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Today, I'm coining a new phrase in financial planning. I'm calling it “Debt-free — but still haven’t paid off the note.” This occurs when a client reaches the point where their investable assets — excluding real estate — are equal to or greater than their total debt.
Gary Logan
Wes Shannon
A client reached this milestone just this last month. She still has a mortgage on her home, and they have some student debt. The total of these is about $300,000 but her investable assets are now $360,000. She is debt-free but has simply chosen not to pay off the debts.
The reason for not paying off the debts is because the cost of that debt is much lower than what her investments make. Her mortgage is 2.7% and her student loans are 5.45%. Her investment portfolio has been making 8.9%, net of fees, for over 10 years. I asked her, “You could pay off all of your debts and free up some substantial monthly cash flow, would you want to do that?”
Of course, she said, “No.”
She is making 3.45% per year more than her college debt and 6.2% more than her mortgage. This is called using other people’s money and in the modern economy it works very well.
Yet, as simple as this is to understand, Dave Ramsey continues to fill the airwaves, and social media telling people this is not good. He quotes biblical references about debt being a form of slavery. Like any old-time evangelist, he uses guilt to make people conform to his way of thinking so that he can make a buck.
Elmer Gantry would be proud.
The Ramsey way is to pay off all debt and be debt free before starting any savings. All debt is bad and must be eliminated as soon as possible. When listening to his podcast he comes across very harshly and unempathetic to people who are struggling and trying to lift themselves up.
I had a young couple (21 and 22) recently married. Still going to school and the other in an apprenticeship program for a trade. They had a small amount of debt. A car note and a credit card that was used when they had an unexpected expense. I counseled them to build up a savings emergency fund equal to three months of income before paying more than the minimum payments on their debt. Once that emergency fund is in place then they can begin an aggressive repayment of the debts. I encouraged them that what they were doing on their education to earn more money was the way to go. Their guilt and shame that they had when they came into my office to meet about their debt was a surprise to me.
After a bit of conversation, they brought up that they had been listening to Dave Ramsey and felt they were way behind. I assured them they were on a good path and that they would be financially successful very soon. They don’t qualify as clients for our firm, but I enjoy so much helping young people get on the right path. And who knows, they may become clients for our firm in the future.
My point of this story is that I believe people are unaware of the harm Mr. Ramsey is causing. The Bible is a great text in the Christian religion to seek God and how we should treat our fellow man. It is not a financial guidebook. Ancient writings from an agrarian economy before currency was in regular use are not the place to seek advice on the modern economy. The rules are not the same.
I’m not sure people understand that Dave Ramsey operates under an exception to the Investment Advisors Act of 1940. His exception is for publishers of financial publications. He is not bound by a fiduciary standard. He sells books and media to the public, and he sells leads from his broadcasts and seminars to financial advisers
There is nothing wrong with how Dave Ramsey operates. It is all perfectly legal. Some of his advice is absolutely correct — like living within your means. However, beyond budgeting, his advice begins to do more harm than good, in my opinion.
For honest, individual advice a person cannot go wrong seeking out a Certified Financial Planner™ with the CFP® marks beside their name. With something as important as your family’s financial future, don't rely on mass media gurus.
Wes Shannon CFP® is a Certified Financial Planning Professional for Brazos Wealth Advisors in Fort Worth.