It’s the beginning of 2010 and if you’re like a lot of people, getting a tighter reign on your finances is one of those big New Year’s Resolutions. And it’s a good resolution to make. In the face of hard economic times, it’s absolutely critical to be a good steward of your resources. It all starts with getting out of debt, and getting in to a savings plan. Myth: Debt is a tool When training for my first career in real estate, I remember being told that debt is a tool. We can buy a home, a car, start a business or go out to eat and not be bothered with having to wait. But I also remember a finance professor telling us that debt is a double-edged sword, which could cut for you like a tool but could also cut into you and bring harm. My contention is that debt brings on enough risk to offset any advantage that could be gained through leverage of debt. Given time, risk will destroy the perceived returns by the myth-sayers. I was once a myth-sayer myself and could repeat the myths very convincingly. I was especially good with the “debt is a tool” myth. I have even sold rental property that was losing money to investors by showing them, with very sophisticated internal rates of return, how they would actually make money. Boy, what a reach. I could spout the myth with enthusiasm, but life and God had some lessons to teach me. Twenty years ago, my wife, Sharon, and I went broke. We had started with nothing, but by the time I was 26 years old, we held real estate worth more than $4 million. I was good at real estate, but I was better at borrowing money. Even though I had become a millionaire, I had built a house of cards.
Story By: Dave Ramsey Photos by: amy Gwaltney
Straight Talk About Debt
The short version of the story is that we went through financial hell and lost everything over a three-year period of time.
bonus points. They all lived on less than they made and spent only when they had cash. No payments.
Only after losing everything I owned and finding myself bankrupt did i think that risk should be factored in, even mathematically. It took my waking up in “intensive care” to realize how dumb and dangerous this myth is. Life hit me hard enough to get my attention and teach me.
History teaches us that debt wasn’t always a way of life; in fact, three of the biggest lenders today were founded by people who hated debt. Sears now makes more money on credit than on the sale of merchandise. They are not a store; they are a lender with some stuff out front. However, in 1910 the Sears catalog stated, “Buying on Credit is Folly.” J.C. Penney department stores make millions annually on their plastic, but their founder was nicknamed James “Cash” Penney because he detested the use of debt. Henry Ford thought debt was a lazy man’s method to purchase items, and his philosophy was so in grained in Ford Motor Company that Ford didn’t offer financing until 10 years after General Motors did. Now, of course, Ford Motor Credit is one of the most profitable of Ford Motor’s operations. The old school saw the folly of debt; the new school sees the opportunity to take advantage of the consumer with debt.
Proverbs 22:7 says, “The rich rule over the poor, and the borrower is slave to the lender.” I was confronted with this Scripture and had to make a conscious decision of who was right-my broke finance professor, who taught that debt is a tool, or God, who showed obvious disdain for debt.
76 percent of undergrads have credit cards, with an average of $2,200 owed. Total U.S. consumer revolving debt reached $962 billion in May 2008. About 98 percent of that was credit card debt.
Our Culture I’ve found that if you look into the lives of the kind of people you want to be like, you’ll find common themes. If you want to be skinny, study skinny people, and if you want to be rich, do what lots of rich peopld do, not what some myth-sayer says to do. The Forbes 400 is a list of the richest 400 people in America as rated by Forbes magazine. When surveyed, 75 percent of the Forbes 400 (rich people, not your broke brother-in-law with an opinion) said the best way to build wealth is to become and stay debt-free. Walgreens, Cisco, Microsoft and Harley-Davidson are run debt-free. I have met with thousands of millionaires in my years as a financial counselor, and I’ve never met one who said he made it all with Discover Card
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Debt is now so ingrained into our culture that most Americans can’t even envision a car without a payment, a house without a mortgage, a student without a loan and credit without a card. Last year, 6 billion credit card offers were put in our mailboxes and people are taking advantage of those offers. According to CardTrak, Americans currently have $807 billion in credit card debt. We can’t do without debt—or can we?
Credit Cards Bankers, car dealers and unknowledgeable mortgage lenders have told America for years to “build your credit.” This myth means we have to get debt so we can get more debt because debt is how we get stuff. Those of you who don’t use debt have found that cash buys stuff better than debt. But if I were selling debt, as the banker is, I also would tell you to get debt to get more debt. I’ve heard all the bait put out there to lure the unsuspecting into the pit. A free hat, airline miles, brownie points back, free use of someone else’s money, a discount at the register—the list goes on to get you to sign up for a credit card. Have you ever asked why they work so hard to
get you involved? The answer is that you lose and they win. An American Bankruptcy Institute study of bankruptcy filers reveals that 69 percent of filers say credit card debt caused the bankruptcy.
Try the “100-Percent-Down Plan.” Luke called me from Cleveland. He made really good money. His income at 23 years old was $50,000, and he married a young woman making $30,000. His grandfather had preached to him never to borrow money, so Luke and his new bride lived in a very small apartment over a rich lady’s garage. They paid only $250 a month for it. They lived on nothing, did nothing that cost money and they saved. Man, did they save! Making $80,000 in the household, they saved $50,000 a year for three years and paid cash for a $150,000 home. No payments! If you make $80,000 per year and don’t have payments, you can become wealthy very quickly.
A study by Dun & Bradstreet showed that the credit card user spends 12 to 18 percent more when using credit instead of cash. It hurts when you spend cash, and therefore, you spend less.
Car Payments Taking on a car payment is one of the dumbest things people do to destroy their chances of building wealth. The car payment is most folks’ largest payment except for their home mortgage, so it steals more money from their income than virtually anything else. USA Today notes that the average monthly car payment is $464 over 64 months. Most people get a car payment and keep it through their lives. As soon as a car is paid off, they get another payment because they “need” a new car. If you keep a $464 car payment throughout your life—which is “normal”—you miss the opportunity to save that money. If you invested $464 per month from age 25 to age 65, a normal working lifetime, in the average mutual fund averaging 12 percent (the 70-year stock market average), you would have $5,458,854.45 at age 65. Hope you like the car! If you put $464 per month in a cookie jar for just 10 months, you have more than $4,000 to pay cash for a car. In just 30 months, or two and half years, you can drive a paid-for $12,000 car, never having made a payment, and never have to make payments again. Today I am convinced that my wife and I are able to do anything we want financially partially because of the car sacrifices we made in the early days. I believe, with everything in me, that we are winning because of the heart change that allowed us to drive old, beat-up cars in order to win.
College Debt Student loans are a cancer. Once you have them, you can’t get rid of them. They’re like an unwelcome relative who comes to stay for a “few days” and is still in the guest room 10 years later. We have
The Myth My dream is to get as many Americans as possible out of debt. Unfortunately, I could sell 10 million books and there would still be 6 billion credit card offers per year, so there is no danger of my working myself out of a job. The best weight-loss program in the world can never ensure there will be no fat Americans; after all, there are too many McDonald’s.
There is no such thing as good debt. spread the myth that you can’t be a student without a loan. Not true! USA Today says that in 1992, 42 percent of students took loans, while in 2006, 65.6 percent of students took loans. Student loans have become normal, and normal is broke. When people call my radio and TV shows to scream, “WE’RE DEBT FREE!” a car or a student loan is almost always the
last they paid off. Except for a mortgage, these are the two largest debts most people have. If you have a student loan to pay off, it’s time to get crazy, get intense and attack that debt.
Mortgages First, let me tell you that mortgage debt is the only kind of debt I don’t yell about. I don’t borrow money—ever. But if you have to get a mortgage, just be smart about it. First, make sure you are ready to buy a home. You should be debt-free and have three to six months of expenses saved for emergencies. Why? Because if you don’t, the roof will leak or the air conditioner will need replacing as soon as you move in. It’s a lot better to rent for a while longer than to be in a house you can’t afford to take care of.
Debt is not a tool. The myth that debt is a tool has been spread far and wide. Always keep in mind that if you tell a lie often enough, loud enough and long enough, the myth becomes accepted as a fact. Repetition, volume and longevity will twist and turn a myth, a lie, into a commonly accepted way of doing things. No more. Debt is not a tool; it is a method to make banks wealthy, not you. The Bible is right: The borrower truly is slave to the lender. Your largest wealth-building tool is your income. When you tie up your income, you lose. When you invest your income, you become wealthy and can do what you want. How much could you give every month, save every month and spend every month if you had no payments? Your income is your greatest wealth-building tool, not debt. There is no such thing as good debt.
Dave Ramsey is a personal money management expert, New York Times best-selling author, nationally syndicated radio talk show host and host of the Dave Ramsey show on the Fox Business Network.
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