Not all debt is bad debt

Friday, July 27, 2012 at 11am
By John Friedman

About a year ago in SFCA, Stephanie Miller and Thom Hartmann got booted off of AM960 Radio in the morning, to be replaced by Glenn Beck and Dave Ramsey. Sheesh, talk about a 360. The first time I heard Beck when I turned on the radio it was . . . really a harsh awakening.

Now, compared to most folks, I’m not much of a multi-tasker. When I walk down the street, I walk down the street, looking around and mostly in front of me, in the direction in which I am moving, rather than looking down, rather than looking down, at my hand, oblivious to my context.

But when I’m doing something I do everyday, such as brushing my teeth or taking a shower (one of which I even do more than once a day . . . ), I just about always listen to the radio. So I’ve gotten to know Dave Ramsey’s financial peace philosophy over the months.

I suspect I’ll have a lot to say about Dave Ramsey over the coming months and years. I find him . . . interesting, and I hope you do too. For me, doing so takes a good heaping doseful of my liberal-arts critical-thinking musk-culls . . .

So today Dave said a lot of stuff, and then went on to Neil Cavuto on Fox News, doing a simultaneous TV and radio cast, with his radio show and Fox News on cable being one-and-the-same. They talked about the price of food going up due to the drought. There were digs at government along the way.

But before that Dave said something on his radio show that got me muttering and thinking that I had my topic for today’s post. He said something along the lines of, “Rich people don’t have any debt. Just about none of ’em. That’s how they got rich.”

Dave’s backstory, you see, is that he was and is an entrepreneurial sort (look at his financial peace empire, as displayed on his website, and you’ll see what I mean — Dave loves to sell ads and loves to sell insurance leads and gosh-only-knows-what-all-else, not to mention his Financial Peace University).

As is true for a lot of entrepreneurs, when he was young Dave had a big failure (old entrepreneurs have them too; Dave had his when he was young). As he notes on his About page when telling his and his wife’s story, “Debt caused us, over the course of two and a half years of fighting it, to lose everything.” Bankruptcy ensued, with its great wiping-clean-of-the-financial slate, and then Dave did it up right and apparently super-successfully as a conservative financial radio personality, etc., etc., etc. (In fact, I’d expect that Dave’s enterprises are making tens of millions of dollars per year).

You can think of Dave as filling out the opposite end of the spectrum from Suze Orman, though his religion and politics play a far bigger role in his on-air advising and talking-headedness than Suze lets her sexuality play a role in hers.

So Dave hates hates hates debt. It hurt him badly way back when, and he has generalized that personal experience to an overall abhorrence of debt, so much so that no-debt is the central thrust, as best I can tell, of his advising.

No debt! The rest of his advice flows from that.

*  *  *

I have a more nuanced approach to it. I think that credit card debt — the kind that lasts month to month because it’s not paid in full each month — is bad. I hate hate hate that kind of debt, and when someone shows up in my advising world with that kind of credit card debt I view it as the financial equivalent of a guy who goes to the doctor, who right away gives the guy a stress test and then immediately — as in, Sir, you can’t even go home first — sends the poor fellow to the hospital to have quadruple bypass surgery, pronto and stet. So I view ongoing credit card debt as the pits.

And I also think that student debt, because it can virtually never be expunged via bankruptcy, is also a fairly incipient-evil sort of debt — especially if the money went to a lousy for-profit school that owes its entire existence to a badly designed student loan industry.

*  *  *

But after that the nuance comes in. A lot of folks in their 50s and 60s owe a good deal of their financial health to the fact that 15 and 20 years ago they were able to get a good mortgage and buy a house that wealthflowed way (WAY!) faster than the interest on the mortgage cash-gashed.

And, to go straight to the heart of what Dave said about rich people, in my experience a lot of very smart, very financially healthy people use debt in very, very productive, very, very financially healthy ways.

My word count is at 666, so I’ll leave that assertion mostly dangling for today, but I’ll add one example and a corollary to that example. Most folks, and I’ll bet Dave, too, think that Proctor & Gamble — to just pick a company that is a steady-Eddy — is a financially healthy company. Currently P&G has about $70 billion of debt versus about $135 billion of assets. So it has a roughly 2-to-1 ratio of assets-to-debt (financial wonks would typically state this as a roughly 1-to-1 debt-to-equity ratio) (ask me if you want to understand that wonkiness).

So if a rich person, had, say, $7 million of debt and $14 million of assets, then that would be about the same ratio-ballpark, right? So imagine a rich person who has built up his/her wealth through, say, a paving business. Mightn’t that business have a lot of loans inside of it? After all, it takes an awful lot of mighty big machines to pave roads. If you wait until you have the cash to buy the machines, you’ll have to do a lot of paving sans machines. And it’s a lot harder that way . . .

So, I say, with one exception, debt is neither good nor bad. Context matters. The exception is that ongoing credit card debt is bad. Period. The end. Other than that, though, it takes a bit of a conversation to say something intelligent.

And don’t even get me started on the federal government’s debt . . .

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