Dave Ramsey Says This Finance 'Rule' Is 'Extremely Naive' — Here's What It Costs You
You've probably seen the videos claiming it's easy to get rich by using debt to invest in real estate. The creator explains the math and by the end of the video, they supposedly have thousands of dollars in "tax-free" money.
It sounds appealing, doesn't it? However, Dave Ramsey offers a different perspective.
According to Ramsey, viewing finances solely through the lens of math is extremely naive. How can that be when all these other popular finance channels preach the opposite? Let's find out why.
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Looking at Finance Through Different Lenses
Whether we like it or not, finances touch many parts of our lives. That's why, when we make financial decisions, we have to look at them from more than one perspective.
Obviously, there's the math lens we already mentioned, running numbers that make sense on paper. But life isn't always as simple as A + B = more money, so relying only on the math can lead to problems elsewhere.
Beyond the straightforward math, there's also the relational perspective or how the choices you make with money affect your family and friends. There's also a career lens, since many people's jobs are closely linked to their finances. And there's a spiritual lens, which shows what the way you use your money reveals about your values and priorities.
Why Is Looking at Finances Solely Through a Math Lens Naive?
There's a reason a lot of creators online boast about how debt can increase your wealth. It's because it can work. Ramsey doesn't dispute that fact. He says that debt is an effective way to make money fast, but that it comes at the cost of increasing your risk.
When you borrow money to invest in real estate, you have to repay it. If you follow the math, it shows you can leverage debt to buy a property, rent it to someone else who will cover the operating expenses and the mortgage and leave you with the remaining cash as profit.
What these videos don't mention, though, is what happens if you struggle to find a renter, your renters stop paying or major capital improvements are needed that you didn't budget for. These are all very real risks you take on when you borrow to invest in real estate and they can cause stress in other aspects of your life.
How Ramsey Bucks Conventional Financial Wisdom
Ramsey gives the example that if you're struggling to make mortgage payments on an investment property, you may stay in a job you hate because you need the money. If you didn't have the debt, you would have the freedom to find a new job and possibly a better career opportunity that could have accelerated your financial well-being even more than the math option did, without all the stress.
This is why Ramsey says he chooses to run a 100% debt-free portfolio. There is no pressure on him to make undesirable decisions when he finds himself in a financially stressful situation. Whatever you're saving in numbers, you risk costing yourself in peace of mind.
Instead of chasing fast money, try making financial decisions that optimize your overall well-being, not just the size of your bank account. You may find it buys you back a less-stressful existence.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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