The Ramsey Show - App - DAVE RANT: Don't Rationalize Buying a House You Can't Afford! (Hour 2)

Episode Date: July 3, 2020

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🎵 Live from the headquarters of Ramsey Solutions, broadcasting from the Dollar Car Rental Studios, it's the Dave Ramsey Show, where debt is dumb, cash is king, and the paid off home mortgage has taken the place of the BMW as the status of choice. I am Dave Ramsey, your host. Thank you for joining us. Open phones at 888-825-5225. That's 888-825-5225. Joe starts off this hour in Philadelphia. Hi, Joe. Welcome

to the Dave Ramsey Show. Hey, Dave. What's up? Not much. I have a bit of a dilemma. I'm currently working a full-time job. It's a pretty easy job. It's for a local government. But I had this landscape business, which I'm really passionate about, that I've been working on the side since I was 16. And I'm just trying to figure out when I should jump over to the landscape business as far as when that good time is. Yeah, when you can do it without damaging your family, meaning you've grown the landscape business to where the jump from the dock to the boat is doable.

So what do you make in the landscape business? Net profit taxable no as far as this year i'm on track to make about 44 928 dollars okay profit um is that profit or gross gross okay what's the profit okay so profits what you get to eat with. Yeah. After expenses, I'm on track for about $31,600. Phenomenal. Well done. Yeah. Okay.

All my equipment's paid off. Good. So what do you make at your day job? Before taxes, I make about $43,680. Okay. All all right and after taxes on 31 yeah how used to how used to uh 70 000 income has your family gotten can you make it on 40 i'm single oh okay um can you make it on 40 well yeah i can make it on 40 my expenses are little to nothing and i'm about to complete baby step three next week okay all right well let's get yeah let's get baby step three completed for sure and um and you know you've got to be managing this business very tightly but basically

if you don't do any better at all you take a pay cut from 43 to 32. Well, actually from 70-something. You've been making some bank, right? Right, but I had payments. Okay, and they're gone now. Yeah. So, anyway, if you can afford to live on $40,000, I think you can increase your income by $8,000 pretty safely when you're full-time, don't you? Oh, I agree.

Or probably more, but I'm just saying try to be conservative. I just don't want you to lose, you know, to get, you know, not pay your rent and get thrown in the street or something like that because we did this deal. But it sounds like you've gotten rid of the debt. You've got your emergency fund in place. You've got yourself where you can live on what the landscape business creates. You're very close. I think you can do it fairly quickly.

If you wanted to wait until next spring when everything takes off again and your income shoots back up again then, right? Well, yeah, but here's the problem I'm running into is I have more work in the landscape business than I can physically do in a week working my full-time job. Already? Yeah. Okay. So you want to quit now?

I want to quit today if possible. Okay. I don't know why you couldn't. You've just got to run your budget out and say, can I eat on, you know, $2,600 a month? Because that's what you're working with. Yeah, I mean, i can definitely do that i've done less than that now for a year while i was paying off debt so are you doing uh anything during the winter to create income with the landscape business uh i wasn't doing much i

always fell back on my full-time job but i do work part-time um during snow events with other landscapers. Okay, so you're going to get some snow equipment, and that's going to be a big push this winter. You've got to diversify this, and you're going to pay cash for it. Yes, I am. Okay, because here's the thing. If you have zero income in December, but you've set your budget up to operate on 32, and you spent all your money this summer uh this is a squirrel

that's going to go the nest there's not going to be nuts there you're going to be hungry yeah right so you got to put some you know you got to prepare for winter uh your income is going to drop and you're going to be adding new lines of business you're going to diversify your offerings which is very bright to do um and i think you're, yes, I think you quit, but you've got to prepare for winter, and you've got to manage the fact that you have a seasonal income. Okay. If you do that, and you live on less than you're bringing in, and you commit to doing that, then I think you quit today.

Okay. Now, let me add one more thing. I'll throw in one more thing okay i really want you to think about how you're gonna increase your income by double okay yep i mean that yeah i just shocked it didn't it you feel it okay so what's that mean it means we're gonna hire some people it means we're gonna think differently about equipment You don't have to do it this year, but let's go ahead and go on an adventure here. I don't want you to just own your job. I want you to own a business.

Right. And when you are the sole producer, you own your job. So we need someone that is producing more than just us, and then you start to own a business. That's why I was forcing you to think that way. Man, you're great. You're going to do phenomenal. Way to go, man. Congratulations.

Jake is in Vancouver, Washington. Hi, Jake. How are you? Hey, Dave. I'm good, man. Thanks for taking my call. My pleasure. How can I help?

Well, my question was, well, actually, let me give a little back story. Last November, my wife and I bought the house we'd been renting from her parents, and they gave us a crazy good deal on it. They sold it to us for $100,000. The house was appraised for $280,000. However, being a rental, it's been pretty much neglected for the last 20 years. So we took out $195,000. $50,000 of that $1,000, or $55,000 of that $1,000, $195,000, $50,000, or $55,000 of that $195,000,

paid off our student loans and combined student loans and credit card debt. So then we were debt-free on that aspect. And then the other $40,000 went onto a roof, a kitchen, and, you know, remodeled the living room, dining room area. So my question is to you, well, the other thing was we're on a 30-year mortgage, and I know that's not a good plan to be on, and we definitely want to be on a 15. So I guess my question is to you, would it be a better idea to, when we refinance next year to a 15, we wanted to take out a little bit more money to either A, by a little bit more

I mean $30,000. We want to take out $30,000 more to invest in siding, windows, and a bathroom, or we take that $30,000 and pay off my truck, and then that way our only monthly bill... You called a show where we teach people to

stop borrowing money, not keep borrowing money. Fair enough, yeah. Yeah. So, no. No to both? No to all of that. You need to pay off your truck.

What about refinancing to a 15? No need to. You've got a good interest rate. Just pay it like it's a 15. It'll pay off in 15. But you don't need to keep cashing out of this thing. You've got a good deal on it. Now you're going to borrow it up to your eyeballs just for siding.

Save up and pay for your siding. Get your truck paid off or sell it. No, we're not going to borrow. By the way, you didn't pay off your student loan. You moved your student loan onto your home. That was really dumb. This is the Dave Ramsey Show. show. Folks, I love telling you about well-made, well-thought-out products. Today, I'm talking about Grip6 belts. I don't know about you, but I'm not a fan of traditional belts.

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Grip 6 is determined to help build and modernize American manufacturing. To learn more and get this month's Dave Ramsey special, visit Grip6.com. That's Grip6.com. Okay, I've had a couple of these calls in the last little while, so I've got to stop and address this for a second. Dave, the rents in our area are so high, so much higher, that I can buy a house so much cheaper a month. Not true. You're not comparing apples to apples. At least over a period of time, it cannot be true economically.

And let me walk you through why. Because it's a basic concept. But, you know, again, this is a thing where we get scope creep, a thing where we get justifying, rationalizing buying a house when you're not ready to buy a house or buying a house you can't afford. Or buying a house in a situation where you shouldn't. I love home ownership. I always believe long-term owning a home is one of the best plans you can have long-term. But you need to do it in a wise way so the home is a blessing and not a curse.

And this stupidity that's out there in the culture, including in some of the wonky think tanks, it's like, oh, home ownership is down. Americans are, you know, the wealth inequality gap is widening. It's difficult to buy a home. Yeah, that's all true. But broke people, when they buy a home, aren't blessed. It makes them broker. That's why they call them mortgage brokers.

And if a whole bunch of people buy a house at one time, you could bundle it and sell it on a hedge fund and later on as a regular mortgage block and actually crashed the whole economy back to 2008. Does anybody remember? So it's not a good policy decision, not a good macroeconomic decision to force people into buying homes or to encourage people to buy homes when they are broke. Now, once you're ready to buy a home, though, and you're looking at rents and you say rents are you know fifteen hundred dollars a month but i can buy this house for eight hundred dollars a month that is just not true long term and here's why it could be true for a moment in a boom town where something's going on like they struck oil, okay?

I mean, you get in one of these boomtowns, you could have that happen. But eventually, a supply-demand curve in economics will take effect. And here's why. Landlords want to have renters. And when there is an abundance of renters willing to pay ridiculous prices, what they do is they start building rental property or buying property and turning it into rental property. And so if there's a house on the market on a street,

and an individual can buy that house and it's $800 a month, or an investor can buy that house and it's $800 a month, and he can rent it for $15, and there's an abundance of renters out there. Is the reason the price has driven up? There's a shortage versus the demand. Anytime demand is higher than supply, prices go up. Okay, when there's a shortage on something, that's when prices go up, in other words. Okay, but what happens is the shortage corrects itself very quickly because

those of us that are investors we want to tap into this hot rental market and so we go buy a bunch of property and turn it into rental property or build a bunch of property and turn it into rental property which raises the supply back up thus the shortage goes goes away. So over time, rents are not going to be double prices of a house price, of a monthly payment on a house, because investors that are willing to borrow money or willing to pay cash like I am will buy enough rental property to take advantage of the great rates of return that an overpriced rental market will do, and it will cause the rental to come down or the value of the houses to go up.

And so rent always approximates slightly above payments. It always does over time. And so when you call me up and say, oh, I can buy 50% of what I can rent, no, you can't. You're not comparing apples to apples in the neighborhoods. If you can buy, you know, because investors would have already gobbled that house up and doubled their money that's the point and that does away with the shortage which causes the economics to balance out now again there might be a six month period of time where that is not true but long term in missouri long term in bo-term in Abilene, that's what happens.

If there is a bit of a jump for one reason or another, very quickly it will even out, and most of the time it's already pretty even. Rent is going to be slightly more than payments on average because investors require renters to pay enough rent so they can pay their payment or so they can get a rate of return on the cash they have tied up like in my case i'm not going to tie up money at four percent return in a piece of rental property i got to get more rent out of it than that because i can make more than that on my money doing something else. And so that's going to drive rental rates.

That's what we're talking about here. And so these are always going to approximate each other. Now, if you find a house payment slightly less than rental, that would be normal. And it is not cheaper in that case. So let's say you have a fifteen hundred dollar rental rate and you have a twelve hundred dollar payment now that would probably be fairly accurate rent is always going to be a little bit more than payment but you're not paying when you're renting to put roofs on and fix heating and air and fix broken hot water heaters. You're not paying the increases in insurance and increases in property taxes that come along

until I renew your lease, and then I'm going to bump up enough to cover that. But that's the difference. Home ownership in a given year might be more expensive for you as a consumer than renting, depending on the repair bill that you end up having. And so there is no economic, no mathematical excuse for buying versus renting until you're ready on the short term. On the long term, owning is always better than renting. So you want to get yourself in a position that you own as you build wealth and as you

head towards retirement. That's going to assist you with a paid-for home in building wealth. But it does not assist you when you buy a home and you rationalize your little butt off just because you got house fever and your little friends are out there buying houses and your little family members are whining at you over thanksgiving dinner about they bought a house and you hadn't bought a house yet why and you bought a house because i'm freaking broke and i'm not going to be broke soon because i'm on a budget i'm going to get my debt paid off i'm going to get my emergency fund in place so when i buy a house with a good down payment on no more than a

15 year fixed rate on no more than a fourth of my take-home pay as a payment then i'm going to buy a house and the house is going to be a blessing not a curse i want you to own your house i don't want to own you and too many people rationalize their butts off they got student loans around so long they think they're a pet they got two car fleeces sitting in the driveway they got master card they've discovered bondage and american distress all the money comes in and all the money comes out and they've strapped themselves to a house on a 30-year adjustable rate mortgage and it's some of the lowest interest rates in my lifetime, and I'm almost 60 years old. If it's the lowest interest rates in 60 years,

where the flip do you think it's going to adjust? Up, dummy. Up. Not down. I mean, where are you going from 2.9 1.9 i mean really is this your set of assumptions on which you justified buying an adjustable rate mortgage that's dumber than a grub worm in a box of rocks that's stupid you're You're gonna get killed. Don't do that. But we gotta have that one with a jacuzzi and a skylight and I don't feel safe three streets over. And we come up with all

this crap that we use to justify and all this peer pressure, the most expensive purchase you're ever gonna make for most people, which is their house. Don't do that. Do it right so that your home becomes a safe haven and not a point of stress on your finances, on your marriage, and in your belly. This is the Dave Ramsey Show. Thank you. We'll be right back. Seth and Donna are with us in Sacramento, California. I see on my screen you're debt-free.

Congratulations. Thanks, Dave. We're real excited about it. Way to go. How much have you paid off? We paid off $220,000. Wow. How long did that take?

That took us about four and a half years. Good for you. And your range of income during that time? I bounced around a little bit from 90 to 60 and now 150. Wow. Cool. What do you guys do for a living? I'm a programmer and my wife is a nurse and that explains the bump.

Okay. Very good. I love it. So what kind of debt was this $220,000? It was $40,000. Let's see, we had a car loan, some credit cards, and a laptop, and the rest was the house. You paid off your house! We did.

We're weird people. You are officially weird people. You're in Sacramento, California with a paid-for house. That makes you double weird. Way to go. What's this house worth? It's worth probably about $480,000. Oh, I love it.

Way to go, you two. How old are you guys? I'm 64, and my wife is 54. So as you're facing towards retirement, a paid-for house, that's got to feel awesome. It feels wonderful. You know, that was probably my biggest fear about retirement was the mortgage. Yeah, that's very real. That's very real. And you've got a half a million dollar house paid for heading into retirement. Ding, ding. Well done. So what happened to you two four and a half years ago that lit the fuse?

Because something caused you to blow up. I was getting ready to go to nursing school and kind of freaking a little bit about, you know, doing the paycheck to paycheck-paycheck thing, and we had saved up money, and just not having a lot of direction, and we saw one of your columns in a local newspaper, and I bought the book and handed it to Seth. I said, let's read this. Yeah, so she hands me the book, and so I've got it on my lap, and I'm thinking, I'm 59 years old. How many books just like this one have I read?

And it ended up not, you know, working out. So I start reading it, and I go, well, that's good, but what about? And then I turn the page, and I go, oh, okay, well, I read a couple more pages, and I go, well, that's good, but what about this? And I turn the page, and you covered that. And so I get to the end of the book, but I ran out of what about. I solved all your objections, and I sold you. I love it. So I turn to Donna, and I go, I am so ready to start doing this.

I love it. Very cool. So a column in the newspaper leads to the book, and that convinces you, shows you the program, makes you believe you can do it, and game on. Yeah, absolutely. Cool. So what do you tell people the key to getting out of debt is? It's the budget. It's always the budget.

You've got to have that budget. The first few months are painful. I can remember friends coming by and saying, hey, we're going to go do this. You want to join us? And going to look in the envelope and going, nope, sorry. I need more notice so I can budget for that. But in communication. Very good.

That was one thing we didn't expect is how much stronger it made our marriage. Absolutely. Yeah, it was a real, real plus. Yeah, you had a common goal, and you were sacrificing deeply. What was the biggest sacrifice you gave to be able to get this goal? Because you have a paid-for house. Well, Dave, I've got to say the wine i'm drinking now is better than what i was drinking when we were paying off bills the downgrade in wine from the good stuff to the science project

oh that's good i like that i thought she was gonna say the cheap hotels we stayed at. Oh, yeah, that'll do it, too. Yeah, if you live like no one else, later you can live and give like no one else. Well done, you guys. Who were your biggest cheerleaders? You know, we kept it pretty quiet. So, you know, I guess the – and I'm not sure who I'd say our business cheerleaders were. Our sons knew we were doing it, and, you know, they're out of the house, and, you know, they were always excited when we told them we'd paid something off.

And we did do a little post on Facebook when it was paid off, and everyone was really excited for us. That's good. You know, it was kind of a private thing. Yeah, yeah, well. So really all people saw was the sacrifice, and you kind of got the eye roll from that, right? Yeah. Yeah. But now you're sitting here with a paid-for house.

How do you like me now? Exactly. I love it. I'm so proud of you guys. Thanks. Very well done. Was it worth it? Oh, yes.

Absolutely. You take your shoes off, walk through the backyard you had the grass feel different um you know we've been in a drought for a few years so it's not as good as we were hoping but okay well but it is yours it's your dirt now yes it's all ours now for better for worse it's all ours i hear you well done you worse, it's all ours. I hear you. Well done, you guys. We've got a copy of Chris Hogan's Everyday Millionaires for you because you will be that if you're not already. You've got a half million dollars towards it right now, plus whatever's in your 401Ks and IRAs.

So you're on your way, kiddo. Well done, well done, well done. Congratulations. Seth and Donna, Sacramento, California, $220,000 paid off in four and a half years. That includes their house. I love it. Count it down. Let's hear a debt-free scream.

Three, two, one. We're debt-free! That's how you do it right there, man. I love it! Well done, well done, well done. Hey, man, they're free. You know what it feels like to have no house payment? Can you even breathe that in?

I mean, some of you have got debt coming out of your ears. You just started listening. You have been listening but you weren't hearing and you haven't done anything yet. Can you think about what it would be like to not have a payment in the world? No house payment.

No car payment. No car payment. No MasterCard payment. Ugly old woman Sally Mae has been kicked out of the house. No student loan payment. No payments. no payments

you know what you would have money because you'd have no payments think about it, folks. If you just breathe that in for a second, you can feel it. That is the shortest distance between where you are and wealthy. Your most powerful wealth-building tool is your income.

When you don't give it to other people, and instead are able to invest it, instead of handing it to Ford Motor, Chrysler Motor, Lexus Motor, whatever motor, General Motor. What is it? What motor is it you're going to hand it to? Instead of handing it to Countrywide, instead of handing it to God help you, Bank of America, instead of handing it to Chase, instead of handing it to Citibank, what's in your wallet? Money, because I don't have you in my wallet.

Yeah, yeah, baby. This is how it works. If you don't have any payments, you're in a position to be unbelievably, outrageously generous. If you don't have any payments, you're in a position to build wealth and completely change your family tree. That's where Seth and Donna are.

Way to go, guys. We're proud of you guys. You're heroes. This is the Dave Ramsey Show. We'll be right back. Our question of the day comes from Blinds.com. They have a 100% satisfaction guarantee. It means even if you mismeasure or you pick the wrong color, they will remake your window blinds for free. You get free samples, free shipping, and new promos every month.

They'll save you even more. Always use the promo code RAMSY. It's magical. All right. Jeanette is in California. They've got a couple of friends that were advised by financial planners not to open a college savings account like a 529 for the children so that it won't count against them when they apply for financial aid and assistance. So if you have a financial planner that tells you not to get a job because that way you can get welfare,

what kind of moron is this? They were instead told to put their money into their own retirement. My understanding is that when you apply for financial aid, they look at the assets of not only the child, but also the parents. Please shed some light on this. Yeah, you've got some financial planners that are morons. You don't tell people not to save money so they can act like they're poor to get financial aid.

That's ridiculous. Save money and send your kid to school. Why is that a hard formula? Why does everyone want some kind of trick or shortcut? There's not. I'm not going to pose like I'm broke fraudulently when I'm not broke in order for my kid to get financial aid. Good Lord. That's ridiculous.

Hope I wasn't unclear. Edith is with us in Houston, Texas. Hi, Edith. Welcome to the Dave Ramsey Show. Hi, Dave. Thanks for taking my call. Sure. What's up? So my question is, last March,

my husband and I purchased a tractor, and we paid $26,000 for it. And of that, $2,000 was for insurance, and it was insurance straight through Kubota. So we are new listeners, and we're down to our last debt, but we're not sure what to do because when I tried to make the last payment, they told me that I'd be kind of downgrading on my insurance and that I'd have to get either a second policy through them or through another provider. That's right. What kind of insurance are we talking about? Just tractor insurance. So to replace it or to fix it, any repairs, anything that happens to it.

Oh, you bought an extended warranty. They didn't say it was a warranty. They said it was insurance. Well, that's repairs. It's not if the tractor gets stolen. You have insurance through your homeowners or your farm operation for the tractor gets stolen, right? So the tractor is not at my house. It's at my mom's property. That doesn't matter.

You bought insurance from your insurance agent on the tractor being stolen, didn't you? Yes, but my insurance will be voided if I pay off the loan early is what they're telling me. One more time. Did you call your insurance agent and buy insurance on your tractor in case it gets stolen? No, not through Allstate. No, I bought it through the tractor company. Okay. Cancel the crap with Kubota and pay the people at Kubota off.

They've combined some kind of bogus extended warranty with some kind of coverage, and I'm not sure you even have theft insurance on your tractor. Well, they said I do. They said that the only difference would be that if anything happens to it, I lose out on a replacement tractor. Okay. That they would be able to replace it. They are awfully desperate for you to keep this insurance and stay in debt to them, aren't they?

Yes, and that's why it sounds so weird. Yeah, you need to get on. I mean, do you guys have a farm operation, or is this like a gentleman farmer tractor? No, it's just for my mom's property. I was helping her clear the property. Yeah, okay. So it's a gentleman farmer operation at most. We're not really doing this as a business.

No, not at all. Go online at DaveRamsey.com and click on insurance and price your car and your homeowners with an independent insurance agent and price tractor insurance and pay Kubota off and tell them to jump in the creek. Okay. Because you're getting ripped off. Okay. Okay. You got ripped off at the purchase. You paid way too much for this insurance because they rolled it and they combined it together with basically what is an extended warranty on the tractor.

The tractor already had some warranties. And if it's a brand-new Kubota tractor, they actually make a very good tractor. And so if it's a brand-new Kubota tractor, you probably had almost no trouble with it and likely won't. They're very reliable. So, no, you do not buy insurance from the manufacturer on your tractor. And you definitely don't stay in debt in order to keep the insurance. Cancel the whole thing. Get debt-free as soon as you get insurance on your tractor for theft.

And you self-insure through the repairs that the standard Kubota warranty does not cover, which is not a bad warranty either if you bought a brand-new tractor, which, by the way, you should not have done for a gentleman farmer operation. Probably shouldn't have done it, period, but you should have bought a tractor for about half that much money that would have done the exact job used and it wouldn't have gone down in value so quickly so side issue but you know we're there now so pay the thing off get clear get your basic insurance in place with a good property and casualty agent who can shop among several different companies

they're called an insurance broker and they'll put good insurance on your tractor so that if it gets stolen or there's a fire and it burned or something like that, just like your car, just like buying car insurance. Think about it this way. If you bought a new car from Ford and they covered your car and it cost about five times more for the insurance than you could have bought the insurance from an insurance broker for.

But it includes all this extra stuff that it covers in case the car breaks down. What did you buy? You bought an extended warranty bundled with an expensive car insurance policy from Ford. That's what you bought. And that's exactly what we're talking about here. That's what Kubota did. I didn't even know they did that, but that's what they've done here anytime these insurance companies start bundling stuff together you can pretty well figure out they're getting ready to screw you

there's one exception to that and that is if you buy your car and your homeowner's insurance at the same place oftentimes you can get a discount on that but other than that if they start trying to sell you um long-term care insurance for a nursing home, but it includes life insurance, eh, eh, eh, eh, danger, Will Robbins. You're getting ready to get screwed, okay? Every time they put stuff together in the insurance world, it is for their benefit and their profit. And these companies that sell extended warranties on their products make more money on the extended warranty than they do margin on the product a lot of times. So that's why when you can't go in Best Buy,

you can't buy a pencil at Best Buy without getting an extended warranty offer on it. I'm amazed at what you can get an extended warranty on. I mean, a Bic lighter, they will give you an extended warranty on it. It's ridiculous. It's crazy. But they figured out where their money is. Best Buy doesn't have much margin in those TVs. It's really a really good buy on the TV.

It is a Best Buy. They're not kidding. I mean, it's a really fair price when you go in there and buy the TV. But try getting out of there without borrowing money or buying an extended warranty. You look down, there's a salesman hanging on your leg while you're trying to get in the car it's ridiculous they wear you out trying to sell you a credit card or extended warranty you can't get in and out of victoria's secret with underwear without somebody trying to sell you a credit card because they pay them more for selling credit cards than they do selling underwear it It's the same thing. They know where their money is made.

And you just got to look. If they're giving you this much grief about it, it's because they make money on it. It's that simple. They wear your butt out. You know, you just, but they make a ton on this stuff. The credit card, I mean, get 10% off at Macy's. Oh, my God, 10% off so you can make 5,000% on me for the rest of your life in a chokehold.

All because I got a pair of socks at your place. Oh, my gosh. But that's exactly. They figured out where their money is. They make more money on extended warranties and on car offering credit on this stuff than they do. And now insurance will add to the list with the old Kubota tractor here. Wow. Who knew?

But that's the way it is. Same thing is true with a car. They've got an extended warranty. They'll wear your butt out, and they make a ton on it, especially on a used car extended warranty. Stay away. Warning. This is the Daveave ramsey show hey guys it's george camel host of the dave ramsey show video channel you can now listen

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