Robert Kiyosaki V. Dave Ramsey

[Travis]

I am a lover of books. I have come across two authors with two different point of views.

Dave Ramsey: author of Total Money Makeover and Financial Peace
His basic message is that debt is bad, and that people should not borrow money. No credit cards, no car loans, and if possible no mortgage (he wants you to buy a house with cash, or pay it off as fast as possible).

Robert Kiyosaki: author of Rich Dad Poor Dad series. I have only read his first two books (Rich Dad Poor Dad, and Cash Flow Quadrent).
He says that there is good debt and bad debt. Kiyosaki says that using debt to buy investment real estate is an example of good debt. Consumer debt would be bad debt.

I for the most part agree with what Ramsey says. I do not have any credit cards, my wife and I are paying off our debt, and we plan on putting at least 50% down on a house.

I would like your thoughts on this subject. Do agree with me, or think I am completely crazy. If you have not read these books, well go get them. They are fantastic books.

[Freelancer]

Personally I HATE debt of ANY kind and I will go to great measures to avoid it, this is also definitley not the absolute best way to go about this.

I'd say that Kiyosaki is correct in many ways but Ramseys way vibes more with my personality...



Ps. Mortgage is about the only slight exception, I can live with that but I'd feel nervous and probably want to pay it off as fast as possible. Really personal for me though...

[VacMan]

Good debt = debt that grows your money.

Bad debt = debt that sucks your money away.

Example of good debt:

A highly leveraged mortgage in an area the is appreciating consistently.

The reason why this is a good idea (disregarding the fact that appreciating properties are not guaranteed) is because "leverage" aka loans multiplies your returns.

For example:

If you have 25% down on a $100,000 property, you paid $25,000

Let's say that the property appreciates at a modest 5% per year. (The national average since the 1950's has been 6.3%)

In one year your property would now be worth $105,000.

You made $5,000 in one year.

You paid $25,000 originally.

5,000 divided by 25,000 is .20 which means you just got not a 5% return, you got a 20% return!

Because you were leveraged (took out a loan) you made more on your money than if you had just bought the property outright.

Now this obviously works better if you have a renter in the property and they are paying the mortgage for you so you don't have any costs associated with owning the property.

You would have to buy strategically in an area that has a high possibility of appreciation, and also you'd have to buy smart in the fact that the property would have to be inexpensive enough where you can afford to rent it out and still make money on the property. (positive cash flow)

Example of bad debt:

Let's say you bought an average car on credit, you put down 25% on a $25,000 purchase.

That's $6,250 down on a $25,000 purchase.

Every year that car is going to depreciate (decrease in value.)

And every year you'll be making payments to the bank with no option to rent out the car to cover your payments.

You'll be giving a ton of this up to interest payments, and even without interest payments factored in, lets say that the car depreciates by $3,000 a year.

Year 1: $25,000
Year 2: $22,000
Year 3: $19,000

Say you want to sell it at this point. You'd still have to pay off your original loan, and your car is worth less than you paid for it.

You're essentially in the hole, and instead of making money, you lost money.

And that's not even considering the interest payments you'd be making every month. Most interest payments are not recoverable and you'd be out even more money than just the depreciation of your car.

Basically, the car is sucking money out of your pocket at an accelerated rate due to the loan while the house was putting money in your pocket at an accelerated rate due to the loan.

Anyhow, that was a long post and didn't really even scratch the surface.

But my viewpoint is you should have as many low risk leveraged assets as you can sustain that put money in your pocket.

Have fun!

[HowlingDao]

I have been a long time listener of the Dave Ramsey Show and have also read Rich Dad Poor Dad. I think that as always there is a middle way. I agree with Vacman. To achieve the financial success you desire you must avoid the bad debt as much as possible. This includes your mortgage!!

However you must use good debt to increase your wealth. If you want to be middle class the rest of your life then pay off your bad debt and dont take on any good debt. If you want financial freedom, pay off your bad debt and take on as much good debt as you can.

[VacMan]

HowlingDao,

You make a great point about any personal mortgage.

I'm going to attempt to clarify your point and correct me if I'm wrong.

Basically, your personal mortgage is actually a liability if you never plan on moving, or pulling out any equity on the property.

This is true because it becomes a consumer product rather than a financial investment.

The reason why this is true is because as you pay off your mortgage you are most likely putting a great deal of that money into interest payments which a large amount of that money is not recoverable.

In addition, if you never plan on selling a house, or take out another mortgage on the house then you'll never see any money from any appreciation on the property. Basically, all the equity is just money that is locked up and not doing you any good in regards to a financial investment.

To sum this point up:

If you are living in your house personally, and plan on doing so forever and never pulling out any equity in the property, then the property is actually a "consumer" product and not a financial investment.

Any debt (mortgage) on a "consumer" product that will not make you any financial returns is a bad idea and becomes "bad debt."

[HowlingDao]

Vacman u r exactly right. What u want to avoid is 'Dead Equity". This is where u have a 200k house and u owe 50k. That means u have 150k of your money sitting there earning you a rate of return that equals 0. Again I think your main point is the important one. Avoid bad debt like the plauge and take out as much good debt as possibe. I suggest Real Estate but u use what attracts u.

[norbert]

It depends on what you want: security, comfort or getting rich.

If you want to get rich, you want to use as much leverage as you can (otherwise it'd take a thousand years). This includes other peoples time (e.g. employees) and other peoples money (e.g. clients, investors or loans). In both cases you use debt because you owe these people. But it's good debt which is fine because it grows your wealth.

Why would you want to get rich? To be able to contribute more to the society But that's another post.

[HowlingDao]

Exactly Norbert. George Bernard Shaw once said that is is the duty of every man to be rich and it is a sin to be poor. Why?? Becasue money is what we recieve for the services we provide. The more service, the more money. no service = no money. Why get rich?? How many people can u help now?? How many people could u help with 10 million dollars. Alot more. Get Rich & Serve Others.

[norbert]

Amen.

[RealEstateMegaBook]

The answer to questions like this is always, "It depends."

Debt is a tool. Like all tools, it has proper uses and improper uses. It's good in some situations and bad in others.

Some extreme examples:

You've built the greatest widget of the decade. Orders for hundreds of thousands of dollars are flowing in faster than you can count them. The only problem is, you don't have money to manufacture the widget. So, you go to the bank and borrow $1 million to accommodate orders received. In this case, going into debt is a great idea because it's going to make you a lot of money.

Another example: You're retiring from your job, resulting in a drastic income reduction. Having saved about $500,000 cash, you're less concerned with increasing your income than maintaining it, so you're investing in passive, low yield investments, averaging 5% per year. You owe $120,000 on your house at 6.5% interest. Because your house is costing you more then you're making in interest, you decide to pay it off, eliminating the monthly payment. In this case, paying off debt is a good idea because you see a net gain of about 1.5%.

The only way to decide whether debt is a good idea or not is to calculate the upside and downside. It is NOT a philosophical question. It is simply a matter of gathering the facts about your individual situation and objectives and then deciding whether debt makes sense.

Jon

[finandom]

So far I never hear or read Dave's books and shows. But I know his name

I only read rich dad poor dad and also the other books from the same series. I agree with Robert's ideas on money so I follow his advice.

To me, a debt is just like a knife. We can use it to cut things but if we are not careful, it will cut us. Same with debt. We can use it to own investment or business that make us money. But it also can make us jump into the hot water if we make a wrong decision. It just about our decision that make us whether a debt is good or bad.

In order to sharpen our mind and make a better decision, we must learn from experience, failure or reading some books. By learning, we increase our knowledge. The more knowledge we have, the better our mind can analysis. Then the better decision we can make and hence the more money we can make. this is what I believe.

Harrison

[Travis]

Everyone here is talking about how we need to have good debt, but what about risk.

Let’s say I buy a house at 100,000 dollars and put down 25%. I now have a $75,000 loan. That loan must be paid, even if there are no tenants. So if you miss about six payments, you will be foreclosed on.

Now let’s instead say that you buy the same house with $100,000 cash. It would not be possible to miss a payment, because there is none. Also the profit per month increases. With a payment, it would only take a couple of months of no tenants to wipe out profit for the year.

I think the same idea about the personal home.
Person A and person B both have $200,000 homes. Person B has a mortgage of $180,000, person A has a paid for home. Both A and B loss their jobs. Person A will have an easier time surviving the person B.

I think Dave Ramsey has the better idea of being debt free.

[Iff]

I can say two things about this subject. First of all, any debt is good debt if you can invest the same amount with a return of loan interest + inflation + reasonable return of investment. So, if you have an investment opportunity in sight that can give you a return of 40% per year, by all means, max out your 18% interest credit card, because you would still end up with a 17%-18% profit. Of course, this example assumes that the magical investment is with a low or moderate risk factor.
On the other hand, sweet deals like the former rarely appear and therefore it's rather safe to say that you should probably avoid all debt as much as possible. Mortgage can be an exception, because an apartment / a house is often a thing that we you can't live without (you have to have a roof over your head) yet rather expensive, so you just might not have the cash for it right now, especially when your still young. So it might become sort of a necessity (yes, you could rent, but it might be more useful to pay the mortgage payments than rent - if the market is favourable, you can pay the same amount every month but end up with your own piece of real estate in a decade or two).

When viewed from another angle... I am familiar with the teachings of both Dave Ramsey and Robert Kiyosaki. I don't want to undermine anyone here, but having read some of the real life examples of people following Ramsey's method, it seems that it is meant for the more average people. For somebody less experienced the difference of good and bad debt can be confusing, so it is easier for them to take it from the all-debt-is-bad point of view and be a lot better off with their lives. Sort of a mainstream method.
Kiyosaki, on the other hand seems to make the individual think more for him- or herself. More emphasis is put on running a business and making profit on other people's work. So, if you're smart enough to exploit other (yes, I don't mean exploit, but work in a team so everyone profits, but I am just getting my point forward), you can be let to decide on your own if the debt you have / could have is worth it or not.

If anyone wonders, I currently have a negative net worth of about $15000 (you know, college kid ), but I am on my way to eliminating it and therefore rather knowledgeable... at least in theory.

[norbert]

Originally Posted by Travis

Everyone here is talking about how we need to have good debt, but what about risk.

[..]

Both A and B loss their jobs. Person A will have an easier time surviving the person B.

Again, it depends on your priorities: 1. security, 2. comfort, 3. getting rich or 1. getting rich, 2. comfort, 3. security.

For me, I want to get rich because I want to have higher level problems than I have now, to be able to contribute more to the society. I don't care about surviving more easily.

The difference is that "surviving more easily" is based on fear while "contributing more to the society" is based on love. I don't want to live in fear all my life.

Again, here's my favourite quote from Steve:
"Life really began flowing for me when I finally let go of that ego junk, pride, and feelings of doubt and said to myself, "I'm just going to focus on making the best contribution I can. If I go broke doing that, I go broke. My fears and worries are just not that important compared to the difference I could make if I really gave this life my very best. If I'm here to make a contribution, then the universe had better back me up."
--Steve Pavlina

[MartialDev]

Anyone who is seriously considering Kiyosaki's advice should read this:

John T. Reed's analysis of Robert T. Kiyosaki's book Rich Dad, Poor Dad

[JohnB23]

Good debt and bad debt is important to know, but I think authors like Kiyosaki, Dave Ramsey, David Bach....all these authors, they miss the bigger picture when it comes to wealth building IMO.

For most people, "investing" isn't going to make much of a difference (at least short term).

Say you've got $50,000 socked away in various accounts (IRA, a regular brokerage account, money market). And it's making 10% a year. That's $5,000 a year.

If you're making 8% a year, that's $4,000 a year. If you're really savvy, maybe you're making 12 or 14% short term, but it doesn't mean much. It's a couple thousand dollars a year difference.

Alot of wealth building is pyschology, daily habits, and thinking patterns. Its not just debt, investments, or "products".

Penny wise, pound foolish thinking is a trap I see people get in all the time, it costs them a fortune.

I know someone that goes out of her way to grab bargains, freebies, etc (she loves 10 cent listing day on ebay).

There's nothing wrong with that, but she overspends by thousands of dollars a year on things she doesn't look at or enjoy. What difference does it make if you're saving $5 here or $3 there?

Or someone worrying about gas when they drive around a big RV. You leave alot of money on the table with this kind of thinking.

[Pat P.]

I have been a listener of the Dave Ramsey show for a year and a half, and I have read his books. I also have read part of R. Kiyosaki's series RDPD. Kiyosaki's principles are good to have present at all times, but Ramsey presents a more down to Earth and practical advice for building wealth to the common men. In the end I have taken ideas from both authors, but I am biased towards the debt-free Ramsey's plan.

I believe that debt is neither good nor bad. The problem lies in the fact that it is marketed as the only way to make it in life, as the only way to create wealth. And I believe that this is wrong. You can and should use leverage to create wealth but money is not the only kind. Time has been the most effective form of leverage for many people; and now creativity and knowledge have become another way to create wealth (tech industry for example).

In the end, both approaches can make you rich; one may do it in a few years (Kiyosaki), and the other most likely will in 15 to 20 years (Ramsey).

Pat

[Eggzachery]

I don't prescribe to Kiyosaki or Ramsey. I think they both do a good job of saying what appeals to the masses, without indulging in that pesky "reality" crap, and selling the hell out of it. If one wants to model themselves after people who have successfully achieved riches the way Kiyosaki claims to have, there are far better examples. If one wants to pull their debt-ridden ass out of the hole they put themselves into, everything Ramsey teaches is repackaged and regurtitated from someone else.

That said, I don't have an universal modus operandi when it comes to debt. I treat different areas of my life differently. In my personal finances, I probably live more like what I remember Ramsey preaching. Little to no personal debt. Business life, I use debt as a tool.

I'll use housing as an example. I own my personal residence outright. Paid for it in full when I bought it. My feeling is, that is where I shelter my family. It is our home. The idea that it is an investment, or thinking of the money spent on it in terms of what kind of return I'm getting is foreign. I don't want anyone (other than the government taxes owed annually) to have any claim to that. It is our bastion of safety.

My rental properties, however, I would never pay for outright. They will be paid off eventually. But I'll let my tenants do that. That's what they're there for.

[bigadam]

Originally Posted by MartialDev

Anyone who is seriously considering Kiyosaki's advice should read this:

John T. Reed's analysis of Robert T. Kiyosaki's book Rich Dad, Poor Dad

That sites a joke. The person writing it has a tremendous personal vendetta against Robert K.

Robert wrote an amazing book (RDPD) then became a fraud, in that order. RDPD is well worth reading.

[dorothy hanna]

I not only read Dave Ramsey's books, I implemented the suggestion with the suggested "GAZELLE INTENSITY, and it works GREAT! I'm almost completely debt-free, credit card-wise, and I own my ranch outright, as well as my entire herd of goats, as well as my vehicles. I've even been able to save a good deal of money. GO, RAMSEY GO!!!

[CStrunk]

I think credit/debt is a useful tool that most people abuse, or straight out don't understand. Companies use it all the time to leverage themselves and make a profit. Consumers are just plain irresponsible with it. I feel uneasy about people saying they outright hate it. It just seems like a waste to me. Sure, if you don't understand it, by all means - stay out. But if you have a level head on your shoulders you can use it and benefit a lot.

Also, if everyone stopped using credit cards and lending, wouldn't that make us all screwed? Banks make the vast majority of their money off of loan fees and interest. Without loans and credit cards to fuel the banks, they wouldn't be able to offer interest on deposit accounts. Imagine the world them. Debt/credit is essential.

[TheIronStar]

What CStrunk and Iff said.

As far as my personal opinion on the two, I don't know anything about Mr. Ramsey, but I think Mr. Kiyosaki is just an empty cheerleader.

[Travis]

So let’s say you buy 10 rent houses using all debt. What will you do if all of the tenants move out?

That’s right; all 10 houses that you have a mortgage on are empty. Now you are stuck paying the mortgage payment.

What if you had paid cash for all the house, and then they emptied out? The loss on the bottom line would not be as bad.

At some point in our lives, something bad is going to happen. We all need to be prepared. Having no debt what so ever is a great way to prepare. Having extra cash at the end of the month will help most people deal with problems.

Please understand that I am not trying to be a downer. I actually am an optimist. But I also know that something bad could happen at any time. I want to be prepared for that in the best way possible.

Hope everyone is enjoying this debate.

[VacMan]

Travis,

The problem with buying properties with cash and not using leverage is that you don't get the multiplier effect leverage provides.

In addition, buying 10 properties outright can be quite expensive and a great entry barrier.

If you plan right you can minimize your risk of having all your tenants leave at the same time.

One of those ways is to use a property management agency to manage your tenants, getting new renters, etc.

A lot of bad things could happen to anything.

What if you put all your money in the stock market and it crashed?

[Iff]

Originally Posted by Travis

So let’s say you buy 10 rent houses using all debt. What will you do if all of the tenants move out?

That’s right; all 10 houses that you have a mortgage on are empty. Now you are stuck paying the mortgage payment.

What if you had paid cash for all the house, and then they emptied out? The loss on the bottom line would not be as bad.
[...]

I don't want to sound demeaning, but let's all stop making meaningless arguments that don't hold water. If you would have had the cash to buy the houses, you'd still have it now and you can pay off the mortgages. If you didn't have the cash to pay for them then, you will sell them pay off the mortgages and be right where you started off - no houses. Of course, the smart thing would be just to get new tenants.

[Pat P.]

Some observations motivated by the debate.
1) It seems to me that a financial system that is heavily based on debt tends to be unstable. Many of the legal barriers that held the banking industry in place after the crisis of the 30's, and that were essential for the economic growth of the west after WWII, have been removed. Indiscriminate lending is leading to an increasing number of bankruptcies and foreclosures, as it was recognized by the Fed Chairman this week.

2) I don't agree with the statement that credit creates wealth. In my opinion, a more truthful one is that credit is a vehicle of wealth transfer (to the banks). Although one can find ventures whose gains offset the cost of the credit (plus taxes), these tend to be highly risky for the common investor.

3) Having a "rainy day" fund does not avoid emergencies. However, it can buy you some peace of mind, give you more options on a crisis, and damp its effects on your life. Assuming that life has no emergencies is ludicrous and unrealistic.

4) One problem with the cash flow projections that many real estate investors make is that they are overly optimistic. Many people use vacancy rates that are inappropriate for the market reality, don't react promptly to local market fluctuations, and in the case of those with a mortgage, have little or no room for lowering the rent (to attract new tenants) without going in red. A landlord that owns the property can be more patient with the market, has more freedom to lower his margin, and can take a loss without affecting other investments or his personal finances.

In the end, debt can give you a temporary advantage, but cash can give you the freedom to offset it and win in the end.

Pat

[Keith]

Kiyosaki irritates me because he insists on redefining the common use accounting term "asset".

* Revenues - all the monetary value that is coming in
* Expenses - all the monetary value that is going out
* Assets - all the monetary value that you own
* Liabilities - all the monetary value that you owe someone else
* Equity - Basically your net worth (Assets - Liabilities)

He may have a point re: Assets that make you money vs assets that cost you money but they're all assets in accounting-speak. How hard would it have been to call them "empowering assets" and "disempowering assets" or something?! It's the accounting equivalent saying "Oh no, it's only a 'car' when it's usefully conveying you somewhere - if it runs you down on the sidewalk it's not a car".

Aside: I used the term "monetary value" rather than 'money' because it's not always cash. eg. As time passes your car (an asset) depreciates in value. This depreciation is an expense even though no money has left your hands because it's reducing your net worth. Similarly if your house appreciates in value that's revenue.

[unwiser]

so I should not get a mortgage? I guess I should save up money until Im 60 so I could buy my first house.

[JohnB23]

Kiyosaki is a brilliant salesman and marketer.

The whole ..."assets put cash in your pocket", "what's an asset and liability"..that's designed to create controversy, get people talking, get his name out there...and sell more books, board games and seminars.

There's lots of assets, balance sheet and off. Goodwill or intellectual property can be an asset. Relationships can be assets. Would any sensible businessman (or woman) hand over all the names in their rolodex?

Guys like Kiyosaki are just too simplified, everything gets reduced down to one or two sentence nuggets of wisdom.

It'd be like someone writing about math, and reducing a complex answer down to just "3" or "1/3" or just "t".

Debt eventually has to be paid back, good or bad. Pat hit the nail on the head that cash is king.

[Keith]

Originally Posted by JohnB23

It'd be like someone writing about math, and reducing a complex answer down to just "3" or "1/3" or just "t".

Ahem. Indiana Pi Bill - Wikipedia, the free encyclopedia