On a recent episode of The Ramsey Show, Dave Ramsey responded to a caller, Daniel from Houston, who asked if his aggressive investment plan was too extreme.
Daniel and his wife, both recent college graduates, earn a household income of $200,000 with a net salary of $145,000 after deductions. They live in an apartment and have no debt, a six-month emergency fund and the goal of Daniel’s wife becoming a stay-at-home mom. Daniel asked Dave Ramsey if they went overboard by investing 60% of their take-home pay while living in an apartment.
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Ramsey’s advice was rooted in the long-term wealth-building habits he has studied over the years. While Daniel’s dedication to budgeting and saving is admirable, Ramsey pointed out that the plan has a critical flaw: housing. According to Ramsey, living in an apartment means having to increase the rent year after year, which could erode the benefits of investing so heavily.
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Ramsey explained that very few of the millionaires he studied followed a path of renting for the long term while investing aggressively. Instead, most bought homes and focused on paying them off. By owning a home, Daniel and his wife were able to stabilize and ultimately eliminate their largest budget item – housing. “Your biggest item is out of your control, and it’s rising every year,” Ramsey warned, underscoring the need to move away from renting as quickly as possible.
The logic behind Ramsey’s advice is simple: homeownership comes with fixed housing costs, while rents will continually rise. Over a fifteen-year period, paying off a house can lead to a significant increase in net worth, Ramsey explains, with much of that net worth tied to both the house and the couple’s retirement accounts.
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Ken Coleman, who co-hosted the show with Ramsey, added a different perspective. He emphasized that Daniel might enjoy living frugally in an apartment, but his wife might not feel the same way in the long run.
“She wants a house,” Coleman said, urging Daniel to think ahead. Ramsey echoed this, pointing out that while Daniel’s intensive savings plan was admirable, it needed to be aligned with a broader, more balanced approach to wealth building, including home ownership.
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Ramsey’s general advice to Daniel was to scale back the extreme savings strategy. Instead of investing 60% of their income, Ramsey suggested sticking to a 15% retirement savings goal while working toward owning a home. He also advised the couple to stop funding their HSA (health savings account) for the time being and focus on building a down payment on a house. Ramsey noted that Daniel would likely see significant appreciation in his home’s value over the years, which would add to long-term wealth.
Other experts also say that buying a home is a smart investment strategy – not only for people looking to strengthen their real estate portfolio, but also for the average homeowner.
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“It’s hard to argue against the long-term financial value of homeownership,” Martin Orefice, CEO of Rent To Own Labs, told Bankrate. “Real estate tends to appreciate in value over the long term. While there are economic boom and bust cycles that can make real estate a losing investment in the short term, ten years or more from now, buyers will usually come out ahead.”
Aggressive investing can be a good thing, but many financial experts say owning a home is a good step toward building wealth. Renting may offer short-term flexibility, but the long-term financial benefit lies in stabilizing your housing costs by purchasing a home and eventually paying it off. By following a balanced plan of moderate investing and saving for a home, Daniel and his wife will be well-positioned for financial success.
If you’re unsure about your financial plan, consider speaking with a financial advisor to ensure your strategy aligns with your long-term goals.
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This article Living in an apartment and investing 60% – is it a smart plan? Dave Ramsey’s response to Houston Grads originally appeared on Benzinga.com
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