Disagreeing (just a bit) with Dave Ramsey on paying off your house early
Eric Franklin
Sep 14, 2019
First, props to Dave Ramsey, as he has helped countless people take charge of their financial lives, doling out solid financial advice for decades. His tough-love demeanor and ruthless simplification of personal finance issues, gives people the confidence that they can implement his advice and improve their financial lives. He’s a positive force for personal responsibility, of that I’m certain.
So, as any Dave Ramsey follower knows, the cornerstone of his investment advice rests on the shoulders of the 7 Baby Steps. While I can quibble around the edges on some of the steps, the overall framework is powerful and directionally aligned with the advice that we at Prospero Wealth provide to our clients; with one notable exception—“step 6: pay off your home early.”
Here’s the thing, I don’t argue with his data, just the conclusion that he draws from it. Dave Ramsey and his team have analyzed thousands of millionaires and discovered that their initial wealth comes from large retirement accounts and a paid off house (see the video above from about 3:25 on). While perhaps true, that data is inevitably using data which includes elderly homeowners, disproportionately representing the millionaires in this country—it’s just a very backward-looking data point. I’d love to see that data sliced by age group and what interest rates those paid-off houses were purchased at.
Since the sub-prime mortgage crisis of 2008-9, we are in rarified air. Mortgage debt is incredibly inexpensive, providing more options, over a long enough timeframe, to invest any excess funds more profitably. If “baby step #6:pay off your home early” should ever take some heat, it should be now.
And I’m not just saying this, I put my money where my mouth is. I have no debt outside of my house, a fully-funded emergency fund with 6 months of expenses, maximized retirement accounts every year, growing college funds for each of my two kids, and expanding wealth.
Today, I have 75% of the funds necessary to pay off my house sitting in taxable investing accounts, and I could easily do it in 2-3 years *if I wanted to,* but I don’t. You know why? I like the flexibility that those accounts give me. That money is cushioning my transition to being a full-time financial advisor and giving me the flexibility to leave my tech career at a time of my own choosing (but way before I turn 65); it also gives my family flexibility if something drastic happens to me—without having to tap the house (I also have term life insurance here to pay off the house if things go really poorly for me ;^)). My goal is to have enough cash in the bank to pay off my house, but not to do that for as long as possible.
By contrast, I know a couple who retired from a business that they ran a few years ago. They lived within their means, contributed to their retirement accounts, and were paying down their house on an accelerated schedule. Unfortunately, due to some business changes and health issues, there were forced to retire prior to when they had planned, they were left with a house that still had a lien, and a shortfall on what they needed to make to retire comfortably. Without enough cash in the bank, they had to tap the equity in their house; now, they’ll never own the house and it won’t pass to their family! The amount they had paid in their house, if kept invested, would have been enough to sustain them *and* pay off the house eventually. (In full disclosure, this family had not been maximizing their retirement accounts throughout their careers. According to Dave’s steps, they shouldn’t have accelerated their house payments unless they had been doing that.)
All this is really to say that you never know what curve-balls life is going to throw you. There’s nothing like having “cash in the bank” when you need it.
Disagree with anything in this post? Feel free to let me know… Happy to have my mind changed.
First, props to Dave Ramsey, as he has helped countless people take charge of their financial lives, doling out solid financial advice for decades. His tough-love demeanor and ruthless simplification of personal finance issues, gives people the confidence that they can implement his advice and improve their financial lives. He’s a positive force for personal responsibility, of that I’m certain.
So, as any Dave Ramsey follower knows, the cornerstone of his investment advice rests on the shoulders of the 7 Baby Steps. While I can quibble around the edges on some of the steps, the overall framework is powerful and directionally aligned with the advice that we at Prospero Wealth provide to our clients; with one notable exception—“step 6: pay off your home early.”
Here’s the thing, I don’t argue with his data, just the conclusion that he draws from it. Dave Ramsey and his team have analyzed thousands of millionaires and discovered that their initial wealth comes from large retirement accounts and a paid off house (see the video above from about 3:25 on). While perhaps true, that data is inevitably using data which includes elderly homeowners, disproportionately representing the millionaires in this country—it’s just a very backward-looking data point. I’d love to see that data sliced by age group and what interest rates those paid-off houses were purchased at.
Since the sub-prime mortgage crisis of 2008-9, we are in rarified air. Mortgage debt is incredibly inexpensive, providing more options, over a long enough timeframe, to invest any excess funds more profitably. If “baby step #6:pay off your home early” should ever take some heat, it should be now.
And I’m not just saying this, I put my money where my mouth is. I have no debt outside of my house, a fully-funded emergency fund with 6 months of expenses, maximized retirement accounts every year, growing college funds for each of my two kids, and expanding wealth.
Today, I have 75% of the funds necessary to pay off my house sitting in taxable investing accounts, and I could easily do it in 2-3 years *if I wanted to,* but I don’t. You know why? I like the flexibility that those accounts give me. That money is cushioning my transition to being a full-time financial advisor and giving me the flexibility to leave my tech career at a time of my own choosing (but way before I turn 65); it also gives my family flexibility if something drastic happens to me—without having to tap the house (I also have term life insurance here to pay off the house if things go really poorly for me ;^)). My goal is to have enough cash in the bank to pay off my house, but not to do that for as long as possible.
By contrast, I know a couple who retired from a business that they ran a few years ago. They lived within their means, contributed to their retirement accounts, and were paying down their house on an accelerated schedule. Unfortunately, due to some business changes and health issues, there were forced to retire prior to when they had planned, they were left with a house that still had a lien, and a shortfall on what they needed to make to retire comfortably. Without enough cash in the bank, they had to tap the equity in their house; now, they’ll never own the house and it won’t pass to their family! The amount they had paid in their house, if kept invested, would have been enough to sustain them *and* pay off the house eventually. (In full disclosure, this family had not been maximizing their retirement accounts throughout their careers. According to Dave’s steps, they shouldn’t have accelerated their house payments unless they had been doing that.)
All this is really to say that you never know what curve-balls life is going to throw you. There’s nothing like having “cash in the bank” when you need it.
Disagree with anything in this post? Feel free to let me know… Happy to have my mind changed.
First, props to Dave Ramsey, as he has helped countless people take charge of their financial lives, doling out solid financial advice for decades. His tough-love demeanor and ruthless simplification of personal finance issues, gives people the confidence that they can implement his advice and improve their financial lives. He’s a positive force for personal responsibility, of that I’m certain.
So, as any Dave Ramsey follower knows, the cornerstone of his investment advice rests on the shoulders of the 7 Baby Steps. While I can quibble around the edges on some of the steps, the overall framework is powerful and directionally aligned with the advice that we at Prospero Wealth provide to our clients; with one notable exception—“step 6: pay off your home early.”
Here’s the thing, I don’t argue with his data, just the conclusion that he draws from it. Dave Ramsey and his team have analyzed thousands of millionaires and discovered that their initial wealth comes from large retirement accounts and a paid off house (see the video above from about 3:25 on). While perhaps true, that data is inevitably using data which includes elderly homeowners, disproportionately representing the millionaires in this country—it’s just a very backward-looking data point. I’d love to see that data sliced by age group and what interest rates those paid-off houses were purchased at.
Since the sub-prime mortgage crisis of 2008-9, we are in rarified air. Mortgage debt is incredibly inexpensive, providing more options, over a long enough timeframe, to invest any excess funds more profitably. If “baby step #6:pay off your home early” should ever take some heat, it should be now.
And I’m not just saying this, I put my money where my mouth is. I have no debt outside of my house, a fully-funded emergency fund with 6 months of expenses, maximized retirement accounts every year, growing college funds for each of my two kids, and expanding wealth.
Today, I have 75% of the funds necessary to pay off my house sitting in taxable investing accounts, and I could easily do it in 2-3 years *if I wanted to,* but I don’t. You know why? I like the flexibility that those accounts give me. That money is cushioning my transition to being a full-time financial advisor and giving me the flexibility to leave my tech career at a time of my own choosing (but way before I turn 65); it also gives my family flexibility if something drastic happens to me—without having to tap the house (I also have term life insurance here to pay off the house if things go really poorly for me ;^)). My goal is to have enough cash in the bank to pay off my house, but not to do that for as long as possible.
By contrast, I know a couple who retired from a business that they ran a few years ago. They lived within their means, contributed to their retirement accounts, and were paying down their house on an accelerated schedule. Unfortunately, due to some business changes and health issues, there were forced to retire prior to when they had planned, they were left with a house that still had a lien, and a shortfall on what they needed to make to retire comfortably. Without enough cash in the bank, they had to tap the equity in their house; now, they’ll never own the house and it won’t pass to their family! The amount they had paid in their house, if kept invested, would have been enough to sustain them *and* pay off the house eventually. (In full disclosure, this family had not been maximizing their retirement accounts throughout their careers. According to Dave’s steps, they shouldn’t have accelerated their house payments unless they had been doing that.)
All this is really to say that you never know what curve-balls life is going to throw you. There’s nothing like having “cash in the bank” when you need it.
Disagree with anything in this post? Feel free to let me know… Happy to have my mind changed.
7724 35th Ave NE #15170
Seattle, WA 98115-9955
(971) 716-1991
hello@prosperowealth.com
Prospero Wealth, LLC (“PW”) is a registered investment advisor offering advisory services in the States of Washington, Oregon, and California and in other jurisdictions where exempted. We are conditionally registered in Texas.
© Prospero Wealth 2024. All rights reserved.
7724 35th Ave NE #15170
Seattle, WA 98115-9955
(971) 716-1991
hello@prosperowealth.com
Prospero Wealth, LLC (“PW”) is a registered investment advisor offering advisory services in the States of Washington, Oregon, and California and in other jurisdictions where exempted. We are conditionally registered in Texas.
© Prospero Wealth 2024. All rights reserved.
7724 35th Ave NE #15170
Seattle, WA 98115-9955
(971) 716-1991
hello@prosperowealth.com
Prospero Wealth, LLC (“PW”) is a registered investment advisor offering advisory services in the states of Washington, Oregon, California, and in other jurisdictions where exempted.
© Prospero Wealth 2024. All rights reserved.