Interrupter CheckmarkInterrupter IconFacebookGoogle PlusInstagramGroupRamsey SolutionsTwitterYouTubeExpand MenuStoreCloseSearchExpand MenuBackStoreSign in

Ask Dave

Not Done Dave's Way

Jeff is worth $11 million and has only $2.4 million in debt. He and Dave have a down-to-earth discussion about using debt as a means of building wealth.

QUESTION: Jeff in California began building his credit at age 15. As a result, years later he had access to hundreds of thousands of dollars of debt, which he used for investing, real estate and businesses. He is worth $11 million and has only $2.4 million in debt. He and Dave have a down-to-earth discussion about using debt as a means of building wealth.

ANSWER: You've obviously done very well. Congratulations. No one can argue with your success. You have been blessed in the process. Here is what I've found. When people from the Forbes 400 list, which is the wealthiest 400 people in North America, are interviewed, 75% of them say the number-one key to building wealth is to get out of debt and stay out of debt.

Your most powerful wealth-building tool is your income until you get to the tipping point, where your investments earn more than you do. You've done well and managed your money well enough that you could survive when you made mistakes or when the economy went down. Most people, not you, leverage their income to do stupid stuff like go into debt, or they do get-rich-quick real estate stuff where they are highly leveraged and will be bankrupt if there is one little ripple in the market. You are not someone who plays that way, though.

Because you were conservative in your approach, what most people don't hear about when using debt is that debt equals risk. I was in the real estate business growing up and had a $4 million portfolio with a $1 million net worth by the time I was 26 years old. I was doing house flipping, and I was 75% debted. We had a downturn in the market, the bankers called my notes, and it crashed me. My old professor saying was right in that debt is a two-edged sword. It cuts both ways.

If you think you need the debt for a tax deduction, I'll work on you there. If you pay $100,000 in interest, and you're in a 38% tx bracket, that saves you $38,000 in taxes. Just keeping the debt solely for the tax benefit, you are saying that you're willing to send the bank $100,000 to keep from sending the government $38,000.

A friend of mine owned about 25 strip-mall centers all over Texas, and he became convinced by faith that he needed to get out of debt. He was more highly leveraged than you are, so he sold down to about eight properties, which are paid for. He is convinced that by having fewer properties, having no debt, and paying more attention to them, what he lost in appreciation by owning fewer properties he gained in cash flow by better operating with lowered risk.

My contention is that we can get to where you are and the peace of mind that you have and the lowered risk that you have and the increased cash flow you have by having a little smaller portfolio and absolutely no debt—and that's a wonderful place to be.