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BB&T Corporation Message Board

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  • inlet_boater inlet_boater Jan 24, 2009 1:42 PM Flag

    What if people refuse to take out loans?

    Good for him. Let him tilt at windmills. Doesn't mean his advice is applicable to the average consumer. And it is stupid in some cases (read on).

    I agree with the idea of being debt free. And I am. Most people aren't. many will never be debt free. Mr Ramsey can rant on his radio program all he wants, there will always be people who take on debt (as I did to buy a home in the past).

    Mr Ramsey also ignores the difference between good debt and bad debt. If I want to buy an investment then debt can be "good". Debt to leverage a sound investment allows you to multiply your earnings rate. Say you buy a condo for rental purposes and put 20% down. Now suppose it only appreciates 2%. If you had paid 100% - your gains is 2%. But since you leveraged your money 5:1 your return on your investment is 10%.

    Now let's futher assume this property costs $100,000. You invest $20,000 and get a 10% return ($2,000 or 2% of $100,000). Now if you could have paid cash you have $80,000 left to invest in CDs - let's say at 4% (another $3,200). If you had paid cash for the Condo you still only get $2,00o increase.

    We could expand on this example and look at rental income, tax writeoffs, etc. The bottom line will still be that this is not "bad" debt.

    Ramsey's advice is simplistic and not always the best use of capital.

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