All right, let’s check out this next one. Here is another video with different advice from Dave. My wife and I are 27 years old. We’re projecting a pre-tax income this year of $198,000. Wow, we have no debt at all right now. We have five months of expenses saved up in a money market account in our house account, and in another money market, we have $52,000 saved up. We’re averaging about $2,700 a month of deposits going into that house account. My debate is, should we continue to save up through the next year and get a conventional 15-year mortgage, or should we live by renting through the next move and try to pay cash?
I don’t yell at people for getting a mortgage, a 15-year fixed-rate mortgage, and you pay it off as fast as you can. But between us, because you asked, the shortest path to wealth is debt-free. So if I were in your shoes, I would have to save up and pay cash because I don’t borrow money. I have become convinced that borrowing money short-circuits the shortest path to wealth. The shortest path to wealth is no debt 100% of the time. I’m convinced of that. The shortest path to wealth is 100%, no debt 100%. That sounds like a guarantee. That’s just some aggressive language. Think about what this means. If you’re saying, “Hey, the shortest path to wealth is no debt,” when you’ve got to buy a car, you pay cash, no exceptions. When you’ve got to go to college, you pay cash, no exceptions. When you’ve got to buy a house, you pay cash, no exceptions. That is the shortest path to wealth. And I just don’t know if experientially—let me break this down.
I always put this into two pots, two baskets: get wealthy behaviors, stay wealthy behaviors. Without a doubt, Dave is tremendously successful. I mean, I think a lot of people, I see a lot of people post what Dave’s worth, and they way underestimate it. I think Dave is getting right at the doorstep of a billion-dollar mark. So he’s tremendously successful financially himself. Yeah, without a doubt, stay wealthy behavior when you’re that successful is that you want to just pay cash for everything. Don’t even fool with debt. But the reality is that when you’re at the beginning of your journey, unfortunately, you have to deal with the tool of debt. Whether we’re talking about reliable transportation for your family, getting the first house—this person is crushing it, by the way. They have a great income, just under $200,000. They have no debt, five months of cash reserves. They’re depositing $2,700 a month above and beyond what they’re already doing. So they’re crushing it. I do want to give Dave the credit that he told them, “Hey, you don’t have to pay cash for your next house. You can use a mortgage.” And he’s going to recommend a 15, but he then went a step further. I just want everybody to know you don’t have to. You’ve got to do the get wealthy behaviors first before you can do the balling move of paying cash for everything.
Dave’s owns. If you go follow his story from, I guess, in his 20s, was it to probably mid-30s when he had that boom-bust, he used a lot of debt. Then he went broke because he over-leveraged. He was being a cowboy. And then he went total no-debt after that. But I think that the party doesn’t… Is that the success came in such a way that he had windfalls of money that started dumping his way. So it was easy for cash because he had a big shovel, he had lots of income coming in. A lot of people are going to… Your rise to success is going to be much more—you get a good job, you get pay raises, you’re going up at 8% a year, 12% a year, 15% as you get pay raises. It’s not going to be you go from zero to a million dollars to multi-million dollars a year. That creates a different journey, and I think that’s something that we need to just draw attention to when you’re giving advice to people. But Bo, you want to talk about… We’re also—I want to bring this back to today. We’re in a unique housing market.
It’s pretty difficult. What’s gone on in housing, what’s gone on with interest rates, and the rise in housing prices, affording a home is a hard thing right now. I mean, for most folks, just affording a home is very difficult. Well, when you throw something on it like doing a 15-year mortgage, it makes a really hard thing even harder. Much less trying to pay for it in cash. That’s why we’ve come up with the rules that we’ve come up with. When we say that you want to buy a house and we have an entire home-buying checklist you can go check out, go to moneyguy.com and download your first house, you don’t have to do 20%. We want to make sure that your total housing costs don’t exceed 25% of your gross income. And if you can do that, those rules will give you some flexibility.
Here’s the case study to show you that. Let’s assume you have a young couple with a median household income in this country of just under $75,000, and they want to buy a house. They’re going to put 3% down because they understand the Money Guy Rules, and they’re going to keep their payments, when you look at the principal and the interest, below 25% of the gross income. So now they have to make a decision. Do I buy a 15-year mortgage, or do I buy a 30-year mortgage? Well, when you look at it in today’s terms, when you factor in the fact that a 30-year mortgage rate is at 7.44%, and a 15-year mortgage rate is at 6.75%, if they were going to have that cash outflow and buy a house with a 15-year mortgage, they could—a home that costs $181,000. However, if they give themselves flexibility and instead opt for the 30-year mortgage, now they can buy a home with the same expected cash outflow on a monthly basis of $230,000. Well, right now in this economic environment, a $181,000 home versus a $230,000 home might be the difference in actually finding a house versus not finding a house at all.
With what’s happened with inflation and the crazy interest rates right now, the ability to boost your purchasing power but still stay within the realm of having boundaries of 25%—the 30% is going to give you that margin, that flexibility. And look, I want to pay a little respect. Dave talks about that in his millionaire study—the largest in history, millionaires pay their mortgages off in 10 years. You can do that with a 30-year mortgage. I’m proof of that myself. And the fact that I think, and by the way, that research—the data point that’s always missing when Dave shares that is because I did my own internal research on what they did and asked some questions of some Ramsey individuals I know, and they confirmed this is not first homes. These are people probably my age in their 40s and 50s who were already at that millionaire track that are paying it off because they just are at the stay-wealthy behavior and paying down debt is a stay-wealthy behavior.
But while you’re on the journey to get wealthy, I want you to just keep things in understanding. We understand you’re going to get into the messy middle; you’re going to have obligations of your time, of your money. What can we do to give you the maximum purchasing power, especially in these unique times where buying a house is not the easiest thing? But also leave enough margin in your life through your monthly payments that you can also save and invest and build your best financial future. That stuff’s important. And another thing I think through, because Dave is saying, “All cash, pay it off, pay it off, pay it off.” Well, let’s assume that this caller, maybe this was a couple of years ago, and interest rates were a little bit lower than where they are now. Maybe they’re in a 2 and a half, 3 and a half, 4% mortgage. It would be really difficult, especially for a young person, to say, “Hey, you know what? You got into the house; you took out that mortgage, but now you ought to aggressively pay down that mortgage.”
I would be concerned that they are trying to solve a shorter-term problem without paying attention to the longer-term problem. And Dave always uses this language. He says, “Well, yeah, the reason that you say that is you’re not accounting for risk. 100% of homes that have been foreclosed on had a mortgage on them.” Okay, 100% of people that ran out of money for retirement did not have enough money for retirement, right? I can use the same exact logic. You need to look at your own personal situation and say, “Man, does this make the most sense for what my ultimate goals are long term?” And when you talk about risk, I don’t mind sharing because Dave made an absolute statement, which always, maybe it’s because we’re certified and licensed, so we’re taught very quickly, don’t make any absolutes in anything financial because you can get yourself in a lot of trouble.
But he said 100% being debt-free is better than the other. I’ve actually… He’s never said he never had anybody tell him they’ve had regrets about paying off their house. I actually had—I taught a Sunday school class, and I had a widow come up to me and goes, “I know what you do for a living. I would love for you to make sure you get the message out that when my husband passed away, I came into a life insurance policy, and I prepaid my mortgage because that’s what everybody told me to do was get out of debt.” She goes, “But I didn’t do the other parts that I should have done. I didn’t figure out what my budget was. I didn’t figure out, you know, because I think she thought because she had three to six months, and that was going to be enough. But she had not done a good enough job of knowing what her margin to live off of. So she used this windfall of money all at once. And that’s the part I get it when you guys talk about the baby steps. When I bring up that it is riskier to have a mortgage that’s 98% paid down but then lose your job than it is to have a mortgage that’s paid down 60%, but you still got a nice emergency reserve, you got a nice investment portfolio that you could actually get access to within two to three days, you know, by placing a trade and getting the money.
Because that is what I think a lot of people don’t take. They’re so just on a journey to get out of debt as fast as possible, and that breaks my heart when I see 20 and 30-year-olds doing that because that’s a stay-wealthy behavior. The risk is you won’t become wealthy because you didn’t give that money a chance to work for you and build wealth. And if you’re somebody who comes into a windfall, don’t get in a hurry to make big, knee-jerk steps. You need to probably move slowly, figure out what your living expenses are, figure out what you need. And maybe the prudent decision would have been pay down half the mortgage, shore up your financial foundation. But that always rings true. I think about that when people tell me they want to pay down their mortgage. I’m like, that’s great, once it’s debt-free. But if you have only paid down 98% of the mortgage and you lose your job and you lose your cash flow, you’re going to find that without an income, the banks aren’t going to be too quick to give you the money that you have locked in your home equity. It’s a true risk. For more information, check out our free resources.
