Quote:
Originally Posted by Xist
One of those sources talked about buying a bigger house each year and renting out the old ones. Kevin says the same thing, but I am pretty sure that advice is older than he is, and buying a new house every year is much more work than he indicated....
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That is how Dave Ramsey become a millionaire the first time and then went broke in less than a year. (Buying real estate with almost no money down to rapidly build his holdings)
He also isn't completely against debt. He is fine with a mortgage (20% down on a 15 year loan) That is a pretty low risk loan
He is also fine with student loans for education (I believe he says they should be limited to the starting salary at the most)
The problem with buying house after house with a little down as possible is that it only works if your houses (or apartments) stay rented and the tenants pay on time. When a recession hits and your tenets stop paying rent all those mortgages are still due. Without equity in the properties you can't even sell some to save the rest even it you could sell them in a down market.
A know a bunch of people that got in big trouble back in 2008 / 2009 because they took out a mortgage with 3-5 % down thinking that housing prices only go up. Then they lost their job in the recession and needed to move for a new job. However, the housing market dropped 30% so now they own 25% more on the mortgage than anyone is willing to pay. So to get rid of the house they would have to cut a check to the bank but they had no money. Some cashed out retirements, some lived in a tiny studio apartment in the new city and kept paying for the old house, and some let the house go into foreclosure.
We did Dave Ramsey's Financial Peace class in my mid-20's when my wife and I had our wake up call and decided to get out of debt. (2002 recession / 60% layoffs at my work / 3X our annual income in debt. I quickly realized our debt financed world would come crashing down in a matter of weeks if I lost my job)
His plan is very straightforward and would work for most people. It is low risk and will work if you work the steps. Lot of people say it could be mathematically better he is into simple and low risk. For people struggling to make ends meet the goal is to become financially comfortable not a millionaire in a few year and quit working. While I'm a general fan I disagree with some things.
The aversion to credit cards is one of them. I get that some people have problems with them and lots of people don't know how they work. I also get that in general people spend more when using a card than with cash. However, the same can be said of a debit card and you can rack up huge overdraw fees on a debit card too.
We did the cash envelope system and it works very well but we were on a VERY tight budget without a lot of wiggle room. (While my wife was in school and we were paying down debt we had 5 years where we each got $5 a week spending money.)
Now instead of tracking every little expense we automated our savings and then take a look out the checking account to see if it is going up as it should or shrinking. Our budget has a lot of wiggle room so we don't need to track the spending to make sure we have enough at the end of the month to cover bills.
Today we use a credit card for everything except for the 12 $1 purchases to top off our Amazon balance and to make sure we use the debit card enough to get our 1.5% interest on the checking account. (Thanks for the tip Redpoint!) We also cycle through about 4 cards a year just to get the sign up bonus and we don't bother with a card unless it pays at least a $500 bonus.
Oh, and I got the "Sell The Car" speech in person from Dave at a book signing. He told me I should sell our 1 year old VW Jetta Wagon TDI and get a $2,000 beater. I didn't because:
1. My wife was driving that car 100 miles a day to school and I wasn't going to have her drive a beater.
2. We would have lost thousands in deprecation selling the car after only a year
3. It got 50 mpg and was saving us almost the car payment in gas per month.
Instead, since I was paying for her school out of pocket we took out some subsidized Stafford student loans and paid off the car. Uncle Sam paid the interest and the principal was deferred until she graduated. We paid those off in about 18 months after she graduated and started working.