before investing in a home can be ill-advised if not harmful, per our example today.
Dogmatic opinions, principles, concepts and systems can harden into legalistic views that create the same cookie-cutter answers and solutions to every question or situation. This is a mortal sin in my book.
Everything Depends on Everything
When people ask financial questions, I often answer, “It depends.” This can be frustrating to some, but good answers usually require more information about a person’s situation, goals, preferences and options since everyone’s situation is multi-faceted, unique and often involves non-financial factors involving jobs, loved ones and other circumstances.
So beware of dogmatic opinions, programs and principles as well as quick-fire answers from so-called experts when it comes to your finances, since they can be all wrong for you and your situation.
When it comes to important financial decisions it pays to remember the difference between good debt and bad and that everything depends on everything.
John Nicholas wrote the recent Amazon #1 New Release book, Debt-Free ASAP! He offers free resources including assessment forms, a 7 Debt Solutions cheatsheet and a fast-track video course at www.FreeDebtVideo.com.