74: Our Disagreements with Dave Ramsey

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0:30You're about to make a trade. Which you do you listen to? Is it get optioning those options? Or let's do a little research. Learn more at finra.org slash trade smart. Hey everyone, and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify. My name is Austin Hankwitz, and I'm joined by my co-host, Robert Kroak. Robert is a seasoned entrepreneur in his 50s with lifetime revenues of over$300 million under his belt. and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advised some of the most well-known fintech companies around the world.

1:14As the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives. One from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. Robert, today's episode is a fun one, and I think our viewers might have a clue as to what it is by the title of it, but kick it off with what we're talking about in the episode. In this episode of the Rich Habits Podcast, we're going to talk about our three biggest gripes with good old Dave Ramsey.

1:49Don't get us wrong, Dave Ramsey is a billionaire, and from one successful entrepreneur to another, we respect the hustle. He's helped tens of millions of Americans get out of debt, but that's also part of the problem. So let's dive into it. Let's do it. I mean, don't get us wrong, right? Dave Ramsey, we respect the hustle. You're a billionaire. Your company does four, five, six, seven hundred million dollars a year. I mean, you're crushing it. We just have a couple pieces of feedback as it relates to your message regarding financial independence and personal finance and things like that that we want to share.

2:24and we think our audience members need to know. That's why we think this episode is gonna be really important. So Robert, kick us off with point number one that we disagree with Dave Ramsey on. Yes, all debt is bad debt. As you probably know, Dave Ramsey's biggest message to the world is get out of debt. His reasoning for this is he believes our earned income at our jobs are our biggest wealth building tools. And if we're paying that earned income to the banks in the form of debt repayment every month, we can't take that money to enjoy it or invest it. So by paying off our debt, we now have more money every month freed up to allocate elsewhere.

3:02Now here's our problem. Not all debt is bad debt and the math doesn't always add up for Dave. So for example, he's going to tell you to work six, seven, eight jobs simultaneously and go to school part-time instead of just taking out student loan debt to get a four-year degree in some sort of STEM-focused major, right? Now, I took on student loan debt, and I did it responsibly, and I've paid it back. Now, I didn't go into hundreds of thousands of student loan debt to get a degree in left-handed puppetry or underwater basket weaving. I took on about$30 ,000 of debt to get a degree in finance and economics, something that I could take to the marketplace and earn and build an awesome career out of, something I did do before I became an entrepreneur.

3:48This debt allowed me and my countless friends, right? I've got a friend that makes$300 ,000 a year at 30 something years old, early thirties, because he's a lawyer and he went to the University of Tennessee and he got his degree and now he's working in big law, right? He's doing whatever. I've got all these friends that are clear examples of taking on student loan debt responsibly, right? Doing it in a way that you're not going hundreds of thousands over a stupid degree, but tens of thousands for a very great degree. And then you pay it back. And now you have this awesome career ahead of you, right?

4:16So that's the first example. The second one, Robert, is having a mortgage is not bad debt either, right? Dave's over here telling people that you should go out and buy a house in cash if you can afford it. But Robert and I are going to say, no, no, no, don't do that. Do not go out and buy a house in cash. That is not how you should be doing this, right? I was able to purchase a$280 ,000 starter home back in 2019. It was a townhome, three bedroom, two and a half bath, and out of pocket for that house. Down payment, closing costs, everything. I paid $10 ,455. That$280 ,000 house in the outskirts of Nashville is now worth$450 ,000.

4:53That's a $170 ,000 appreciation in value of this house that I wouldn't have been able to participate in if I didn't have Dave Ramsey's 25 % down, 50 % down, or go buy it in cash, right? That's not something I could have done. But because I did go into debt, I had a 3 % interest rate, and I put this$10 ,000 down to do it, I got to participate in that wealth building that came with this house. And now that house is a rental property for me, and it produces cash flow every single month. Yeah, for me, Dave Ramsey's message of paying cash or don't buy it just doesn't make sense. My mother had that theory as well.

5:29And unfortunately, most people just are never going to have enough cash to be able to participate in owning a home and doing some of the things we're talking about. And it really doesn't make sense for me at all, because the wealthiest people on earth have mortgages, car payments, and even payments on their mega yachts, even though they could pay for these items 10 times over. The reason being, and you've heard Austin and I say this for over a year now, is that if you can borrow for less than what you can make with your money, you always borrow because you want the positive arbitrage going into your pocket and not elsewhere.

6:04So for example, Austin bought his home and was able to get a 3.3 % interest rate on his mortgage. So the goal here would be to use as little of your own money as possible and that interest and arbitrage the rest by investing. And so by making 8%, 9%, 12 % in the markets, Austin is actually putting that 6 % to 10 % per year on the$250K mortgage that he hasn't paid off into his own pocket because he's arbitraging the difference to himself. So the clear math on that is I borrowed$270 ,000 to buy my house. Since then, I have invested$270 ,000 of excess capital over the last four or five years now into the stock market.

6:48I chose to do that instead of paying off my house. That$270 ,000 invested into the stock market is now worth well over$400 ,000. Instead of paying off my mortgage early with this$270 ,000, I took that. I invested it knowing that the market goes up over time. That money is now worth 400. And if I want to use that 400 to pay off the house, I could do that and have money left over, right? But if I just went and paid off the house, it's only worth what the house appreciates to. And I don't have any liquidity on that. The only way I can access that money is one, if I sell the house completely, which sucks.

7:23I don't want to do that. I want to have the cash flow it affords me. Or two, I go into debt with a HELOC and now I've got like a monthly payment with that, right? So it's like, I understand where Dave Ramsey is coming from with like having some of your wealth go to these payments. But if you can have a payment, like a mortgage, right, an asset, something that goes up in value, and you can kind of keep that on the side while also taking money and putting it elsewhere at this 8%, 10%, 12 % like the markets do while you have a 3 % interest rate over here. It's just such a no brainer, Robert. But it's just so important to understand if you can borrow the money for less than what you can make with it, you always borrow.

7:58It's just that simple. Everyone does it. I mean, Robert Kiyosaki, he covered this very well in Rich Dad, Poor Dad. And it's really just important to understand this leverage mechanism when building wealth, that good debt is not a bad thing. And you want to be able to use this good debt along the way to build your wealth. Now, on the flip side, I will admit my house that I'm in right now, because interest rates went up, I have a 6.7 % interest rate on this house, right? My monthly payment on this mortgage is$2 ,500. and I owe about$320 ,000 to pay it off. So my$2 ,500 per month, and I pay that every month, so that's$30 ,000 a year I pay out of my pocket to live here.

8:41Now, if I had taken$320 ,000 to pay that off and I divide that into that$30 ,000, I'm getting a 9.4 % return on my money by paying off my mortgage, right? Cash on cash return. That's how people need to be thinking about paying off their mortgage. Not because Uncle Dave is telling you to do it and you have a 2 % interest rate or something, think about the cash on cash return. So Robert, I will pay off this mortgage early because I can get a guaranteed 9.5%, which is again, 8, 9, 10 % that we'd get in the markets anyway. This is going to be apples for apples. But if you do the same math with the first house I got at that lower interest rate, that return quickly drops to only 4.5%.

9:20And I can think of a lot of better places to earn more than 4.5 % than paying off my mortgage early. I love doing the math. on these equations because at the end of the day, our message is always clear with the Rich Habits podcast. And that is how can we break down these tough topics and help people understand how to make their money work as hard for them as they work to get it. And these strategies are the way to do it. So point number two, the second disagreement we have with Dave Ramsey, kind of piggybacking back on this idea of paying off your house early is net worth millionaire status is not what it's all cracked up to be.

9:58Now, don't get me wrong. If you're a net worth millionaire, you should definitely be proud of yourself. You've done something right. But the way that Dave Ramsey encourages people to reach that net worth millionaire status is where we have a disagreement with. He tells you to pay off your primary residence as fast as you can, and then invest 15 % of your income toward your retirement accounts via a 401k. This is cool if you want to retire at 70, but I don't want to do that. And we don't want that for any of you. So think about it like this, right? Let's pretend. And I've heard these people call into his show all the time saying this, and he's kind of like backed into a corner like, oh gosh, I don't know what to tell you, right?

10:35Let's pretend you're in your mid forties. You did what he said. You've been listening to him for a while and you paid off your house, right? And now it's worth$600 ,000. And let's say you're, you know, you're in your mid forties, maybe early fifties, and you've got six or$700 ,000 in your 401k and you're a net worth millionaire, right? Right. You've got 1.2, 1.3 million dollars of net worth and you can afford to theoretically retire as this millionaire status but you can't because you can't touch the retirement money in your 401k for another 10 or 15 years despite being a millionaire on paper so you're sort of stuck in the rat race of dang i gotta work still for the next 10 to 15 years at a job that i might not like that much but you're still a millionaire so it's like oh i'm a millionaire look at me but it's like okay but can you retire can you access that money?

11:20Is that money that can pay for your daily monthly living expenses? No, it's not. And this$600 ,000 that you use to pay off your house or$400 ,000, whatever your mortgage was when you bought it, that money could have been invested elsewhere and earning you income, but instead you used it for it to pay off a house that just goes up in value that you can't access any of that money. So Robert, I just, I can talk about this one in circles here, but walk us through your thoughts. Yeah, I was going to say we could definitely spend hours on this, but this is why Austin and I have talked about building a bridge account for so long.

11:53We don't want our listeners to find themselves because you're smart and you're definitely going to have the money when you're older in a place where you have hundreds of thousands of dollars in an account you can't touch and hundreds of thousands in a primary residence that isn't producing any sort of cash flow. I'd much rather you have a mortgage of$2 ,000,$2 ,500 a month, assuming you bought the house when interest rates were lower and keep that while building up the bridge account to three, four,$500 ,000 and building your 401k over the coming decade compared to using all of your disposable income to get rid of a single$2 ,000 monthly expense by paying off your mortgage early.

12:35Now that might've been confusing. So think about it this way. If your mortgage balance is 400k and you scrimp and save for the next 8 to 10 years to pay that balance off with cash only to get rid of a$2 ,000 monthly payment, you need to seriously reconsider the math. $2 ,000 a month is$24 ,000 a year in cash outlay you're saving by paying off your mortgage early. But on the flip side,$400 ,000 invested in the stock market will produce roughly$40 ,000 a year in cash in your portfolio income. So would you rather have$24 ,000 in savings or$40 ,000 in income? I'll choose the$40 ,000 every single time.

13:18Not to mention, Robert, if you don't touch that$400 ,000 for seven years, you now magically have$800 ,000 because that is how compound interest works. And that quickly turns into$1.6 million after another seven years. Your house does not do that. I do not care about my net worth per se. I care if my investments are making me more in portfolio income than I spend every month, because if that's the case, I am financially free. And if I have access to that money, right, it's in an account like a bridge account that we've talked about here. I can touch, withdraw, do whatever with that money without paying penalties and fees like a 401k.

13:56I have the flexibility and I have the option to retire early, to take a couple of years off, do what I want. I don't have to wait until I'm 60, 65 years old before I can begin to enjoy the fruits of my labor throughout my 30, 40 year career. Yeah, I love it. And this is just a great episode to really kind of debunk some of these things that we believe are incorrect. Because the last thing I want to see is people finally retire, but then they don't have the income to be able to pay their bills. And then they end up having to sell their primary home to pull that equity out and be able to live off of it.

14:31That's why this is a better mousetrap for people moving forward. You know, what I don't want this episode to be is I don't want people to say, oh, okay, I just won't invest in my retirement accounts. No, you definitely should. We talk about the Roth IRA all the time. We want you to get the match with the 401k. It's free money. We don't want you over investing, right? A lot of people make the mistake of I'm going to max out my 401k. I've got like$3 million into it. I'm in my early fifties. Look at me. It's like, nice you have three million dollars you cannot touch for 10 years like yeah sucks dude and then you go take a 401k loan because you think that's the that's the solution because you're not interest back to yourself but then you know maybe you have to change jobs or something happens and i have to pay all that money back at once because that's just the terms of the loan so there are just so many things that people get wrong because of a dave ramsey is a more specific thing that he says or does or wants or encourages you to do and we just think it's really important for you to think holistically about your finances, right?

15:26Of course, we don't want you to have a mortgage when you're retired. Like that sucks, right? I hope you pay off your house eventually. Like we don't want you to have a car payment when you're 72. Like that sucks, right? But we also want you to be making the right decisions while you still have time on your side, assuming you're in your 20s, 30s, 40s, or even 50s, right? A lot of people make the mistake, Robert, of saying, I'm going to have all this money in retirement. And then they look around, they're like, well, it's in my retirement an account, I can't touch it. And so that's our big thing that we want people to realize here.

15:54Robert, what is our third big disagreement here with Dave Ramsey? Yes. Number three is Bitcoin is a scam. Dave Ramsey believes it's a scam. He put it all over the internet. He put it on his YouTube channel. And we obviously disagree with this. Is Bitcoin volatile? Yes. Is Bitcoin magic internet money? It might be. But no matter what it is, you can't argue with the fact that Bitcoin since its inception has experienced a 102 % compounded annual growth rate. I'm up 46 % on my Bitcoin alone this year and I have every intention to hold for the foreseeable future. I believe Bitcoin should live inside of a well-diversified portfolio for everyone making up 5 to 15 % of someone's invested capital and I'm excited to see Bitcoin eclipse 100k for the first time over the coming months and i think we're going to get there finally and it's going to be really good times in the crypto market i am very optimistic in where bitcoin's going over the next couple years several years couple decades right i am right there with you got hundreds of thousands of dollars in cryptocurrency definitely over indexed from a net worth perspective but that's just because i got in pretty early but at the end of the day robert i couldn't agree more and not to mention bitcoin there are now bitcoin etfs right we hosted Jay Jacobs on the show just a few months ago to talk about what BlackRock is doing with Bitcoin and their ETF strategy.

17:16So to say all this stuff's a scam, I just, I can't, I can't agree with it. I mean, you know, Dave's also the type of guy that says that he doesn't hold gold. He thinks gold's bad. And like, don't get me wrong. I'm not a gold bug. I don't have a lot of gold in my portfolio, but you know, should you have a little bit of gold in a well-diversified portfolio? Sure. Right. I think at the end of the day, Dave will rather tell you to put your money into international stocks that have gone sideways or down over the last 10, 20, 30 years, because it has a long track record, right? Then to put yourself into a new asset class, like cryptocurrency, new, right?

17:49It's been around for 15 years. I just don't see it, man. And if that means I'm a trailblazer, if that means that I bought into a scam, right? I'll take my hundreds of thousands of dollars in profit, and I will admit that I bought into a scam. Well, and I think, too, a lot of it is that we see in the markets, and Dave's not the only one, is that a lot of times when people are late to the party or they're unsure about something, then they spread fear. Because if they don't understand it and they don't get it, then to them it has to be a scam, or if they were late to investing in it themselves. We see that a lot in AI.

18:24We see that a lot in big tech. We see it in humanoid robotics where people are fighting back that that's the future of the workforce. And I do believe we're trailblazers because we are here to provide our audience with up-to-date knowledge on all topics of personal investing and what to do and how to do it. And I think that is what makes us different and so good is because we are independent thinkers that are trying to help all of our audience reach financial freedom like we are. And just to be able to help them guide these waters in understanding all of these topics. And don't get us wrong. There are absolutely scams that happen in cryptocurrency.

19:04There are rug pulls, there are scammers, there are all these things just like Enron and all the other scam stocks that happened over the decades, right? There are always bad actors and no matter what asset class you're talking about, people will try and scam and connive and do bad things with money because people are greedy and it sucks. And people get unfortunately tied into those schemes and it sucks. I totally get it. nfts are a great example of this that was such a crazy experience in 2022 with these stupid nfts that stuff i'm right there with you scam stupid it sucks but bitcoin or ethereum or chain link you know some of these cryptocurrencies that have been around for over a decade now i'm just like no i think they're cool i'm good i'm good with taking the risk here so i don't want people to misconstrue us endorsing cryptocurrency as a whole when we are very well aware that there are rug pulls and scammers and all that stuff happens.

19:55We get that. And that's why my portfolio is literally three cryptocurrencies. I know Roberts is a little bit larger than that, but we don't want people to think that we're endorsing these crazy things that do happen. We are definitely cognizant of it. We are saying that Bitcoin alone, Bitcoin is a scam, aka what Dave says is wrong. And I think it really speaks to what our overall message is, and that is having diversification throughout your investing portfolios, whether it's cryptocurrency or it's real estate or it's ETFs that we talk about or individual stocks. We want to see people diversified enough that if any one given sector were to really dump hard or go into, you know, a downward spiral that you're going to be protected and you're going to be okay.

20:40And that's just really important is that diversification. Well, Robert, speaking of adding diversification to your portfolio, here's something interesting. New Deloitte data has found that 58 % of wealth managers' clients consider their art collections as part of their overall estate planning strategy, and UBS released a report that nearly 40 % of ultra-high net worth collectors are allocating 30 % of their entire wealth to artwork. Well, I guess it's a good thing that we're partnered with Masterworks then, isn't it? We're not saying that any of you need to allocate 30%. We're not saying that any of you need to allocate 30 % of your wealth to art, investing of course, but we love, love, love diversification on this show.

21:22And Masterworks currently has over 950 ,000 users and nearly$1 billion in assets under management for a reason. because diversification into art makes a lot of sense for a lot of people that diversify in their portfolios. Yeah, 100%. I mean, both Robert and I have invested with Masterworks, and I've personally been a user of the platform for many years now. I remember I became a user of Masterworks in 2018, Robert. I was sitting at my desk at my 9-to-5 job, and I saw them. It popped up as an ad somewhere, and I was like, oh, this is cool. And so I opened my account of Masterworks in 2018, and now we are here six years later having them sponsor our podcast.

22:00Now, since inception, they've had 23 exits, each of them individually delivering a profit. And not counting works that are still in holding, they've distributed over$55 million in proceeds back to their investors. Masterworks gives you a chance to invest in shares of multi-million dollar paintings by artists like Banksy, Basquiat, and more. In honor of the relationship they have with Rich Habits, they let our subscribers skip the wait list by going to masterworks.art front slash rich habits. That's masterworks.art front slash rich habits, which is also shown in the show notes of this episode. As with any investment, past performance is not indicative of future returns.

22:43Investing involves risk. Important Regulation A disclosures can be found at masterworks.com front slash CD. Robert, I just logged into my Masterworks account. I'm up 27%. How cool is that? I mean, sure, stocks rocking and rolling. Sure. Dividend stocks doing their things. Yeah. Crypto's all over the place. Yeah. And I'm also up here on Masterworks up over 25 % in my account. I just think it's really important to have that diversification, you know? I love clicking buttons and making money. It is definitely one of my favorite pastimes. So our first question in our question and answer section of the podcast, which by the way, if you have a question for us, you can ask it at richhabitspodcast at gmail.com or send us a dm on our now verified instagram account rich habits podcast yep got the blue check mark comes from justin w justin says i love the podcast a friend put me on about a month ago and i started from the very beginning and i've listened to every single episode now my wife and i are teachers and we took another teaching job in another part of the state of texas we'll be selling our home and we're going to walk away with 250 000 of proceeds We want to buy another house, but we've not yet found one that we like, so we're going to be renting for the next year.

23:53However, I want to maximize our sitting money. My wife is taking a pay cut, and we moved to an expensive part of the state right outside of Austin. So, here's my question. Do I dump the money into something like an SPYI, or do I put it in a high-yield savings account? My wife is worried that if the market turns and the S &P 500 drops, we would lose a significant amount of our money and not have all$250 ,000 to put toward our forever home in the coming year. Thanks for any advice and your help. Good question, Justin. I agree with your wife. I probably would not put$250 ,000 into a volatile asset, assuming you are only going to be there for 9 or 12 months, right?

24:30I think that you should absolutely put it into something like a T-bill on public.com paying 5.1%, 5.4%, whatever it is there. That's going to be a super easy$13 ,000 a year for you here by just having this money parked and sitting there. About$1 ,000 a month in passive interest income because you parked your money and you're keeping velocity with it, right? You're doing it correctly. Now, if you said that you're going to be renting for two or three years, then I would say probably a good idea to split it down the middle, put some in some T-bills, put some in like an SPYI and then ride the wave there.

25:03Kind of have that income come in. It'll offset some volatility by up to, what is it, 12 or 13 percent. So you should be fine. But since you said it's such a short period of time, like maybe you guys find that dream home in seven months. You cut your lease down early. You go take now your proceeds and you go buy that house. I agree with your wife in this instance. But Robert, what's your perspective on the question? Yeah, I love it. And I love the train of thought. And I think you covered it perfectly because it's such a short amount of time and we could see some volatility in the markets in Q3 and Q4.

25:32You know, it might make the most sense to do exactly that. Go get those T-bills or get it into high yield savings, make it around 5%. You're going to be fully liquid there and just have that additional income on your money without the volatility of the markets. Because, you know, when we talk about these ETFs and stocks and different vehicles that we like, we're talking long term investment strategies. We're not talking short term in a few months because you could be on the bad side of some volatility in those few months and then you'd be scorned over that investment. So I think you're on the right track.

26:04And I think, Austin, you covered it perfectly. Yeah, I think, Robert, what's so important about this, too, is broke people react, wealthy people forecast. And I think that is what our friend Justin here is really trying to figure out. He's trying to forecast. He's trying to figure out, you know, how do I ensure my money has velocity and not say, well, I put it here and now it's down and now I got to react to this volatility. I don't know what to do. Right. He's trying to forecast in a very smart way. And what's that saying, Robert? Happy wife, happy life. Your wife is right. Go to her and say, baby, you're so smart.