There's a huge reason why it's best to pay off your debts smallest to largest with the debt snowball.
3 Minute ReadTopic: debt
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.
That’s because debt is dumb—but it still has a choke hold on so many of our friends and family members. Most normal people are just plain broke. They are in debt up to their eyeballs with no hope of help. If you’re in debt, you don’t have the freedom to use your money the way you want.
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According to a Pew Charitable Trusts report, 47% of Baby Boomers have mortgage debt, 41% have credit card debt, 13% have school loans, and 36% 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.
Dave Ramsey’s Background
When training for his first career in real estate, Dave Ramsey was told that debt was a tool: “Debt is like a fulcrum and lever,” allowing you to lift what you otherwise could not lift. You can buy a home, buy a car, start a business, or go out to eat and not be bothered with having to wait.
He remembers a finance professor telling his class that debt is a two-edged sword: It can cut for you like a tool, but it can also cut into you and bring harm.
Over and over again, we hear the myth that you need OPM (other people’s money) to prosper. We’re told all the time that sophisticated and disciplined financiers use debt to their advantage. Well, folks, it’s just not true.
Consider the Risk
Here’s the truth: Debt creates enough risk to offset any possible advantage. Given time—a lifetime—risk will destroy any possible returns. Dave actually used to believe the myth himself and could repeat it very convincingly. He even sold rental property that was losing money. He would show the investors, with very sophisticated internal rates of return, how they would actually make money!
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Debt creates enough risk to offset any possible advantage.
It was a reach. He could spout the myth with enthusiasm, but life and God had some lessons to teach him. Only after losing everything he owned and finding himself bankrupt did he think that risk should be factored in, even mathematically. It took this painful wake-up call for him to realize how dumb and dangerous the myth is.
Life hit Dave hard enough to get his attention and teach him.
According to Proverbs 22:7 (NIV), “The rich rule over the poor, and the borrower is slave to the lender.” When Dave was confronted with this Scripture, he had to really consider who was right—his broke finance professor, who taught that debt is a tool, or God, who never has anything good to say about debt.
Opera singer Beverly Sills had it right when she said, “There are no shortcuts to any place worth going.”
Are you ready to break free of debt and get to where God wants you to go? Join an FPU class near you!