'More Risk Equals More Debt' Dave Ramsey Dispels the Myth of 'Good Debt' to Popular Finance YouTuber Graham Stephan
During an appearance on The Iced Coffee Hour podcast, personal finance guru Dave Ramsey chats with hosts Graham Stephan and Jack Selby about good and bad debt. During the talk, Ramsey dispels the myth of ‘good debt' and why it is not a great tool for building wealth.
While in a discussion about debt, Selby agrees with Ramsey's opinion that debt is bad for the average person. He then poses another question for the finance expert: Can debt be used for wealth growth?
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"If people utilize debt in an effective way, such as Graham," Selby uses co-host Graham Stephen as an example, explaining that he is a responsible person who is quite knowledgeable on the markets and leveraging his money with debt. "Do you think this is a more effective way to grow fast?"
Ramsey responds by agreeing that utilizing debt to grow wealth is an effective method if fast-calculated growth is your only goal. However, Ramsey does point out the problem that many people do not realize about using this method.
"You've increased your risk exponentially. More debt equals more risk." Ramsey cautions.
This is not a new perspective from the finance expert, who has consistently emphasized that debt is not a reliable tool for wealth creation.
Ramsey explains to Stephen and Selby that many people will run an IRR (internal rate of return), which admittedly is better when leveraging debt, and will see a promising rate of return with zero risk. However, according to Ramsey, the reason why no risk is apparent is because the IRR calculation does not account for it. But that doesn't mean it is not there.
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"The IRR is agnostic to risk. So, it doesn't recognize it," Ramsey says.
For Ramsey personally, knowing how to make the right choice when it comes to using debt was something he had to think carefully about. This is because Ramsey reveals that in biblical scriptures, nowhere does it say that debt was used to bless people, yet his finance degree says otherwise. He understands the reasoning behind using debt to grow wealth.
Ramsey explains that just because there is no chance of risk showing up, this does not mean that utilizing ‘good debt' is a good way to build wealth, nor is there zero risk. Ramsey reveals that this risk is more than just monetary. It adds stress to your daily life, to your marriage, and to your body. He knows this firsthand from his dealings in the real estate business, where he lost all his money and went broke because he could not perceive risk. Ramsey explains that in real estate, the risk meter is removed, and people must take extra caution to perceive that there is a risk even when the IRR says otherwise.
In his blog, Ramsey reiterates that debt always carries a level of risk and asserts that the only beneficial type of debt is debt that has been fully repaid. Ramsey advises that individuals should not even consider wealth-building until they are debt-free. He compares attempting to invest while in debt to running a marathon with your feet chained. Instead, Ramsey believes that the most powerful wealth-building tool you can use is your income.
For some people, using debt to build wealth can be beneficial if done correctly. For it to work, high-interest debts should be paid off first, and positive cash flow needs to be identified.
Some effective strategies for building wealth with debt include investing in assets that will appreciate and diversifying your investment portfolio. Investing in real estate or stocks can see an appreciation in value and be a good way to build wealth as long as you are calculating the risk in the rate of return.
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