Avoiding the Debt Trap

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It’s mid-October and the pastor has just preached his annual message on responsible giving. As church folks file out of the sanctuary to grab a cup of coffee, Bill Johnson tells George Smith, one of the deacons, “You know, George, it’s just about impossible for me to give much money to the church. I’ve got a big mortgage, a car to pay for, and a credit card I can barely make monthly payments on.” Of course there are other church members who cannot give because they have been hit with financial issues beyond their control, such as medical problems, unemployment, or earnings that do not cover the minimum cost of living.

But many of us find ourselves in Bill’s shoes, young and old alike.

At the heart of this matter lies a serious spiritual problem: we don’t recognize who exactly owns our resources. We all need to learn how to handle wisely what God has given us. And we need to exercise discipline in spending. This means buying essentials rather than satisfying the wants and desires that the media instill in us everyday.

An unsettling example of satisfying wants occurred a few years ago to a student in an accounting class. The student started the semester well, but over time his attendance slipped, and when he did come to class he wasn’t prepared and did not perform well on tests. In discussing this with him, his professor learned he was working about 25 hours each week—not to pay living expenses or cover tuition but, rather, to make payments on his new truck.

It’s also quite common for recent college graduates to get married, purchase a house, and enjoy the “good life”—including expensive vacations, nice clothes, and a new car. But in addition to a mortgage, many new grads are saddled with at least $20,000 of debt for college expenses. Even if they have well-

paying jobs, the debt they take on from buying and furnishing a home as well as making payments on a new car and college loans is often more than they can truly afford. An emergency or unexpected job loss can leave them in serious financial trouble.

We’re not suggesting that people in this situation sell their homes or cars, but they might consider reducing their debts by cutting out nonessentials (like fancy clothes and vacations) and paying off high-interest credit cards. Once their credit cards are fully paid, they can tackle their car loans. Paying off large amounts of debt takes time, effort, and discipline, but people find that it’s well worth it to reduce the anxiety and stress of being in financial difficulty—which is something anyone, especially newlyweds, can certainly do without.

Recent surveys highlight the severity of our debt problems. U.S. citizens as a whole have “negative savings”—that is, they spend more than they make. In fact, for every dollar earned, the average American spends $1.20. Canadians aren’t doing much better. A survey released late last year by Statistics Canada revealed that between 1999 and 2005, the median debt load for families rose 38 percent, from $32,300 in 1999 to $44,500 in 2005. More than 6.5 percent of families operate with a negative net worth, and 30 percent have no retirement savings at all.

Avoiding the Debt Trap

It’s obvious that many North Americans have a debt problem. Yet it’s quite possible, with discipline and common sense, to keep from falling into the debt trap by learning how to budget the resources that God has entrusted to us. Here are 10 practices that can help keep you financially healthy:

  1. Recognize who owns your talents and financial resources, and use them in a stewardly manner. As Proverbs 3:9 states, “Honor the Lord with your wealth, with the firstfruits of all your crops.” Despite our current economic woes, North Americans have so much more at our disposal than does 80 percent of the world. Our problem often is not having enough resources but, rather, using them wisely as God has intended. It’s often our materialistic attitudes and desires for instant gratification that get us into financial trouble. We’ve probably heard stories about the Great Depression from our parents or grandparents. We pray those days will never return, but many of us experience our own Great Depression because we overspend.
  2. Prepare a monthly budget and stick to it. At least once a month analyze your expenses to see how you are doing compared to your budget. If you overspend one month, examine why and tighten the belt a little so that you can make it over the long haul.
  3. Build a savings account for true emergencies. What is a true emergency? Well, it’s things like a furnace that needs to be replaced in mid-December, or the unexpected car repair. It’s certainly not for spending on Christmas gifts when you don’t get a year-end bonus. Experts recommend having three to six months of your income in savings that is readily available in case of a sudden job loss.
  4. Save for retirement and start now! It’s never too early. In fact, if a 15-year-old can set aside just a small amount of money every month, it will grow and compound significantly by the time he or she reaches 70. For example, saving $50 each month starting at age 15 and investing at an annual rate of 6 percent will yield more than $250,000 at age 70. If you wait till age 25 to do so, you’ll yield only $138,000. Most recent college graduates have probably not been able to set aside money for retirement. But they should begin doing so as soon as they’re established in a new job. In the U.S. a Roth account and in Candada an R.R.S.P. (Registered Retirement Savings Plan) will most likely be the best way to start. The money should be invested in a “no load” mutual fund each pay period. You can probably have it deducted from your paycheck so you won’t even miss it.
  5. If you’re unable to pay off your credit cards each month, stop using them. Then get them paid off as quickly as possible. Interest rates of 20 percent or higher per year are not uncommon with many credit cards. If you have an outstanding balance on more than one credit card, pay off the one with the highest interest rate first.
  6. Use a credit card responsibly to make tracking your expenses easier. Some financial planning experts claim   that no one should use credit cards. But with careful use credit cards do have their benefits. Some cards even have cash-back options and reward points, but you’ll quickly lose those benefits by not fully paying your balance each month. If you’ve spent too much and gotten behind in your payments, it’s time to get out the scissors and cut that card up!
  7. Make every effort to pay off your mortgage before it’s due. The best type of mortgage for most people is one with a fixed interest rate that you can pay off in 15 years or less. One thing to avoid is being required to have mortgage insurance because you’ve overextended yourself (in order to protect their interests, lending institutions require mortgage insurance when there is a low down payment). Mortgage insurance is just money down the drain. As an alternative, a 30-year mortgage might also work for some people—if you make double payments so you can pay it off in 15 years. The interest rate might be a little higher than it would be for a 15-year loan, but if you lose your job you can temporarily reduce your payments to the 30-year payment plan. But do that only in the short term. Stick to your goal of paying it off in 15 years.
  8. When buying a house, consider a conventional mortgage (which requires that you first save for a down payment of 20 percent). That will give you the best (lowest) interest rate as well as some equity in the home. Banks and other lending institutions will often extend credit beyond what you can truly afford. So do your homework and build the mortgage payment into your budget. Buy only what you can truly afford. Financial experts suggest that housing payments should not exceed 25 percent of your monthly take-home pay.
  9. Consider other money-saving tips. For example, buying automobiles is probably the biggest expense you will have. At least home purchases tend to maintain and even increase in value. But a new car loses at least 20 percent of its value the moment you drive it off the dealer’s lot. People who travel for a living may find that a new car is indeed the best alternative for them. But if you drive only 15,000 miles a year, a new car is a waste of your resources. If you plan on buying a fairly new vehicle that you plan to keep eight to 10 years, then you might consider a “program” car. This is a vehicle that was a rental or one that is coming off a lease. It may have about 20,000 miles on it and will probably be one of the best deals you can find. If you can’t afford a new or program car, then find a good used car that is two to four years old. You can’t know for sure what future repair costs on a used car might be, but there are a number of sources available to help you determine its expected dependability. Life insurance is important, but whole-life policies have a very low return as a retirement savings plan. We suggest purchasing term insurance. It’s less expense than whole-life or universal life insurance when someone is young and really needs the coverage. When you are older, the cost increases, but you’ll usually have less need for such insurance.
  10. Review these practices on a regular basis. Spend some time each month or at least each year to see what progress you have made. If you are making progress, praise the Lord. If not, seek God’s council so you can become a responsible Christian with the resources he has graciously entrusted to you.

Where Can I Get Help?

What if you’re already in a high-debt situation? How do you climb out? Thankfully there’s help available. Several not-for-profit agencies provide debt counseling and assistance. However, you need to be cautious in seeking such help.

Many of these organizations charge a fee (even if they have the name “Christian” in their title). So find out the cost up front. Be suspicious if you don’t get a straight answer. Also be aware that enrolling in a debt-settlement program will negatively impact your credit score.

You might also consider a debt-consolidation program that replaces current high interest rates with lower payments and lower interest rates. Some of the agencies that handle these programs charge fees, and they may require you to use your house as collateral. In the final analysis, you’re replacing unsecured loans (credit card debt) with a secured loan on your house.

The best place to start may be with organizations that provide advice and counseling without a fee. For example, some of the Love Inc. locations provide financial counseling and financial seminars. Other sources include Dave Ramsey and his Financial Peace University, and Crown Financial Ministries. Both also

provide information and seminars. Many churches sponsor seminars based on materials from these organizations.

A final word of caution about credit counselors in general: in May 2006 the IRS announced that it has stepped up efforts to deal with abusive credit counselors and has revoked the tax-exempt status of 41 of the largest credit-counseling agencies. These agencies accounted for almost half of this billion-dollar industry in the U.S. Please be careful where you seek help.

—Ray Slager and Don Reynolds

About the Authors

Ray Slager is a professor of accounting at Calvin College, Grand Rapids, Mich., and a member of Lakeside Community CRC, Alto, Mich.

Don Reynolds is an associate professor of accounting at
Calvin and a member of Fellowship CRC, Big Rapids, Mich.

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