- What is my take on getting out of debt
versus Dave Ramsey's approach?
Get ready.
I'm going to differentiate between how I view debt
and how to get out of debt versus how Dave Ramsey does.
You can determine which one is right for you.
So my purpose here is to give you insights
into ways to accomplish your goals
maybe differently than what you thought before.
(gentle upbeat music)
So I'm Doug Andrew and I've been a financial strategist,
a retirement planning specialist now
for nearly five decades,
helping thousands of people optimize assets, minimize taxes,
and empower what I call their authentic wealth.
My understanding is
that Dave Ramsey's been doing a similar type of thing
for about as long as I have, maybe longer.
And before I share with you my viewpoint
on how to get out of debt,
let me just say this.
Dave Ramsey has helped thousands,
maybe hundreds of thousands of people.
He helps many, many people who sometimes advisors like Dave
or Suze Orman refer to as financial jellyfish,
act their wage, as Dave says,
because so many people have too much month left
at the end of their money.
So he does a great service for a lot of those people.
There are a lot of people that have come to me
throughout my career that once they got outta debt
and they got more disciplined,
then they wanted to learn a little bit more
or they were studying
and began to understand how money really works.
And some of the things that they were taught
or they always thought because of what Dave Ramsey preaches,
all of a sudden it didn't mesh.
And so they learned maybe a higher level of understanding.
Okay?
So with that as a preface,
let me just address my background and experience,
which started about probably the same time Dave Ramsey did.
My understanding is that Dave owned a lot of assets,
I think real estate holdings,
and this maybe happened the same time it happened to me
when I lost a home in foreclosure in 1982.
I understand that he had some financial setbacks
because maybe he was over leveraged
and he owed a lot of money.
And of course,
when all of a sudden the real estate market goes down
or crashes or implodes, then you get stuck.
You don't have the cash flow,
or if there's vacancies and what have you.
And so ever since that bad experience,
and I understand this,
I think Dave Ramsey has pounded the key,
get outta debt, get outta debt.
Debt is stupid, stupid, stupid, okay?
Now, I don't go that direction.
I built a beautiful 6,400 square foot home in 1978,
and I've never paid a down payment
for any piece of real estate I've acquired or any home.
And I satisfy down payments, but not with my money
because my belief is that the key elements
of a prudent investment is number one, liquidity,
number two, safety.
Whether the asset or the property goes up or down in value,
you wanna have safety of principle
of what you have in there.
And number three is to earn a predictable rate of return
in that order.
And then the tax advantages are icing on the cake.
Dave generally talks about get outta debt
and then invest money and put it into the stock market
and mutual funds and hang in there.
When the market goes down, the market always comes back.
And I've heard him say you should average 12%.
Well, according to DALBAR,
most Americans are not earning 12%.
And that's what I started out doing back in 1974 until 1980.
I was a big by term invest the difference proponent
just like Dave Ramsey.
And that all changed in 1980 when I began to get educated
on how to buy term and invest the difference
under a tax-free umbrella
and how to self-insure in about 12 years
instead of being able to self-insure
after 30 years of buying term
and investing the difference in a portfolio of mutual funds.
So I accomplished goals faster
than the methods that he talks about,
and he admits a lot of people are not disciplined
to do maybe what I recommend.
What happened is, in 1980 during that recession,
we had the energy crisis.
And even in Houston, Texas, 16,000 homes got foreclosed on,
not because they became bad people.
They just couldn't make their mortgage payment.
And so I learned that when I had an experience in 1980,
three things happened to me.
I never dreamed it would happen simultaneously.
A man that was a supervisor in our company embezzled money.
And while they were investigating him,
they froze my income, my commissions, and two others.
And all three of us lost our homes in foreclosure
'cause we lacked the income.
But the point is this.
I learned that leverage,
in other words, borrowing OPM, other people's money,
leverage wasn't bad, okay?
Leverage without liquidity is stupidity, okay?
So my take right off the bat is a little bit different.
I want to stay liquid.
And I learned that
if you send extra principle payments against the mortgage,
or you put huge down payments,
and all of a sudden something happens to you
and you get disabled, you lose your job,
or a recession hits,
when you need the money, the worst out of that asset,
it's the hardest to get
because you don't have the ability to repay.
And so I would maintain
either keep your property's mortgage to the hill
or free and clear.
Anywhere in between, you're not in control, the lender is.
But if I have my equity separated in a position of liquidity
where I can access the money
with an electronic funds transfer or phone call,
then it doesn't matter 'cause I don't have to qualify
for a loan to borrow the money out of my property
that I've been hurrying to pay down.
'Cause it doesn't matter if I have a $500,000 house
or a million dollar house.
If I owe 900,000 on it or if I owe 100,000,
if I get behind three months,
they will foreclose on it.
And they'll foreclose on a property
that has a lot of equity in it faster than they will
that's mortgaged to the hill.
They'll work with you when you owe as much
or more than the place is worth.
I've seen that happen hundreds of times.
So I learned to keep my money liquid, safe,
earning a predictable rate of return.
So what we do is when I learned that experience,
from that point forward, I began to write books
and teach and help people accumulate their money
in a safe environment over here,
let's say in this right hand pocket.
These are your assets, let's say, over here.
This pocket is your liabilities.
And so Dave basically says, "Get rid of the debt."
And you've heard the quip.
There's two kinds of people in the world,
those who pay interest and those who earn interest.
Well that's cute, but actually that's not true.
There's three kinds of people in the world,
those that pay interest in order to make more interest.
See, leverage is what makes the world go round.
This is what banks, credit unions, insurance companies do.
They use leverage with liquidity.
Banks borrow OPM.
So think about it, a bank or credit union
or a life insurance company's greatest asset
is their liabilities, okay?
If they stopped paying interest,
they would wither up and die.
Now, you don't wanna just pay interest to pay interest.
You want to pay like the parable of the talents.
You wanna put your money to work to earn more
than what you're paying for.
And this has been going on since the beginning of time
where banks, credit unions, financial institutions,
a bank will pay you 1 or 2% interest.
So when you put your money in a bank,
credit union, whatever,
there's four things you can do with money.
You can spend it, lend it, own with it, or give it away.
Now again, Dave simplifies things
and says you should own and never loan or borrow.
You gotta get out of debt as quickly as possible.
Well, I can prove to you how to get out of debt
probably two and a half years faster using the same money
that Dave Ramsey is trying to get you outta debt.
So stay with me here.
And then I'll gift you a copy
of one of my books here at the end.
So let's go back to this.
When you put your money in a bank or credit union,
it's in a lended position in a savings account
or an insurance company.
It's in a lended position.
Are they just a benevolent institution paying you interest?
No, they don't just stick your money in a vault.
What are they doing with your money?
They're loaning it back out again.
In fact, a lot of banks and credit unions
put 30 to 40% of their tier one assets
into the multi-trillion dollar insurance industry, okay,
because of safety.
Because in the Great Depression, when banks closed,
and 40% never reopened their doors again,
and some real estate dropped 80%,
not one single legal reserve insurance company went under
in the Great Depression.
Same thing happened in 2008 when 400 banks went under
and 900 more were on the brink, on the watch list.
There wasn't one single legal reserve insurance company
that went under in 2008.
So this is where banks and credit unions borrow your money.
And let's say they pay you 1%,
which they've been doing for the last decade or two.
So every million dollars that they borrow,
so to speak, where you deposit,
when we collectively deposit money
into a financial institution,
if the bank pays you 1%,
that's only 10,000 a year they're paying in interest.
And they're turning around,
putting that in insurance companies and earning 4 or 5%,
or they're loaning it back out again,
let's say at 4 or 5%.
Let's say five.
How much more is five than one?
Don't say four.
It's 500% more.
Let me word it this way.
Would you hire an employee for 10,000
that made you an extra 50,000?
Would you buy a widget machine for 10 grand
that made you an extra 50 grand?
So let me give you an example.
In my books that I wrote at the turn of the century,
many people would read my books
and call up the Dave Ramsey radio show
and say, 'Well, what about Doug Andrew?"
And he would cut them off, and he would say,
"You're borrowing money on your real estate at 6% back then,
and you're earning 8% in his universal life insurance.
So you're only earning 2% higher than that."
So he would say, "You'll do all that for 2%?"
And I'm going, "Oh my heavens."
Dave doesn't even understand how money works.
It's not 2%.
First of all, if I borrow at 6% for a piece of real estate,
and I can tax deduct the interest,
in a 33% tax bracket, it's not costing me 6%.
On a million-dollar mortgage, let's say,
if I'm borrowing at 6%,
that's 60,000 that I pay in interest that year.
If I can deduct that, which I always make sure I can,
then I get to write off that 60,000 in a 33% bracket.
I get back 20,000.
I save a third of that 60,000.
So the net cost is only 40 or 4%.
So if I'm borrowing at six, it's only really four.
And if I'm earning eight, it's not 4%, it's 100% more.
Would you hire an employee for 40 grand
that made you an extra 80 grand?
That's 100% return on employment cost.
Would you buy a widget machine for 40 grand
that made you an extra 80 grand?
But in actuality, most of my career I have borrowed money
at 4.5% and net cost of three.
And in my indexed universal life, I have netted over nine.
How much more is nine than three?
300%.
Why would I not take advantage of a 300% rate of return?
I'm making 90 grand.
It cost me 30 grand.
You show me where else you can make 300%.
So it's not just 2%.
You've gotta calculate the net cost after tax
and calculate what you're earning,
and is it double or triple or quadruple?
When interest rates were low,
I borrowed on a lot of real estate at 3% tax deductible
in a 33% bracket.
It was a net cost of two,
and I was earning 11 netting 10
in my indexed universal life.
How much more is 10 than 2?
Five times. 500%.
The banks were borrowing OPM at one,
and they were earning five.
They were making 500%.
I was borrowing at a net cost of two and earning 10.
I was making 500%.
The banks were happy, I was happy.
Everybody else in America was like, "What's going on here?"
Is this making sense?
So I want to make sure
that you don't just borrow and over leverage.
You want to use leverage,
which is the ability to own and control assets
with very little or none of your money tied up
or at risk in that asset.
The thing that I disagree with, with Dave Ramsey,
he says, "Keep paying extra principle payments
and send extra money
and huge down payments against your house."
And now all that money's trapped in the house.
You are giving up liquidity and safety.
I keep that separated over
in this pocket compounding tax free.
This pocket my assets are compounding tax free.
This is the liability, simple interest tax deductible.
Do the math.
If you were to take the differential
between a 15-year mortgage payment, okay,
which might be this,
and a 30-year advertised mortgage payment,
which would be less, take that differential,
plus the tax savings you will achieve
during the first 15 years of a 30-year mortgage.
Okay, don't spend it.
Have a system.
I can show you how to calculate this
to set aside that difference into this pocket.
And I would recommend a max funded
indexed universal life structured correctly
so that you can earn a net of 9%
like I have for the last 30 plus years.
And so you put it over here compounding at 9%,
and over here you're paying a net,
if you're borrowing at four and a half,
a net of three.
I'm making 300%.
What's gonna happen is you take that differential,
and you'll have enough money in this pocket
in your insurance contract
to totally pay off the 30-year mortgage
in 12 and a half years with the same money
that advisors like Dave Ramsey are telling you
to take out a 15-year mortgage
to get your home paid off in 15 years.
I can get out of debt two and a half years faster,
but you have to be disciplined.
I have actually heard him tell other people,
say, "Well yeah, those numbers don't lie.
But most people aren't disciplined
to set aside that difference."
That's true.
And so if the only way that you can get out of debt
is to have the mortgage company take it away from you,
maybe that's the best way to go.
If you're disciplined and you can set it aside,
you can get out of debt faster.
But you start thinking about it,
once I have enough money
to take the money out of this pocket
and pay off all the liability in this pocket,
I can be out of debt if I want anytime.
But if I'm earning 300% or 500% more than the cost of it,
you wouldn't believe how many clients I have
that are multimillionaires,
and they have mortgages on their properties to the hilt.
And they always finance their things
because they can make more than using OPM.
So why are these mega wealthy people
who could write out a check for cash,
why do they have all of these loans and liabilities?
'Cause they understand how money works
and they understand compound interest tax free
versus simple interest tax deductible,
which is maybe 1/3rd what they're earning over here.
Is this making some sense?
So that's why I like to become my own banker.
Hopefully this has given you some insights.
Again, my objective here is not to throw rocks
at Dave Ramsey.
He helps a lot of people get out of debt
that otherwise wouldn't do it.
But there are a lot of people, once they do that,
then they come and go, "Isn't there a higher way to go?"
(Doug laughs)
This is not what I notice wealthy people do.
And so this is just an insight that I wanted to create
on this educational episode to give you food for thought.
If your goal is to get out of debt,
I'd recommend you stay liquid,
keep your money safe in case that real estate
or whatever goes down in value, the stock market,
and that you accumulate your money tax free.
You ought to do that in a property structured,
max funded insurance contract.
And I know Dave Ramsey and his team say,
"I've never seen an insurance policy do that."
Well, they haven't seen one structured correctly
because I have averaged 9.62%
on my indexed universal life policies
ever since actually 1980
when indexed universal life wasn't around until 1997.
Since 1997, I've averaged 11.17 and netted 10.07
by using indexed universal life and rebalancing.
Unfortunately, a lot of advisors do not understand
how to structure one correctly.
So if this is resonating with you,
and you want to learn more,
I wanna gift you a copy of my 11th book.
It's been flying off of the warehouse shelves.
It's called "The LASER Fund."
This stands for Liquid Asset Safely Earning Returns.
And so you simply go to laserfund.com
or click on the link below.
You contribute a nominal amount
towards the shipping and handling.
I'll cover the rest of that cost and I'll pay for the book.
I'll fire out a hard copy to you priority mail.
There's options there to listen and learn, watch and learn.
You can even check out some
of the educational webinars that we teach
and you can even set up an appointment
to talk to a specialist with no obligation
to see how these strategies
may help you achieve your financial goals.
But I would recommend that maybe the general advice
for the masses is maybe not the best way to go.
It may be a good way to go, but not the best way to go.
And I've always been one that likes
to implement the best strategies.