Ask your average American who comes to mind when they think “personal finance,” and they’re likely to report one name above the others:

Dave Ramsey.

Ramsey is a jovial-but-punishing, debt-be-damned crusader whose teachings have infiltrated the middle class – and with good reason! He preaches the most stringent fiscal responsibility that (probably) works best for an American making an average income with very little financial education.

“Katie,” you might be shouting at your laptop, “How could you speak such blasphemy?”

Look, I get it – Ramsey’s teachings have become popularized anew in the Instagram/TikTok age of personal finance as the new guard of personal finance voices takes over, but for the opposite reason: People share their perspectives relative to Ramsey, oftentimes citing how different they are. It’s become fashionable to do so.

And hear me out: The average American makes about $52,000 as of 2019, and is in roughly $6,000 of credit card debt, $32,000 of student loan debt, $208,000 of mortgage debt, and $19,000 of auto loan debt.

While I’m lazily combining all of these statistics into a picture of one, average indebted American, you don’t have to be a mathematician to see why people might consider debt an issue for your average American.

After all, if you’re looking at this “average” person, they owe lenders 5x what they make in a single year. Yikes. Debt must be pretty bad, huh?

The personal finance #debtfree community

Dave’s teachings inspired a loyal legion of followers who (maybe blindly) espouse the debt-free lifestyle.

They pay cash for brand new, fully loaded vehicles (and Dave applauds it, hilariously), eschew credit cards because they believe any type of rotating credit line is bad and credit scores are unnecessary witchcraft, and stuff labeled envelopes full of cash in the name of budgeting.

I’m not trying to dunk on Ramsey or these ideas – but today, I’m trying to prove that the advice that helped some middle class Americans get out of debt is the very sentiment that’s keeping them in the middle class.

This, my dear #RichGirls, is the problem when we accept financial dogma at face value without digging a layer deeper – when financial truths get diluted down to their lowest common denominator, we rob people of the opportunity to understand why it’s considered a truth. We begin to miss the point.

Dave Ramsey’s anti-debt reign of terror is well-meaning: There’s certainly a subset of Americans in consumer debt up to their financed Warby Parkers. But should we rob those same people of the opportunity to learn more advanced financial truths in the name of financial triage?

Sure, let’s stop the bleeding – but the no-debt-ever-again tourniquet isn’t a long-term solution, and I’d argue it can be more damaging in the long run when you consider the investing lifetime of your average adult.

Save up $40,000 cash to pay for your Ford Explorer and avoid payments? If it takes you five years to save $40,000 cash, you’ve just missed out on average 10% returns in the stock market on your money – and now you’re driving around in (what could’ve turned into) $64,420 over the next 60 months while you financed the vehicle instead, using your monthly cash flow to pay for the low payments.

Instead, you’ve got a depreciating asset on which you’re making no payments. Sure, your cash flow every month is improved, but your overall net worth has lowered substantially.

Is there such thing as good debt?

When money is as cheap as it is now (between 2-3%) and stock market returns are as high as they are now (VTSAX up 18.93% year-to-date, as of August 21), you’re actively putting yourself behind by paying cash for your assets. Rich people know this – that’s why they’re borrowing cheap money at record highs (but more on that later).

Unfortunately, when your personal finance coming-of-age is defined by the idea that all debt is evil, you stand to miss out on lucrative financial benefits and pay steep opportunity costs.

It all comes down to simple math: If an asset appreciates faster than the interest rate on the loan, it’s an investment. You come out ahead. But teaching nuance is hard, and it’s even harder to explain to someone in $200,000 of debt that they’re just in the wrong type of debt. It’s much easier to categorically swear off the entire concept.

After all, "#DebtFreeUnlessItsLeverageToIncreaseYourFinancialPosition community” isn’t as catchy.

The same could be said for paying off a home early – sure, you’ve now increased your monthly cash flow, but having a substantial amount of equity in your property is quite costly, mathematically speaking (for the same reasons) – equity in your home is just money that’s not earning 18% this year. And while your property is likely to keep up with inflation over the long haul, the chances that it’ll appreciate 18% annually ever are slim.

That’s not to say you shouldn’t buy a home, just that rushing to pay it off in an environment like this one is – frankly – short-sighted.

And while the common rebuttal I hear to these types of comments is a frustrated, “Well, money is personal and psychological – and I hate being in debt,” it’s just another reminder to me how much we (the middle class) have internalized the idea that debt is bad.

It’s costing us handsomely.

If being in debt were unilaterally seen as a wise financial position – a desirable strategy to increase one’s net worth – do you think your financial emotions would change to fit that narrative, too?

If I told you that you could either save $5,000 in interest or make $50,000 in the market, would you still pick eliminating the debt? Probably not.

For most, emotions adjust as more information arrives. And for those who still swear they’re just too uncomfortable with debt, I maintain: This is simply internalization of a message that does more harm than good.

Numbers are the only thing that don’t lie to us, and they’re completely unbiased.

How do the rich avoid taxes?

The personal finance game has levels, and amongst the most slippery and impactful is the reality that rich people actively use debt to better their positions.

One could argue that American policy today around borrowing and inheritance incentivizes super rich Americans to cheat the system.

Today, you can pass down $11.58 million tax-free (as of 2020), directly incentivizing the rich to amass staggering wealth and then borrow against it instead of “realizing” (read: using) it, so they can pass it down to their future heirs.

And you know what? I don’t blame them! Don’t hate the player, hate the game. I’m fully in favor of exploiting tax laws that benefit the rich to become rich myself – but it pays to know the rules of that game, and unfortunately, anti-debt rhetoric is in direct opposition to winning.

At the risk of sounding like a Bernie Sanders campaign volunteer, it keeps the small woman small.

How the rich use debt to get richer

To understand how this works at scale, consider how quickly $1M compounds.

A 10% average return on $1M in one year is $100,000.

Imagine having so much money that your money earned six figures each year.

Now imagine that you need $100,000 to buy a boat.

Does it make sense to withdraw $100,000 from your portfolio, or to go to the bank and say, “Hey! You’ve got $1M of my money, and I’d like a $100,000 personal loan. I promise I’m good for it.”

Well, they’ve already got 10x that amount in your name – they know you can pay them back.

You’re probably going to get the loan, and you’re probably only going to pay about 3% on that money in an interest rate environment like the one we’re in now.

So you take out $100,000 in debt, live out your Jimmy Buffett dreams, and pay $3,000 in interest for the privilege to use their money instead of your own. You use your monthly cash flow to pay back the debt, instead of using money from your own portfolio.

Had you liquidated $100,000 of your portfolio, you would’ve paid $9,000 in taxes (assuming you’re single; the long-term capital gains tax rate is 15% on amounts over $40,000) and be left with $900,000 left in the bank to compound instead of the full $1M.

But instead, your full $1M portfolio sat in the market for another year, making another $100,000 (assuming a 10% return), while you traversed the globe in your borrowed-money boat.

Instead of withdrawing $100,000 of your own money and paying $9,000 in taxes (leaving you with $900,000 in the bank, assuming you paid your taxes out of your withdrawal and kept $91,000 of the withdrawal for your boat), you now have $1.1M after a year of compounding, a full $100,000 of the bank’s money that you spent on your boat (instead of $91,000, that – let’s assume – you’d have to supplement with $9,000 of cash if your boat costs a full $100,000), and a debt to be paid of $103,000: A total net worth of $997,000.

($1.1M in assets and $103,000 in liability that you’d be paying back with your cash flow each month, instead of a giant lump sum withdrawal. This is ignoring the value of the boat.)

You went $100,000 into debt and still came out $97,000 ahead. The reality, of course, is that your $900,000 would’ve theoretically continued to compound, too; it would’ve made roughly $90,000 assuming the same 10% return, making the real gap in outcomes a lot less impressive – about $7,000, plus the $9,000 in taxes: about $16,000.

That’s a silly example, but imagine this at massive scale, repetitively. It’s easy to see how wealth begets wealth – and more importantly, cheap debt begets wealth.

Leverage is a knife that cuts both ways

That, my friends, is an example of leverage.

Another example of leverage is borrowing against your own portfolio to invest more.

Imagine borrowing money at 3% and then turning around and making 10%.

You’re netting 7% gains on someone else’s money!

This is the basic premise of how real estate investing works, but you don’t need to own rental properties to trade with leverage – you just need a lender who will give you the money to trade.

Of course, if things go belly-up, you now owe money at a loss. Look no further than the 2008 housing market crash for an example of what happens when you’re in over your head and things don’t pan out the way you expected.

In essence, people bought homes they couldn’t afford assuming they were bound to appreciate. When they didn’t, people owed more money on their homes than their homes were worth – and many defaulted.

Because of the subprime bond markets that were backed by these bullshit mortgages, the economy collapsed. It was a mess, and it ruined people’s lives.

The bottom line

It pays to understand the math and rationale behind our favorite personal finance aphorisms.

In the case of debt, the entirety of the middle class being taught that debt is unilaterally bad keeps a large subset of society in a position where they won’t consider using leverage to better their financial positions. The grand irony? The people using leverage the most are the ones who need it the least.

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