How COVID-19 Stress Validates Dave Ramsey's Approach to Debt

There’s really no doubt about it. Dave Ramsey’s desire to eliminate all debt is a pretty attractive approach in times like these.

While members of the financial community are offering special programs to prevent widespread evictions and foreclosures, landlords can still rack up interest and fall behind on payments with nonpaying tenants. Ramsey’s approach provides peace of mind. If you are heavily leveraged, his principles can help float you through these next few months.

Maintain Personal and Business Savings

For instance, he and many other financial professionals recommend three to six months of personal savings for rainy day issues. Are you doing the same for your business?

Most investors build this into their cash flow calculations, accommodating a few months of vacancy or non-paying tenants. The BiggerPockets community is often working toward financial independence and/or early retirement, meaning our financial literacy may be higher than in Dave Ramsey’s target market. Many readers are able to regroup as they rely on their emergency business and personal funds.

This pandemic creates a lot of confusion and uncertainty, but the economic effects so far are similar to that of a recession. Our communities are coming together a bit more this time around. Many landlords are waiving late fees, and most are being flexible with payment plans for currently struggling tenants.

Landlords with paid-off mortgages enjoy more financial freedom but are still required to fix repair requests and pay taxes and insurance premiums. This approach leaves less liquid capital available, which can be a major drawback in recessions.

Prioritize Certain Types of Debt

If you feel you’re too highly leveraged, there are still a few things Dave Ramsey suggests before calling it quits. He has no qualms in suggesting desperate measures to stay afloat in desperate times, and one of those steps is to call creditors to see what reduced payment/payment delay programs they offer and the implications of those plans.

The best decision is different for many, but strategically prioritizing debt is particularly important in today’s climate.

Ramsey suggests debt is bad in pretty much all cases. He rarely ever suggests using credit cards or taking out loans to purchase something (primary homes and few other things excepted). Most of us, on the other hand, thrive on debt. We take credit cards out for insurance policies to reap the benefits of the rewards programs, we use other people’s money to profit off rentals.

Debt has helped me build a real estate business for me to retire on. I save very conservatively for my properties, but even I feel the pinch in today’s economy.

Create a Well-Weathered Portfolio

Ramsey’s approach shines in down economies. His approach to personal finance truly helps those needing a big money makeover, specifically those living paycheck to paycheck. Those threading the needle too closely with their properties may benefit from his training, as well. But if this pandemic continues long enough, many may find themselves losing money in some way.

That’s why Ramsey’s approach can create a well-weathered portfolio.

Some landlords completely disagree with this, as this approach takes up more capital, denying them the chance to purchase more rental properties. They may be able to survive with two properties even if just one of them is paying. This scales upward, as well.

Diversification can be key to many landlords, which is why no single approach is the “be-all, end-all.” My approach is a blend of the two, as some of my properties have mortgages and some don’t.

Conclusion

Not all tenants can fully pay right now, but landlords with multiple properties are able to divert profits to otherwise uncovered expenses. Operating on debt can over-leverage certain individuals, and having fewer debts is beneficial in down economies. Dave Ramsey’s approach to debt is validated for many in this case, and keeps people from suffering massive losses when their tenants are unable to pay.

What do you think of Dave Ramsey’s approach?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.