Saturday, January 02, 2016

Dave Ramsey Gives Wrong Advice for Some People

I have listened for a long time to Dave Ramsey and his Teachings on Money. I listen also to many others.From hearing all these various opinions there is an unavoidable conclusion:  Dave Ramsey is WRONG for some people.

IF you are in debt, can't get control of your credit card spending, foolish with money, living beyond your means earn a fixed amount of money per month in a job, then Dave Ramsey is for you.  He speaks to the working man and woman on a fixed salary and what he says for them is good.

He is wrong however for others. For those who move into the 1%.  Not rich. Just really well off.  These are not fixed income people, salary earners.  They are not wage makers they are wage payers.  It is a group we need.  Those in business for themselves.  For them Dave Ramsey can be poison.

Let me offer some examples of why and how:

Ramsey is big on getting your credit cards paid off and cutting them up.  That's fine if you are going to stay home, go to work and come back home.

IF you are as a business owner who needs to travel, rent a car, get a motel room, fly somewhere, buy something from Amazon, buy gas, you will need a credit card. NOT a debit card. You don't want to take that risk.  Debit cards for travel are dangerous. You need to have 2 or 3 cards with as low interest cards as you can find and at least $7000 credit line.  It's good to pay them off monthly,  but sometimes business ebbs and flows and you will need this informal line of credit to keep you going when things get slow.  This takes discipline. If you don't have it you will not make it in business anyway. Cash flow management is everything.  Dave's recommendation is not for the business owner.

Dave is big on paying cash for your car.

First, I'm not against it if it's a really cheap car.  Never buy new.  That new car smell is the most expensive thing you will ever enjoy.  Instead a 3 or 4 year old car without too many miles, under 50,000 miles is always a better bet.

Then, rent it to yourself.  Borrow all you can.  Car loans are cheap. 2-4%.  Don't pay it off.  Pay just what you must and hope that on the last day of the last payment the wheels come off and the engine explodes at 300,000 miles.  That car will owe you nothing and you will owe nothing on it.

Buy and borrow only what you can safely handle.  Don't get crazy.  My experience has been if you do this right you will always be able to trade it back or sell it for about the loan balance at any time.  I have more than once taken back or sold a car on which I owed money for about what I owed.  That car owed me nothing.  It was cheap transportation and I didn't own a depreciating asset.

This is not true for boats and other toys. RENT Them.  They are money burners.

Dave recommends you pay off your house as soon as possible. Double up on payments to do it.  I am puzzled by this.  Why?  This is bad advice for the guy earning a hundred grand per year.  Its not much better for the wage earner.. but a little. Here's why paying off your house is bad advice.

Once you pay anything on the principle that money is lost to you.  If you need it for medical emergencies the bank isn't going to give it back to you.  What if the prime earner gets hurt or disabled?  They will not lend you the money you put into your house because you won't have the income stream to pay it back, no matter the equity. You will end up selling your house and be homeless to get your money out. Better would be to get the largest mortgage on which you can afford the payment on your budget.  Treat it like a rent payment. Don't get stupid and put yourself in a place you don't want to be by owning too big a house. Think about what it would cost to rent decent quarters in your area and try to get your payment under that.  Then only pay the minimum and stay current.  You NEVER want to pay off your mortgage.  In fact if you decide to refinance, take out as much additional as you can afford and bank the difference in a mutual fund.  Any money you might have paid extra into your mortgage should go into a mutual fund.  Preferably something tax advantaged.  The other good news is the government gives you a DEDUCTION for carrying a mortgage.  Houses may go DOWN in value someday again.  You will always have that money available in your mutual fund to pay it down to avoid foreclosure if it gets upside down again.

To think about this clearly, consider your mortgage like a rent check to YOU.  You are a landlord to you.  Treat yourself well but keep your rent/payments in line and why would you send your landlord extra money.  A house is NOT an investment.  It is a place to keep you warm and dry.  That is it's function.  A truly wealthy person doesn't live in a huge house.  They live in what they need and bank the rest.

This also had to do with home improvements.  Any money you put into your house is lost forever.  Very few home improvements are ever recovered in additional value.  This is not true for adding square feet. Most everything else is lost wages (worse than Las Vegas).  So be careful and don't go all money pit on the house.

I know this goes against the grain, but conservation of resources in personal cash flow is the name of the game and accumulation of wealth is even more important.  Mutual Funds accumulate wealth, houses don't. Rich people never spend money on depreciating or costly assets. They buy things that hold or increase in value.  Sure they have all the same expenses you do, they just don't spend the overage on home improvement or doubling up on house payments.

One last strategy that might challenge you, but I want to start thinking differently.

Buy a house you can afford with the biggest mortgage you can afford the payments on.  Pay on it for a while and when you have at some point paid it down some or the house drifts up in value .. BORROW ALL YOU CAN on a second mortgage (Home Equity).  Invest the proceeds in a good mutual fund.  Allow it to work.  Seconds cost about 3-5% in today's interest market.  Most good funds are yielding 6-7% today.  That's a profit. BUT WAIT.. there's more.  As your second earns money.. you are getting a tax deduction on your second mortgage as well.  You are double dipping.

After a few years if you feel like it you can retire your second from the fund at a profit.. and... if you choose to sell your house which in ten years will likely increase in value as much as the second was.  It's really quite a trick. It cost you nothing and you had the use of the money without the money costing you anything.

Remember these strategies are only for the high earner.  The wage earner who lives paycheck to paycheck needs to stay tuned into Dave.

If you wonder how the rich get richer?  They use other peoples money, don't own things, invest in things.  Buy nothing that loses value.  Pay wages and leverage people's work for profit.  Wage earners can't really do this.

I know this is hard to understand.. it seems counter intuitive. It's how it's all done.

Please don't do this if you don't have money sense.. but if you do.. you are missing it.  Never own a depreciating asset, only rent or lease it.. and houses are questionable.

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