'More debt is more risk': Graham Stephan confronts Dave Ramsey on the merits of 'good debt' — can it be used as a tool to help investors build wealth?

Good debt vs. bad debt

Ramsey and Stephan have similar views on what they consider to be “bad debt” — or debt used for consumption.

Ramsey once said on his own show, “The Ramsey Show,” “people get credit cards for mainly one reason: so they can buy crap they don’t have money to buy.” Similarly, Stephan wrote a Substack article stating, “If holding on to debt does not make you more money, then avoid it.”

However, it’s “good debt” where these two finance experts disagree. Stephan believes money borrowed to invest in appreciating assets could be justified under some circumstances.

“If buying something does not make you more money, buy it outright. But if it does make you money, then finance it sometimes,” he wrote.

In 2022, Stephan claimed to have $4 million in debt, much of which was in the form of mortgages on his rental properties or his personal residence. But he wasn’t bothered by it at all. Mortgages are considered good debt because not only does a home provide shelter but its value tends to appreciate over time. Same with student loan debt, as it can be considered an investment in one’s future income prospects.

Ramsey, however, tries to avoid debt altogether. On “The Iced Coffee Hour,” he said using good debt is “a more effective way to grow fast if that’s your goal, but what people leave out of the discussion is that you’ve increased your risk exponentially. More debt is more risk, period.”

Ramsey is well-aware of this risk because of his bankruptcy in the late 1980s. At 26 years old, he says he was already an experienced real estate investor with several projects under his belt, but much of his empire was fueled by debt.

“I had never lost money on a flip,” he told Stephan. “I was not behind on the loans, they just called them. They had the ability to do that because it was commercial paper, it wasn’t traditional mortgages.”

Commercial property loans often have loan-to-value requirements, credit requirements and terms that are less favorable than traditional residential mortgages. Sometimes, these lending arrangements can have call options that allow the lender to revoke the mortgage.

Since recovering from the bankruptcy, Ramsey has continued to invest in real estate. However, he’s said multiple times on his show he now buys property outright and encourages listeners to do the same to avoid debt if they’re able.

But he also understands that many don’t have that much cash on hand, and when it comes to his famed “baby steps” to help get rid of debt and build wealth, paying off mortgage debt if left until the end.

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Calculated risks

Although borrowing money isn’t Ramsey’s style, he agrees that leverage could be a powerful tool for someone with the right risk appetite.

“I’ve got a degree in finance,” Ramsey said. “I know how to run an Internal Rate of Return (IRR) [calculation] and I know what the IRR looks like with debt and without debt. It’s not nearly as good unless you’re leveraged.”

Ordinary investors who have the right risk appetite, discipline and calculations could use some good debt to fuel their investments. But for risk-averse investors like Ramsey, a slower debt-free approach might be warranted.