Why Investing Is About More Than Just Math

Summary

Ramsey Everyday Millionaires: Why Investing Is About More Than Just Math

Release Date: January 13, 2025

In the January 13, 2025 episode of Ramsey Everyday Millionaires titled "Why Investing Is About More Than Just Math," the Ramsey Network delves into the intricate balance between mathematical investment calculations and the qualitative factors that influence successful wealth building. Hosted by Dave Ramsey alongside Ken Coleman, Rachel Cruze, George Kamel, Jade Warshaw, and Dr. John Delony, the episode provides listeners with insightful discussions on investment strategies, debt management, and the psychological aspects of financial decision-making.

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1. Introduction to the Episode

The episode opens with a brief sponsorship message from SmartVestor, setting the stage for a deep dive into investing, retirement planning, wealth building, and generous giving. The hosts emphasize the focus on how ordinary individuals have amassed extraordinary wealth by adopting disciplined financial practices.

Notable Quote:

A (00:04): "You're listening to Ramsey Everyday Millionaires, where we talk investing, retirement, building wealth, and outrageous generosity."

2. Listener Question: Investing vs. Paying Off Mortgage

The primary discussion centers around a caller, Hannah from Columbia, South Carolina, who poses a compelling question about the trade-off between investing surplus funds in an asset yielding a 12% return versus using that money to pay down a low-interest mortgage at 2.5%.

Notable Quote:

C (00:30): "Why should my husband and I not put extra money into an investment that has a 12% return instead of paying off our house that has an interest rate of 2.5?"

3. Research Insights on Millionaire Strategies

Dave Ramsey responds by referencing extensive research conducted on over 10,000 millionaires. He emphasizes that the majority of these wealth builders did not leverage their mortgages to invest but instead focused on disciplined saving and debt avoidance.

Notable Quotes:

B (01:06): "We studied 10,167 millionaires... How did you become a millionaire? Did you inherit the money? Did you win the lotto?... What did you do?"

B (02:20): "Zero. We never had one tell us that, that that's how they became a millionaire."

Ramsey underscores that while mathematically, investing at a higher return than the mortgage interest rate seems advantageous, real-world factors like taxes, risk, and personal freedom play a crucial role in financial success.

4. The Role of Risk and Taxes in Investment Decisions

The conversation highlights that beyond the pure numbers, investing involves additional considerations. Higher returns come with increased risk and potential tax liabilities, which aren’t always accounted for in straightforward mathematical comparisons.

Notable Quotes:

B (02:21): "The difference is that you're going to be paying taxes on the money unless you're investing it into a Roth."

B (02:55): "You've also taken more risk because you're home."

Ramsey argues that the psychological and strategic benefits of being debt-free contribute significantly to an individual's financial prosperity, often outweighing the potential gains from higher-yield investments.

5. Addressing Personal Financial Beliefs and Education

The episode delves into the challenge Hannah faces in reconciling her husband's accountant-driven investment philosophy with the proven strategies advocated by the Ramsey Network. Ramsey critiques the traditional financial education that often prioritizes leveraging and investing over debt elimination.

Notable Quotes:

B (03:43): "Let me submit to him that he's doing a naive, primitive, incomplete math formula because his math formula does not include risk and his math formula does not include taxes."

B (04:10): "The more debt you have, the more risk you have."

Ramsey shares his personal experience of overcoming debt and reorienting his financial strategy based on Biblical principles and common-sense money management, contrasting it with his previous academic and financial missteps.

Notable Quote:

B (06:00): "I read in there, the borrower is slave to the lender... I went broke. I'm going to try this Bible stuff and it's common sense."

6. Concluding Insights and Recommendations

In wrapping up, Ramsey encourages individuals to consider the broader implications of their financial decisions beyond mere mathematical advantages. He advocates for a holistic approach to wealth building that incorporates debt management, risk assessment, tax planning, and personal well-being.

Notable Quotes:

B (07:35): "Thanks for tuning in to Ramsey Everyday Millionaires."

B (07:35): "To learn more about Investing, visit ramseysolutions.com/investing or click the link in the show notes."

Ramsey concludes by reinforcing the message that successful investing is not solely about achieving higher returns but also about creating a stable and stress-free financial foundation.

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Key Takeaways:

• Debt Management Over Leveraging: The majority of millionaires prioritize paying off debt over leveraging low-interest mortgages for investments.

• Beyond Math: Factors such as risk, taxes, and personal freedom are pivotal in making sound investment decisions.

• Holistic Financial Planning: Successful wealth building involves a balanced approach that integrates debt elimination, disciplined saving, and strategic investing.

• Challenging Conventional Wisdom: Traditional financial education may overlook critical aspects like risk and emotional well-being, leading to incomplete financial strategies.

This episode serves as a valuable resource for individuals seeking to navigate the complexities of investing while maintaining financial stability and personal peace.

Transcript

[A]

This episode is sponsored by SmartVestor. Connect with an investing pro for free at RamseySolutions.com invest. You're listening to Ramsey Everyday Millionaires, where we talk investing, retirement, building wealth, and outrageous generosity.

[B]

Hannah's in Columbia, South Carolina. Hi, Hannah. What's up?

[C]

Hi, Dave. Hi, Jade. I'm so excited to talk to you guys.

[B]

You too. How can we help?

[C]

Okay, my question is, I have been listening to you guys for about two or three months and I'm really gung ho. My husband and I are almost to baby steps 4, 5, and 6. And I know you guys say to be intentional in those and do them together. So when you're in those steps, why should my husband and I not put extra money into an investment that has a 12% return instead of paying off our house that has an interest rate of 2.5?

[B]

It's a great math question. And the reason is more than math. So we studied 10,167 millionaires, okay, and asked them, how did you become a millionaire? Did you inherit the money? Did you win the lotto? Are you a country music star? Did you save and invest? How did you do it? What did you do? What's your age? What's your income? What's your career? So we could find some correlations and 10,000 people is enough to study, to draw some real airtight research based conclusions. And we got a lot of wonderful data from that. In other words, facts. Here's what's interesting. The number of those millionaires that said I became a millionaire because I borrowed on my home at a lesser interest rate so that I could invest more, which is effectively what you're talking about doing. You're not borrowing on it, but you're not paying it off, which is the same thing. Okay? The number of them that said I delayed paying off my home so that I could invest more, and that's how I became a millionaire. You know how many of them it was out of 10,000?

[C]

Not very many.

[B]

Zero. We never had one tell us that, that that's how they became a millionaire was that they leveraged their home into investments. Isn't that interesting? And yet the math that you bring up is actually accurate. I mean, there's, you know, you can borrow money, you might have a mortgage at 3% and you can make 10, 12, maybe 14% in the last 12 months. You can make 30% on an S and P. Okay, which is not normal. But, but you know, you're 12%. I don't argue with it all. The difference is that you're going to be paying taxes on the money unless you're investing it into a Roth. And you know, you've also taken more risk because you're home. So something happens to people when they get their home paid off. The freedom that they sense in their relationships and their careers causes them to prosper more and faster than the difference in the interest rates. And so that's the only explanation I've got for it. And I will tell you this. Here's an interesting thing you can do. Go ahead and pay off your house, and if you hate it, just go get another mortgage.

[C]

That's where I am. I really want to do that. But I'm also married to an accountant who said he knows the math and he's the problem. I see it.

[B]

Let me submit to him that he's doing a naive, primitive, incomplete math formula because his math formula does not include risk and his math formula does not include taxes. And if he can quantify the risk. Exactly. And put it into a math formula, he's a better guy than I am and I'm a math nerd from now on. But it is a real risk because we can all honestly say the more debt you have, the more risk you have. Agreed.

[C]

Yes.

[B]

And to not mathematically factor that into his formula makes his formula naive and incomplete. So I don't care if he's an accountant, he's wrong.

[C]

Right.

[B]

That's the thing. I mean, now how do you convince him of that? I don't know.

[D]

That's a different story.

[B]

You've been convincing him is wrong since he's wrong since you got married. So maybe you can work on it.

[D]

Yeah. My biggest question for him would be, what is his ultimate goal and why are you guys doing this?

[B]

His ultimate goal is Bill wealth, and he thinks he's leveraging the money. Right? Am I right?

[C]

Yes. Yes, you are right.

[B]

Yeah.

[D]

But I guess my question is, is it a, let's say, let's say he says, my, my goal is to have $8 million. Right. Is it a time frame? Is it a time frame he's so caught up on? Or is there a way that you can present that argument and say, hey, we can still get there. We're just going there in this order, and this is going to give me more peace. Do you see what I'm saying?

[B]

Yeah, Hannah, I, I, he was trained by the same people I was trained by. My finance professor was broke. What's wrong with that picture? A broke finance professor is like a shop teacher with missing fingers. My grandpa was not broke. And he was also an accountant. The reason he was not broke, though, is he avoided debt like the plague because he was a child of the Great Depression and he had no debt. No debt, no debt, no debt, no way, no debt. When I started going in debt like a crazy man to buy houses in my 20s, he said, I'm going to throw you out of the family. You couldn't be one of ours. You're too dumb. He didn't say that, but he. He made me feel that. There you go. But, yeah, I mean, because it's so polar opposite of what that generation that had common sense lived. So the problem, Hannah, is your husband was trained by a broke finance professor to believe an incomplete, inaccurate math formula. And you can play this back for him and Jay, you know, it's an interesting conversation because we get this question like all the time, once a week, right? And when I first started this journey, this journey being common sense money. I've got a finance degree. I've got letters and licenses of all kinds after my name that says I'm supposed to know something about money. But I'm 28 years old and I'm bankrupt because I borrowed too dead gun. Much money. And I'm an idiot. And I got the opportunity to start over. My wife would have left, but she didn't have a car. I mean, it was awful. Horrible. And I was a brand new Christian. And so I started learning from this guy named Larry Burkett that the Bible had financial principles. And I read in there, the borrower is slave to the lender. And then I read in there, he who is impulsive exalts folly. And then I read in there the blessings and cursings to the house of Israel as they cross the Jordan. And after Moses has led them in the wilderness, the blessings are, you will be so wealthy, you will be a lender. The cursings are you will be a borrower. Every single thing in scripture that I was reading as a brand new believer was negative about debt. And yet my intellect and academics all told me that to borrow money like her husband, the accountant. And I struggled with exactly the same thing. But I made the decision in those days on the basis of faith. I just said, okay. I tried it the academic way. I went broke. I'm going to try this Bible stuff and it's common sense. Now, years later, I discover, oh, they left out risk. They let the math formulas incomplete. These academics aren't so dad gum smart after all. Who knew?

[A]

Thanks for tuning in to Ramsey Everyday Millionaires. To learn more about Investing, visit ramseysolutions.com investing or click the link in the show. Notes Ramsey Solutions is a paid non client promoter of participating pros. Learn [e-mail] SmartVestor.