If you’re remotely interested in personal finance or real estate investing, chances are you’ve come across Dave Ramsey or Robert Kiyosaki.
While both have achieved the enormous financial success and offer their strategies to the wider public through books and other media, Ramsey and Kiyosaki outline very different paths to achieving wealth.
Both are both New York Times best-selling authors, so they’ve obviously made a wide impact on millions of readers and listening. However, which financial guru is right?
Before concluding, let’s discuss the basic financial principles that have guided their journey to success!
Dave Ramsey: Debt is Dumb and Cash is King!
If you’ve ever listened to Ramsey’s nationally syndicated radio show or read his best-seller The Total Money Makeover, you’re likely familiar with Ramsey’s view on debt.
If not, let’s just say Ramsey offers quite a counter-cultural perspective to how most Americans view debt! This is obviously one of the main aspects that sets him apart from Kiyosaki (as well as other well-known financial experts).
Everything outlined in Ramsey’s philosophy (i.e. the 7 Baby Steps) is built to 1) get people out of debt and 2) to STAY out of debt to build long-term wealth.
In the process, his students are able to learn to live below their means by getting on a budget, using the excess savings to pay down debt via the “Debt Snowball,” and eventually eliminate 100% of their non-mortgage obligations.
An overview of the 7 Baby Steps
The Baby Steps are meant to provide a simple, straightforward path to getting out of debt, staying out of debt, and building wealth. This path is so simple that it will certainly work for the masses (which is Ramsey’s main audience).
Baby Step #1: Save $1,000
In his first Baby Step, Ramsey instructs listeners to save $1,000 as a “starter emergency fund.” This certainly won’t protect you from big ticket expenses. However, the starter emergency fund will provide a little bit of a buffer for when “life happens.”
If you have a flat tire, minor medical expense, or other unplanned issues during the month, this $1,000 should help you cover the cost. Obviously, this will keep you from turning to high-interest credit cards or other debt to cover the expense.
After all, the first step to getting out of debt is to not take on any new debt!
Baby Step #2: Pay off ALL Debt except for the mortgage
No excuses! Ramsey instructs his followers to cut up the credit cards and eliminate all debt except for the house.
Car loans, student loans, credit card balances, medical debts, and any other consumer debt should be paid off from smallest to largest regardless of interest rate (i.e. the “Debt Snowball Method”).
While the math nerd in you may say to pay off the loan with the highest interest rate first, Ramsey believes that paying off smaller debts and checking them off the list provides a psychological win that keeps you focused on staying the course!
This is probably the most “controversial” aspect of Ramsey’s advice as outlined in The Total Money Makeover. While being “debt-free” certainly reduces risk, it may not be the most optimal way to generate the largest amount of wealth.
After all, people like Kiyosaki and other real estate investors rely heavily on “leverage” to amplify returns.
Sure, paying off high-interest debt is almost certainly optimal. Paying off a credit card charging 15%+ is a GUARANTEED return that is hard to beat. However, investors such as Kiyosaki use “good debt” to finance the purchase of assets that more than pay the monthly obligation. This is known as “interest rate arbitrage.”
Investors like Kiyosaki would argue the most optimal path is to borrow money at 3%-6%, earn 10%-12%+ and pocket the spread. For example, instead of paying down debt with interest rates less than 5%-6%, why not use that money to invest and earn a greater return?
Obviously, Ramsey would cringe at the thought of leverage and interest rate arbitrage and would say to always pay cash for investments since leverage adds risk!
This is probably the key difference in Ramsey’s philosophies versus other finance gurus.
Baby Step #3: Save 3-6 months of spending in an Emergency Fund
Once all consumer debt is eliminated, Ramsey believes in building a 3-6 month emergency fund.
By having a 3-6 month emergency fund, most unforeseen expenses will be covered and his students won’t have to resort to putting the bill on a credit card or taking out a loan.
Your emergency fund should be liquid and accessible.
Baby Step #4: Invest 15% of your gross income for retirement
In Baby Step #4, Ramsey instructs his listeners to invest 15% of their income in good mutual funds for retirement. He recommends “growth,” “growth and income,” “aggressive growth,” and “international” funds. He explains in The Total Money Makeover that an investor can expect to achieve annual returns of ~10%-12% annually using this strategy.
After all, Social Security is probably not enough to live the lifestyle you were used in in your earning years! By investing 15% of your gross income, your portfolio should be able to generate enough income to replace your salary.
This should be able to allow you to live the retirement you want – financially free and incredibly generous.
Baby Step #5: Save for College
If you have kids, it’s a great idea to begin socking away money for their higher education.
After all, student loans are one of the biggest debts that are crippling America’s youth today. By saving and investing for their future education, you can help them continue the debt-free lifestyle you’re working hard to obtain or keep.
Baby Step #6: Pay off the House
Imagine what it would be like having a paid for house. No more mortgage and no more payments at all.
In this Baby Step, Ramsey helps you achieve this goal of being completely debt-free by eliminating the mortgage! This should free up a ton of extra income given that housing expense is the largest line item in most people’s budget.
By eliminating your mortgage prior to retirement, you will have even more income to spend or give as you see fit.
Baby Step #7: Build Wealth and Give
After you’re 100% debt free, you have complete control of your most powerful wealth-building tool – your income!
By socking away this extra savings in mutual funds and index funds, you’ll be able to build substantial wealth to leave your children or causes that mean the most to you.
After becoming debt-free, you’ll have even more money to invest and give!
Dave Ramsey’s Financial Advice Summary
Ramsey offers a very conservative approach in his financial advice. It’s probably a lot like advice your grandmother would give – simple, straightforward, and almost fail proof.
Get on a budget, get out and stay out of debt, and invest for the future.
Sure, it’s not the most optimized approach. However, it’s the most easily implemented and has proven to have helped millions of people get out of debt.
By learning the details around his 7 Baby Steps and other advice as outlined in the The Total Money Makeover, you too can learn how to manage finances and win with money!
Robert Kiyosaki: Money equals freedom! The Rich view money differently than the poor!
Rich Dad, Poor Dad was published in 1997 and has sold over 32 million copies globally. If you aren’t one of those readers, you should be! The message has shaped millions of lives since it was first published more than two decades ago.
First, let’s establish that Kiyosaki’s book is quite a bit different than the personal finance lessons taught by Ramsey.
Instead of outlining steps to building wealth, Kiyosaki focuses on the tactics of how the “rich” spend money versus how the “poor” view finances.
He expands on this topic by comparing and contrasting how his father interacted with money versus how his friend’s father viewed money. This book summarizes the lessons learned.
The Tale of Two Dads: Rich Dad and Poor Dad
Kiyosaki’s father was a highly educated, Ph.D who worked in education. While they weren’t poor, his biological “Poor Dad” could never seem to get ahead.
Instead, they lived the “American Dream” nearly paycheck-to-paycheck. They relied on his father’s traditional employment to pay the bills. Over the decades of working, “Poor Dad” had not managed to accumulate any meaningful assets that produced cash flow and wealth.
By contrast, his best friend Mike’s dad hadn’t even graduated the 8th grade.
However, Mike’s dad (i.e. “Rich Dad”) had a fundamentally different view on money that Kiyosaki’s biological father. Instead of the traditional route of high school, college, and working for someone else, “Rich Dad” worked hard starting, building, and running businesses.
Through years of hard work, “Rich Dad” became a respected businessman in the community. He employed numerous people to work on his construction projects and stores.
“Rich Dad” was not educated in the traditional sense. However, “Rich Dad” possessed an immense “Financial IQ.” He surrounded himself with advisors and partners who were “smarter” than him in certain areas. With his team, he eventually became one of the wealthiest individuals in Hawaii.
Poor Dad, however, was traditionally “book smart” but lacked meaningful Financial IQ.
The Rich Don’t Work for Money
The first difference is the rich don’t work for money. They work to build assets that generate cash flow and work for them!
By contrast the poor enter a never-ending cycle of work, paying bills, sleeping, and repeating. This is called the “Rat Race.”
Have you ever felt like a hamster in the wheel? Little control of your destiny. Living to work for no real purpose and just trying to survive? This is the rat race. Most of us spend our lives working a job that we don’t enjoy just because we have to pay for our lifestyle expenses.
Because money lessons are taught at home, there’s a huge financial literacy gap in our society. As a result, we continue the cycle of producing low Financial IQ generations who can’t escape the rat race.
Our society says go to school and make good grades so that you can get a job with a good company that has benefits. Work your way up the corporate ladder and eventually you will be financially successful.
Rich Dad challenged the status quo
Rich Dad’s philosophy differed drastically from that of “Poor Dad” who encouraged Kiyosaki to follow the same societal pattern.
Mike’s dad (“Rich Dad”) explained, “Why work for a good company when you can simply own the business? Instead of working your way up the corporate ladder, simply own the ladder and make your own path.”
Owning and building a business will be difficult. However, all good things in life are challenging. Life pushing you around is life teaching you valuable lessons that can make you rich one day.
The poor work for money. However, the rich have money work for them!
The rich learn accounting, investing, understand markets, and learn the law.
They used the parameters established by the government to optimize their businesses and make the best strategic decisions. However, the poor do not invest the time necessary to learn these often mundane topics.
Instead, they’re content to earn a paycheck and spend their money on consumption.
Kiyosaki uses two key investments to build wealth
Kiyosaki explains that he personally invests in two types of asset classes to build his own wealth.
- Real Estate
- Small Capitalization Growth Stocks
In Chapter 5, Kiyosaki explains that real estate comprises the foundation of his investment portfolio.
Cash-flowing real estate provides income each month. He uses this cashflow to reinvest.
Differing from Ramsey who does not advise debt for any reason (other than a primary home mortgage), Kiyosaki uses leverage to amplify his returns. He borrows money at a lower percent and earns a spread. Essentially, Kiyosaki is able to have 100% control of an appreciating asset with relatively little of his own money in the property!
However, Kiyosaki explains that the stability offered by real estate does not necessarily provide monumental returns.
Instead, real estate provides reliable appreciation and monthly cash flow. This steady appreciation and consistent cash flow allows him to take greater risk elsewhere.
For accelerated returns, Kiyosaki invests in small-cap growth stocks.
These are more speculative investments. However, Kiyosaki is able to develop a system of identifying companies with higher return profiles than traditional investments. However, this comes with additional risk.
Once his money has been made in small-cap stocks, he shifts the profits into steady real estate investments. This reduces his overall risk thanks to the lower-risk nature of real estate. The rich are willing to take calculated risk to earn higher returns.
Poor Dad never wanted to assume any risk. There was never an investment opportunity that was “secure” enough. However, the problem with “secure investments” is they are too safe to make any money.
By implementing Kiyosaki’s strategy, he claims that $100,000 in passive income can be made in 5-10 years.
Ramsey’s opposition to debt and small capitalization stocks
Ramsey is a fierce advocate for real estate. However, Ramsey only advises real estate that is 1) within driving distance and 2) purchased without any debt.
By contrast, Kiyosaki view leverage as his friend to amplify returns.
Obviously, there are a few issues that arise from Ramsey’s principles. Firstly, real estate in your area may not be a great investment. If you live in a high cost of living area, the rents may not support the cost and cash flow. Instead, you could be coming out of pocket every month when capex, maintenance, repairs, and vacancies occur.
Secondly, it may take quite awhile for the average person to pay off all of their debt and then accumulate enough cash to purchase investment properties. You could spend 5+ years paying off debt and another 5+ years saving diligently to pay cash. All the while, property values are steadily climbing.
By contrast, Kiyosaki would recommend putting only a down payment to take control of the property before prices increase. By using the cash flow to pay down the loan and reinvest, you can build wealth that compounds over time. However, this certainly does come with added risk as the loan must be repaid – even if renters do not pay their rent on time!
Growth stocks!
Kiyosaki explains that he uses small capitalization growth stocks to generate the capital to invest in real estate. Small-cap growth stocks have the potential to skyrocket in a short amount of time. However, they also have the potential to plummet.
This means they’re often “volatile” and have a higher beta (risk).
Ramsey also only recommends mutual funds and index funds. This provides for diversification and allows investors to mimic overall market returns. He deems individual stocks too risky.
Conversely, Kiyosaki is willing to do the due diligence to ensure his investment is relatively secure. He can take the higher risk for higher reward because of his real estate portfolio.
Kiyosaki’s Financial Advice Summarized
Rich Dad Poor Dad is much more than a personal finance book.
Kiyosaki focuses on more than just practical personal finance tips and tricks. Instead, he looks at the psychology of money. Chiefly, how the “rich” view money versus how the “poor” spend their resources.
Rich and poor is not defined by educational attainment or “book smarts.” Financial acumen is determined by how money is spent.
The rich view money as a tool to “buy freedom.” By investing in real estate and stocks, they can generate income that frees them from the need to earn money. They use investments and assets to pay for liabilities. Instead of climbing the corporate ladder, they own the company.
By contrast, the poor are stuck in the “rat race” because they spend their money on liabilities and live paycheck to paycheck. They seek to “keep up with the Joneses” and have little control over their lives. Instead of learning accounting, investing, and the legal framework, they’re content to be told what to do. The poor do not take risk and won’t find investments that provide suitable returns to generate wealth.
By reading Rich Dad Poor Dad, you too can learn the principles and mindset that separates the rich and the poor!
So… Is Dave Ramsey’s Debt-Free Strategy or Kiyosaki’s use of Leverage Right for You?
This is certainly a personal opinion that is determined by you own preference to risk. There are millions of advocates who have been successful using BOTH strategies.
Generally, leverage will amplify the returns of the specific investment. In a rising market on a financially lucrative investment opportunity, leverage will greatly increase the overall returns. This would certainly allow investors to build wealth more quickly. However, in a declining market, leverage can leave you underwater on your investment. Further, debt can lead to personal bankruptcy.
After all, debt and leverage comes with increased risk. A missed payment by the tenant due to job loss can lead to loan default if there are little reserves. Leverage may increase returns, but it also increases risk and the potential stress in down markets!
YOU will have to determine how much you want leverage to play in your portfolio.
Investing debt-free may not generate the highest overall returns. It may be a much, much slower process that requires decades. However, investing from a debt-free financial position will certainly generate the highest cash flow possible. After all, there is no mortgage payment. This allows for everything generated to be re-invested.
Further, being debt-free greatly reduces risk and stress in life.
In the end, the determination of who is “right” will be determined by YOUR perspective and thoughts on debt.