Dave Ramsey admits he once went broke and learned important lessons about debt and risk

Dave Ramsey admits he once went broke and learned important lessons about debt and risk

As the young co-hosts of "The Iced Coffee Hour," Graham Stephan and Jack Selby make no bones about their admiration of finance guru Dave Ramsey. Stephan even keeps a Ramsey cardboard cutout in his family room and named his cat "Ramsey" because, among other things, he got him for free. (What’s next? A Dave shrine?)

But that doesn’t mean they’ll give him a free pass on all things finance. When Stephan and Selby sat with Ramsey, they challenged his views on debt – bringing up the so-called "good debt" that might be placed in well-researched investments.

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Selby asked: “Do you think that that is a more effective way to grow fast if you're calculated with it?"

"It is a more effective way to grow fast, if that's your goal," Ramsey responded. “But what people leave out of the discussion is that you’ve increased your risk – exponentially. More debt equals more risk. Period.”

A real estate reality check

Ramsey in the video recalls when he went broke in real estate investing. "I had never lost money on a flip," he said. "I was not behind on the notes. They just called them. They had the ability to do that cause it was commercial paper, it was not traditional mortgages. It was 90-day paper."

In other words, Ramsey was financially trounced once the banks demanded full repayment. The flips he’d executed numbered in the thousands, but he was doing it “100% financed.”“After I crashed, I kind of had to go through a CSI autopsy,” he said, making a reference to the crime investigation TV show.

He learned first and foremost that he had no understanding of risk, something he blamed on growing up in a real estate family with a dangerously optimistic attitude. “I had to go through kind of a healing of my heart in that regard,” he said.

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Second, he came to see that using other people’s money is dangerous. He conceded that the issue exists “on a spectrum,” and there are those that more intelligently use debt and take on risks. But he added that macroeconomic events like recessions can prove disastrous in such scenarios. Ramsey paraphrased a famous quote from billionaire investor Warren Buffet: “When the tide goes out, you can tell who's skinny-dipping.”

Your bank’s money never comes for free. You need to know beforehand how much you might be on the hook for – both in terms of principal and interest rate – if using debt to invest doesn’t work out.

Assume you take out a personal loan to invest in the stock market. According to the Federal Reserve Bank of St. Louis, the interest rate on a 24-month personal loan at a commercial bank was 12.35% in the last quarter of 2023. (This is the simple unweighted average of each bank's most common rate charged.)

That means on a $20,000 loan, your payments starting immediately will be $945 per month. Can you afford that? Have you accounted for the $2,674 the bank will make if the loan goes full term? How confident are you that your returns will top 12% and change? And are you certain that you have the cash reserve to never miss a payment?

At least a scenario where one buys stock takes risk into account, whereas the real estate investment plays Ramsey made never really did. And he risked more than dollars and cents. During the interview he talked about the negative effects stress can have on your life, your marriage, and your body when you take on risk.

Ramsey, who makes no secret of his Christian faith, also stressed that his journey out of real estate ruin led him to an unlikely source of financial advice: the Bible. “I can find nowhere in scripture that debt was used to bless people,” he said.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.