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In 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 $200,000 household income with a take-home pay of $145,000 after deductions. They live in an apartment and have zero debt, a six-month emergency fund, and a goal of having Daniel’s wife become a stay-at-home mother. Daniel asked Dave Ramsey whether they were going 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’s studied over the years. While Daniel’s diligence in budgeting and saving is admirable, Ramsey pointed out that the plan has a critical flaw: housing. According to Ramsey, living in an apartment means subjecting yourself to increasing 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’s studied followed a path that involved renting long-term while investing aggressively. Instead, most bought homes and focused on paying them off. By owning a home, Daniel and his wife could stabilize their largest budget item – housing – and eventually eliminate it. “Your largest item is out of your control, and it’s going up every year,” Ramsey warned, highlighting the need to move away from renting as soon as possible.
The logic behind Ramsey’s advice is simple: homeownership locks in a fixed cost for housing, whereas rent will continually rise. Over 15 years, paying off a house can lead to a significant net worth boost, Ramsey explained, with much of that wealth tied to both the home and the couple’s retirement accounts.
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Ken Coleman, who co-hosted the show with Ramsey, added another perspective. He emphasized that while Daniel might be comfortable living frugally in an apartment, his wife might not feel the same way in the long run.
“She’s going to want a house,” Coleman said, urging Daniel to think ahead. Ramsey echoed this, pointing out that while Daniel’s intense savings plan was admirable, it needed to be aligned with a broader, more balanced approach to wealth-building, including homeownership.
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Ramsey’s overall 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 they work toward owning a home. He also advised the couple to stop funding their HSA (health savings account) for now and focus on building a down payment for a house. Ramsey noted that Daniel would likely see substantial home appreciation over the years, contributing to long-term wealth.
Other experts also state that buying a home is a smart investment strategy – not just for those looking to amp up a real estate portfolio but 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 usually appreciates over time in the long run. While there are economic boom and bust cycles that can make real estate a losing investment in the short run, over 10 years or longer, buyers will usually come out ahead.”
Investing aggressively can be a good thing, but many financial experts say owning a home is a good step to take to build wealth. Renting may offer short-term flexibility, but the long-term financial advantage lies in stabilizing your housing costs by buying 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 is aligned with your long-term goals.
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