Ramsey vs Kiyosaki - To borrow, or not to borrow?
Homeowner · Anaheim Hills, CA · Member since 2013 · 6 posts · 8 votes
Ramsey vs Kiyosaki - To borrow, or not to borrow?
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13yMany of these financials EXPERTS often times talk about if you eat salad and be ultra cheap everyday for 30 years you might be a millionaire!
They do not mention you will be miserable for 30 years, the million will not be worth anything close to what it is today because of inflation, etc.
So you followed some guru who got rich off of you selling seminars and books etc. and you got ahead a little bit. That's not really how to build accelerated wealth.
If you have ever listened to Billionaire Richard Branson he takes risks every single day. The difference is they are CALCULATED risks based on research and knowledge to decrease the chances of a bad outcome.
I am a believer in taking INFORMED risks. If you want to be ultra safe your returns will show that as well. What are banks paying out 1 percent if you are lucky?? The whole thing is a joke. People put money in banks for paltry returns when they can be doing much better on their own.
I believe it really is as simple as living below your means and investing the rest and creating a snowball affect. Then when you are bringing in 100,000,150,000 a year or more etc. you can up your lifestyle of living within a comfortable range. I have had some people personally e-mail me and say they make 6 figures a years and haven't saved a dime. Their job could be gone tomorrow and all they have is debt and a bunch of crap they will sell for 15 cents on the dollar when they get desperate for cash. It's sad that finances and credit and saving and compounding are not taught in schools as kids. You have to look for outside sources to get educated.
99 Replies
- Contractor · Round Rock, TX · Member since 2013 · 767 posts · 389 votes13y
I'm a big Dave fan as well. They both acknowledge each other and claim to be friends, but don't agree with each other. They agree to disagree. I think Dave Ramsey is geared towards the lower end of the spectrum by not buying a tv and cell phone on credit and buying a $1500 mortgage when you make $2000 a month. So it applies to it all. I think debt is ok in some situations when controlled and you don't go ape crap buying things up. Don't get yourself too far out and don't buy more than you can afford. Make smart well informed decisions not based upon emotion. I apply it to my business in hvac. I won't take a job I can't buy my way out of in case something goes wrong or the customer turns into a nut job.
- Investor · Houston TX / Lynchburg, VA · Member since 2013 · 56 posts · 46 votes13y
I'm familiar with both and this is my simple analysis:
Ramsey - Much of his target market (or at least the majority of his followers) have had serious debt issues in the past. He posts the stories all the time. "Joe and Nancy pay off $112,000 in credit card debt in 3 years" or something like that. That's great! Nothing wrong with being debt free... and lots of others into personal finance like the discipline of only spending money on things you can afford. The investments he advocates are usually mutual funds for long term. He shares LOTS of success stories. But he doesn't talk much about "good debt" and making it work for you.
Kiyosaki - He differentiates between good and bad debt. And he only teaches to use good debt once one receives a financial education. Conversely, he openly says to pay off the bad debt. He teaches how to print your own money using leverage... The person who nudges off the financial education side of the coin and jumps into the "cool" investments like real estate can find themselves in a bad situation.
So it's either the envelope system or taking the time for financial education. I don't think Trump made it rich by paying for his gas with cash...ha. I'm just being sarcastic there;)... My wife and I did Ramsey's Financial Peace University several years ago and I'd have no problem recommending it.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
No debt is too large, so long as you can pay it off. If the Empire State Building were for sale, I'd buy it if the financing was right and it cash flowed, and I knew I could get out by selling if needed. That said, it's tougher to get in a deal like that than to talk about it, with what ifs.
I've not read your author's works, I have heard ill things about RDPD.
I don't know why people don't read finance text books that teach personal finance and business finance any highschool kid can read them, at the beginning levels. I guess they are boring, dry, no stories or agendas to spice them up. The problem with the books by gurus is the agendas, supplemented by stories and claims that make them exciting. Guess it depends, do you want to be entertained or do you really want to learn.....???? :)
- Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes13y
Hi Michael,
I am a big fan of both of these men's strategies, but in my mind they are for different points in your life. Dave Ramsey is great for digging yourself out of a hole. I think anyone living beyond their means NEEDS to listen to him and get out of debt.
Kiyosaki, IMO, is best for when you are at the point you describe- everything but the house paid off and it is time to invest in something. So you find something like REI that will diversify your portfolio, provide long term gains, and most importantly to me, cash flow.
We were looking for a new investment strategy, and buy and holds seemed to fit for us. We still have a mortgage on our own home, but no other debts. Now we have two more mortgages but also another stream of income, and in 3-4 years we can pay ourselves back for the investments we made in these houses :)
Hope that helps,
Kelly - Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes13y
I kept reading Rich dad/poor dad books waiting for details on how to get rich and never found them. I think his general idea is good, but there isn't any real substance to his books.
I have a different philosophy than most. I will borrow on anything I can if my return is significantly higher than my borrow rate. I don't see why it matters what I am borrowing against since ultimately I am using that money to invest. I can get over 20% cash on cash returns on my rentals. I borrow againts my cars as long as I can, I think my rates are below 3% for 6 years. I can use that money I would have spent to pay off the car loan and buy rentals that generate 20%+. Seems like a no brainer to me, but I am happy with risk considering the payoffs.
My goal is to become extremely wealthy as quickly as possible, not just be comfortable in ten to twenty years so my strategy may be more agressive than most.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
Many of these financials EXPERTS often times talk about if you eat salad and be ultra cheap everyday for 30 years you might be a millionaire!
They do not mention you will be miserable for 30 years, the million will not be worth anything close to what it is today because of inflation, etc.
So you followed some guru who got rich off of you selling seminars and books etc. and you got ahead a little bit. That's not really how to build accelerated wealth.
If you have ever listened to Billionaire Richard Branson he takes risks every single day. The difference is they are CALCULATED risks based on research and knowledge to decrease the chances of a bad outcome.
I am a believer in taking INFORMED risks. If you want to be ultra safe your returns will show that as well. What are banks paying out 1 percent if you are lucky?? The whole thing is a joke. People put money in banks for paltry returns when they can be doing much better on their own.
I believe it really is as simple as living below your means and investing the rest and creating a snowball affect. Then when you are bringing in 100,000,150,000 a year or more etc. you can up your lifestyle of living within a comfortable range. I have had some people personally e-mail me and say they make 6 figures a years and haven't saved a dime. Their job could be gone tomorrow and all they have is debt and a bunch of crap they will sell for 15 cents on the dollar when they get desperate for cash. It's sad that finances and credit and saving and compounding are not taught in schools as kids. You have to look for outside sources to get educated.
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes13y
Every successful business in the world uses debt. Apple is raising billions in a bond offering. Corporate and govt bond markets are trillions of dollars. Anyone who categorically says debt is bad is just plain wrong. Debt when used to purchase appreciating or income producing assets (like a business would) is good. As long as the rate you borrow at is much less than your earnings on the investment its good to borrow. Only thing to study carefully is the risk. I wouldnt borrow money and go play craps or invest in the stock market. I have no control there. Real estate is a different story all together. Much more manageable risk profile. At todays rate, I am happy to borrow as much money as a bank will give me!
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
Michael Manawil
I don't agree with either gentleman. RK says that you should own your personal residence free and clear. DR says you should be totally debt free.
I say, it depends on YOU, neither RK or DR. If you are just starting out and have little cash, then it would be hard to buy property without incurring debt. Another guru i heard say you should not borrow from a bank, but only get seller/private financing. Hey debt is debt, you owe it and somebody wants it repaid, does it really matter if its an individual or an institution?
The first 5 properties that I bought were all 100% financed in one form or shape. i could not have bought that many that fast without financing, no silver spoon here! But as an individual advances in their career, no debt investing becomes possible. In fact some forms of investing demand it like sheriff sale. Also cash buying is so liberating, so speedy, and often times you can get a really good price with those all cash, no contingency contracts, but they are not for everyone, nor appropriate for every experience level.
- Hanover Park, IL · Member since 2013 · 9 posts · 6 votes13y
I'm a hard core Ramsey fan and a hard core Kiyosaki fan. I was stuck between 2 worlds (2 ideas) and I begin to think to myself, do I want to work 2 jobs for the next 3 years (Missing my family and friends) to buy my first property in cash? Or I can get a loan, buy a property, and start building equity with a cash flowing property A.S.A.P? This is a no brainer. Me and my wife are very conservative with are finances, and I think we can managed the debt wisely, and start building wealth. I just look at the people at my job who buy a $2000 dollar computer on a credit card, or go into debt to buy a nice car, but can afford the repairs. This is silly.. Use debt wisely!
- Investor · Milford, CT · Member since 2012 · 592 posts · 285 votes13y
Borrow, but borrow wisely!
- Investor · Vienna, VA · Member since 2011 · 158 posts · 45 votes13y
I live in an expensive area, so buying all cash is almost impossible. Our strategy was to buy several houses (using 25% down on each to get the best possible interest rate) during the down real estate cycle. We made sure the houses would cash flow well, though. Now that the market is on the way up, you can't really buy cash flowing properties any more in my farm area. Now we are concentrating on paying them off as quickly as possible to get rid of the debt and to maximize cash flow (or to buy more houses when the market tanks again). At our current savings rate, we will have four properties paid off within five years. In my case, I am glad we did it the way we did. We have gained about $300k in total equity in those properties in 2-3 years, which we wouldn't have been able to do if we had paid cash. In fact, we would have missed the whole real estate down cycle. I think the best idea to manage risk is to buy rental properties in area with high/increasing demand, with good stable tenants (near several military bases for us), that cash flow well (even if we didn't have the appreciating equity). We weren't really counting on the appreciation, that is just icing on the cake. Without taking some risk, this wouldn't have turned out well for us.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
Tamara R.
I've usually done 20% down for investment property, at same rate as 25%, saving some cash for other expenditures.
If you are satisfied with the number of properties that you currently own then by all means pay off those mortgages as quick as possible.
But when you pay ahead and add more to your monthly payment, while that reduces your principle balance, it does not reduce your monthly payment. So paying more on the debt does not improve your current cash flow and eats up possible other investment funds or a rainy day funds.
The counterpoint to paying down a mortgage is that today's interest rates are so low, historic lows, that sometime in the future interest rates will be higher, perhaps much higher. Think 1981 when mortgage rates were in the 15- 18% range fixed for 30 years.
I've always felt that I wanted to borrow as much as I can for as long as I can. (Within reason, within ability to pay back, and with the lowest possible interest rates.)
If inflation and interest rates kick up, you might be glad to have mortgages at today's low rates as opposed to not being able to borrow either any money or only at very high interest rates.
- Real Estate Consultant · Brighton, MI · Member since 2013 · 607 posts · 251 votes13y
In my own opinion, John D. Rockefeller said it best, "own nothing, control everything!" So long as you are able to pay off a debt and still make a profit, then it's worth the investment. This kind of debt dramatically increases your credit rating, boots your credit line and your income potential. Living completely debt free, will not do any of these things and can in fact, lower your credit worthiness.
I read Rich Dad, Poor Dad and tried to encourage my 21 year old to read it, but she has little interest. I think it should be added to highschool reading list as it contains valuable information graduates are sorely missing today.
- Investor · Vienna, VA · Member since 2011 · 158 posts · 45 votes13y
David Krulac: To clarify, we are saving up our cash (not adding more to each mortgage payment) so we can pay off in one lump sum if we so desire--or pay for more properties if the market goes down again (which it could--houses are selling with multiple bids the day they hit the market and its starting to look like 2005 again around here).
- Abingdon, MD · Member since 2013 · 193 posts · 60 votes13y
Michael,
I think I'm in the same boat as you. I've started out listening to Chuck Bentley and Crown Financial Ministries, and picked up Dave Ramsey from there. I was about $50,000 in debt (not including the house) from living well above my means and not knowing how to manage money.It took my wife and I four years and selling our house to get 100% debt free. We have since purchased a home.
I am looking forward to reading RDPD as soon as I finish the current book I am on. But I know the principals behind it.
I agree with most of the posters here that say it's a personal decision on how much debt to carry. But I think we really need to lean on the side of being conservative. Everyone here is probably pretty wise with thier money (hence they are investing in real estate). But how many people do you know still have a car payment? Paying off school loans? renting furniture? Sadly most people in the world (just like me) believe the lie that debt is the American Way.
For me, I am remaining debt free. Not that I agree with everything Dave Ramsey says, but it's just about minimizing risk and minimizing stress.
Dave Ramsey does talk about debt free real estate investing on his radio show from time to time. The general advice is to start small. It takes a long time to get that first property. Then a shorter time to get that second property. But it gets easier as you go, and you get to a point where you can start aquiring properties quickly.
For me, that means, I'm starting with nice townhomes in the burbs. I'll be starting with row homes in the inner city. Maybe that's not where I want to be in 20 years, but it will allow me to get started, get experience and it sure beats putting my money in the bank.
- Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes13y
I think it all comes down to good debt vs bad debt, and your personal aversion (or comfortableness) with the risk associated with debt.
I don't have any consumer type debt (i.e. credit cards, auto loans, etc), which I would consider "bad debt". However, I do have real estate debt in the form of mortgages on properties that make me more money than the debt payments. I would consider this a form of "good debt".
I'm not overly extended though and could easily make all of my mortgage payments if something were to happen, so I'm comfortable with my ability to handle this debt.
It's all personal preference though.
- Investor · El Paso/Socorro, TX · Member since 2012 · 365 posts · 75 votes13y
I am one of those with Student loan, and two car payments, all close to being payed off because of my "good debt" in the form of three mortgages on rental houses. Sure I could have payed off the "bad debt" more quickly by not taking out the mortgages but I feel that the "good debt" has more than made up for still having the "bad debt". I will soon be free of "bad debt".
- Grand Rapids, MI · Member since 2013 · 99 posts · 30 votes13y
Ha, well I agree that it depends on your values/morals. Mine personally and far different than most investors.
I am ultra conservative with money. The only debt we have ever had was a small credit card my husband had in college that we paid off the week we got married and now - our mortgage - which is also much lower than what we qualified for/"could have" spent.
I personally don't believe in good debt/bad debt/debt being a "tool". I don't understand how people can claim to be DR followers in their personal life but not in their business - that's somewhat inconsistent to me. My beliefs on money for life and business are the same just as my ethics for life and business are the same. I am the same person.
I want to be successful but I'm not looking to be a billionaire. I want to be smart with the money God has blessed us with and manage it the way that will please Him. I understand this will take us much longer but that's also why I'm starting early (age 23).
We won't buy our first investment until we have our own house paid off (projected 5 years) but we can still do a lot in this field to learn and prepare for when the time comes (wholesale, help with rehabs, learn real estate, etc).
I'll also add that when we do have cash to invest, we live in an area where we can get properties for $20-70k which makes it more obtainable with our strategy.
We're very simple, content, people. We don't take much to live and don't have an expensive lifestyle. Other people with different beliefs/lifestyles adapt to their needs - so whatever category you decide to be in, surround yourself with people who line up with your thoughts and stay true to what your comfort level is - even only being in this industry for a short time I can already see how people go in with one plan and the hype sweeps them way past what they intended getting them in over their heads. To invest in cash requires patience, planning, and as Dave would say, the ability to use the ancient word, "No" :)
- Investor · El Paso/Socorro, TX · Member since 2012 · 365 posts · 75 votes13y
Beth Declercq Excellent strategy and if I had started at 23, I would have probably gone the same way. However at 60, I don't have the time to do things the slow way. Leverage is the only way I'm going to be able to insure a "comfortable" retirement, meaning not working until I die just to leave maybe a house and a car paid off.
- Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes13y
To add to that, instead of taking all that cash and paying off your mortgages, would you be better off using that cash to buy more properties and pay them down enough so they will cash flow at your target number?
Thats the question that I'm asking myself now. My assumption was as long as I was getting the cash from my investing anyway, why not use to pay down the pricing so that I can continue to add more properties that will cash flow at my target number.
Lets say your target number is 400 a month cash flow. And you were able to achieve that before by buying homes for 80k. But now those homes are going for 100k. Would you be better off using that 20k to just buy a 100k home?
To me, I think since my goal is to build up as much cash flow as possible, the answer is yes.
Lets say I had 60k in the bank and on those homes I paid 80k for, thats all I owed. By using that 60k to pay off the one house, I'm only saving my mortgage payment (300/mo maybe?). But by using that 60k to buy down 3 houses now going for 100k back to the 80k mark, I will be adding 1,200 a month in cash flow.
Seems like that would be a better use of my funds. Now if you're saying the values have gone up more than 20% than maybe you have to adjust the numbers a bit - or a lot. But I still think you'd likely come out way ahead by using your money to buy down more deals in today's market.
The more real estate you can control in an improving market, the more net worth you're going to build. And as long as each house you add is generating that target number, you should be good.
Bottom line is that even with putting in an additional 20k, you're still going to come out way better cash on cash than if you simply paid off your mortgage which is only costing you 5% or so a year.
- Abingdon, MD · Member since 2013 · 193 posts · 60 votes13y
Originally posted by Mike H.:
Bottom line is that even with putting in an additional 20k, you're still going to come out way better cash on cash than if you simply paid off your mortgage which is only costing you 5% or so a year.I really feel like I've listened to Dave Ramsey's program so much I could answer questions like this for him. (which I know is corny) But Dave has said a million times to callers with similar circumstances that the one thing you are not quantifying is risk. You don't physically put a number on the risk involved with taking out loans. Risk has been mentioned, and wise investors know they have to watch thier risks, but it is an abstract theory that makes no impact on thier decisions as they leverage themselves to the eyeballs.
If everything goes smoothly, yes you are better off borrowing money at 5% and making 10% on that money. But if something goes wrong, then you could end up bankrupt. Dave Ramsey tells the story (If you don't know his story he was a real estate investor who went bankrupt in the bubble burst of the 80s) he tells the story of the debt collectors calling his house at all hours and harrassing him and his family, and how one of them said to his wife "How could you marry a man like that, who doesn't pay his bills" that put his wife in tears.
That really hit home for me, because truth be told, I was very close to defalting on my mortgage payment and facing those debt collectors. I didn't want my wife to go through that. I'm very thankful that she never had to, and I will pass up any amount of profit to remain debt free and ensure she never has to go through that.
- Abingdon, MD · Member since 2013 · 193 posts · 60 votes13y
I should really mention, I know I sound like a Dave Ramsey Kool-Aid fanatic, but I really don't agree with him on too much other than debt avoidance. He was way off base on his predictions during the real estate crash and I didn't follow his guidelines for a home purchase or stopping 401k investing during debt payments.
Dave is a very polarizing guy, you either talk about how great he is, or how wrong he is. But I think he is doing a great job helping a lot of people.
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes13y
I am also pretty conservative with money. I never buy anything on credit that I could not pay cash for. With the exception of my home. But I will take a car loan at 0.9% and keep my money invested in higher returns. The way I see it, the government and the Fed is making it foolhardy to do anything but borrow your way to prosperity. The fed has pushed interest rates to zero so there is no risk free place to keep your cash. On the other hand they have made it possible to borrow money at 3.5% for 30 years on property. Now, we all know inflation will come as a result of this reckless fed spending. How should we protect ourselves? If I borrow money today at a very low interest rate that is fixed (this is the key), I will pay it back in the future are a highly discounted rate due to inflation. Inflation reduces the debt. At the same time, the asset purchased with debt goes up due to inflation. So you win both ways. Meanwhile the income produced more than offsets the debt payment (the other key). These low interest rates cannot last forever. It is effectively a government subsidy, one of the few that I am eligible for! I'd be crazy to not take it.
Ramsey preaches to the generally financially illiterate. Those that use 18% credit cards to pay for shoes are not investors. Investors have to think differently.
- Real Estate Investor · Milford, NE · Member since 2011 · 201 posts · 140 votes13y
Originally posted by Bill Gulley:
No debt is too large, so long as you can pay it off. If the Empire State Building were for sale, I'd buy it if the financing was right and it cash flowed, and I knew I could get out by selling if needed. That said, it's tougher to get in a deal like that than to talk about it, with what ifs.I've not read your author's works, I have heard ill things about RDPD.
I don't know why people don't read finance text books that teach personal finance and business finance any highschool kid can read them, at the beginning levels. I guess they are boring, dry, no stories or agendas to spice them up. The problem with the books by gurus is the agendas, supplemented by stories and claims that make them exciting. Guess it depends, do you want to be entertained or do you really want to learn.....???? :)
I was broke when I started buying 20 years ago......I agree with Bill, If the deal cash flows and the money is there, I would buy the earth :) If I had saved my way to prosperity, I would be working like a dog right now instead of watching my kids play in the pool as I type this. Without the smart use of debt, ( at least up to this point), there is no possible way I would be where I am today, no way.
Sean
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes13y
Michael Manawil--managed debt is fine. If you can cover your debt with income and have reserve funds you are in good shape. All too often we hear of investors that go into a transaction with no backup plan, and possibly even worse, no cash put away in the event things don't go as planned. Proper planning is one of the most important considerations before making an investment decision. How to get in, how to get out, what if scenarios, long or short term expectations, etc. I am not fond of debt, but it helps to make my goals a reality.
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