The Truth About Debt

by Dave Ramsey

Myth: Debt is a tool and should be used to help create prosperity.
Truth: Debt isn't used by wealthy people nearly as much as we are led to believe.

Debt is dumb. Most normal people are just plain broke because they are in debt up to their eye balls with no hope of help. If you're in debt then you're a slave, in the sense that you do not have the freedom to use your money to help change your family tree.

According to a recent USA Today article about debt, 78% of Baby Boomers have mortgage debt, 59% have credit card debt, and 56% have car payments. It takes a lot of will, discipline, courage, and help to slay the debt monster. But it can be done. Imagine how much you could put toward retirement if you just didn't have a stinking car payment? This is how the wealthy really build their wealth. Debt is dumb. Welcome to the real world!

Dave Ramsey's Background

When training for my first career in real estate, I remember being told that debt was a tool. "Debt is like a fulcrum and lever," allowing us to lift what we otherwise could not. We can buy a home, a car, start a business, or go out to eat and not be bothered with having to wait. I remember a finance professor telling us that debt was a two-edged sword, which would cut for you like a tool but could also cut into you and bring harm.

The myth has been sold that we should use OPM, other people's money, to prosper. The academic garbage is spread really thick on this issue. We are told with sufficient snobbery and noses in the air that sophisticated and disciplined financiers use debt to their advantage. Careful there, you'll get a sunburn on your upper lip.

My contention is that debt brings on enough risk to offset any advantage that could be gained through leverage of debt. Given time, a lifetime, risk will destroy the perceived returns purported by the mythsayers. I once was a mythsayer myself and could repeat the myths very convincingly. I was especially good with the "debt is a tool" myth. I have even sold rental property that was losing money to investors by showing them, with very sophisticated internal rates of return, how they would actually make money.

Boy, what a reach. I could spout the myth with enthusiasm, but life and God had some lessons to teach me. Only after losing everything I owned and finding myself bankrupt did I think that risk should be factored in, even mathematically. It took my waking up in "intensive care" to realize how dumb and dangerous this myth is. Life hit me hard enough to get my attention and teach me.

According to Proverbs 22:7: "The rich rule over the poor and the borrower is slave to the lender" (NKJV). I was confronted with this scripture and had to make a conscious decision of who was right - my broke finance professor, who taught that debt is a tool, or God, who showed the obvious disdain for debt. Beverly Sills had it right when she said, "There is no shortcut to anyplace worth going."

What Do Rich People Do?

I have found that if you look into the lives of the kind of people you want to be like, you will find common themes. If you want to be skinny, study skinny people, and if you want to be rich, do what lots of rich people do, not what some mythsayer says to do.

The Forbes 400 is a list of the richest 400 people in America as rated by Forbes magazine. When surveyed, 75 percent of the Forbes 400 (rich people, not your broke brother-in-law with an opinion) said the best way to build wealth is to become and stay debt free. Walgreen's, Cisco, Microsoft, and Harley-Davidson are run debt free.

I have met with thousands of millionaires in my years as a financial counselor, and I have never met one who said he made it all with Discover Card bonus points. They all lived on less than they made and spent only when they had cash. No payments.

History also teaches us that debt wasn't always a way of life; in fact, three of the beefiest lenders today were founded by people who hated debt. Sears now makes more money on credit than on the sale of merchandise. They are not a store; they are a lender with some stuff out front. However, in 1910 the Sears catalog stated, "Buying on Credit is Folly." J. C. Penney department stores make millions annually on their plastic, but their founder was nicknamed James "Cash" Penney because he detested the use of debt.

Henry Ford thought debt was a lazy man's method to purchase items, and his philosophy was so ingrained in Ford Motor Company that Ford didn't offer financing until ten years after General Motors did. Now, of course, Ford Motor credit is one of the most profitable of Ford Motor's operations. The old school saw the folly of debt; the new school saw the opportunity to take advantage of the consumer with debt.

The Debt Myth

You have probably heard a lot of the sub-myths, which fall in line behind the big one that says, "Debt is a tool." Are you beginning to understand that debt is NOT a tool? This myth and all its little sub-myths have been spread far and wide. Always keep in mind the idea that if you tell a lie often enough, loud enough, and long enough, the myth becomes accepted as a fact. Repetition, volume, and longevity will twist and turn a myth, a lie, into a commonly accepted way of doing things.

No more. Debt is not a tool; it is a method to make banks wealthy, not you. The borrower is truly servant to the lender. Your largest wealth-building asset is your income. When you tie up your income, you lose. When you invest your income, you become wealthy and can do anything you want.

How much could you give every month, save every month, and spend every month if you had no payments? Your income is your greatest wealth-building tool, not debt. Your Total Money Makeover begins with a permanently changed view of the debt myths.

Debt Free Success Stories

"We needed direction. We started The Total Money Makeover Plan and got on the narrow road to Financial Peace. We'll have paid off $11,000 in eight months and are well on the road to debt FREEDOM!"
-Kathy and James Smith

"We've actually relieved ourselves of over $50,000 worth of debt in two years just from using these principles."
-Russ and Mary Lee

Dave Ramsey is a personal money management expert, an extremely popular national radio personality and best-selling author of "The Total Money Makeover: A Proven Plan for Financial Fitness." In his latest book, a follow-up of his enormously successful New York Times best-sellers Financial Peace and More Than Enough, Ramsey exemplifies his life.s work of teaching others how to be financially responsible, so they can acquire enough wealth to take care of loved ones, live prosperously into old age, and give generously to others. This content is provided by DaveRamsey.com and may be used only in its entirety with all links included. Dave Ramsey is changing the face of America by helping people.

Copyright © Dave Ramsey. Permission to republish granted to Pregnancy.org.