Tuesday, March 16, 2010

God's Solutions To Debt

This is a continuation of our finance series. Here are the others so far:

Managing Our Finances
Dedicating Our Finances
Spend Less Than You Earn
Giving As An Act of Worship
Saving and Investing

Before 1958, people were basically limited on how much they could spend by their paycheck. Then in 1958 Bank of America figured out how to create the all-purpose charge card, called the BankAmericard. Before then, each individual company had it's own card, but it was a pain to keep track of and therefore credit wasn't readily used. With this new card, people could instantly use it at 20,000 stores across California. Bank of America realized that like the telephone, the power of their card was the network: the more users the better. So they began to license their card and system to other companies in the US and eventually across the world. As this system got bigger and bigger BofA eventually gave up control of their system to a third party who's sole job was to manage the system. In 1976, that group brought all the independent licenses together and changed their name to one brand: VISA. Since then VISA has continued to be the largest credit card in the world. This, in part, lead to massive economic growth because people could buy something today based on future income earned.

On a personal level, when I started my shirt printing business I was mailed a credit card. It had great terms even though they knew nothing about me. Suddenly, my business had more credit than I did personally. It was crazy! Still, I used the card to buy the equipment and materials needed to get going. Within a few orders, I had made enough money to pay off my card and start saving for Legos. Had I not had the card, I'm not sure how I would have gotten going so fast. So I fully appreciate the power of credit and debt. However, I also know that there can be downfalls. Specifically, I'd like to talk about three potential pitfalls.

Expected Income
When you buy something on credit, you do it based on an expectation that you'll be able to make the payments later. However, there are a couple problems. First, sometimes we don't actually have as much as we think we should (due to a cut in pay or an increase in another expenses). When this happens, you fall short and a hole starts to get dug. This is the risk of credit. Unfortunately, our bet works out so often that we get lazy and make assumptions (yeah, I should have enough this month). It's when (and believe me, it's "when", not "if") we lose this bet that we get into trouble. By avoiding debt, you avoid this risk.

Fake Money
I remember when I first started working for Arby's my whole outlook on spending money changed. If something cost $20, it no longer represented a single green bill, but over 2 hours of my life! It really made me stop and think about each purchase because the idea of trading time for money was VERY real to me. However, over time I stopped making that comparison because I became deadened to the idea of trading time for money (just like watching violence on TV).

Making purchases with a card removed me one more step from that idea. Now instead of at least having to count out the bills, I swipe a card. It's painless and there's just a number on a screen for a few seconds. It many ways, it's fake money. It has no real meaning. I have to work REALLY hard to connect it to my time. As a result, it makes it easy to buy things. It's only $20? What's that? Nothing. Swipe.

One Master
Unfortunately, it is easy to get caught up in our debt mentally. We focus on having it, paying it off, and let it rule our lives. The Bible even points this out when it says, "... the borrower is servant to the lender" (Proverbs 22:7b NIV). As our debt increases, the likelihood of this happening increases. Since God wants us fully devoted to Him, you can see why debt could be an issue.

Given these pitfalls, it's important to try and reduce your debt as much as possible. We talked about 9 steps you can take to reducing your debt.
  1. Pray: Part of dedicating everything to God is also dedicating your debt to Him. So start with prayer.
  2. Develop a debt-free mind set: Decide you will no longer rely on credit cards and that you'll wait until you have the money actually saved.
  3. List all your debts: Also write down the interest rate on each debt. It will help you decide which debt to pay off first. Then focus on paying off one at a time.
  4. List everything you own: Is there anything you can sell which can be applied to paying off debt?
  5. Establish a spending plan: Can you do something for less? Where are the areas you can cut?
  6. Establish a debt-repayment schedule: know how far you have to go and see where the goal is.
  7. Consider earning additional income: See my early post on Saving and Investing for some ideas.
  8. Consider a radical change in your lifestyle: Many people temporarily lower their cost of living to become debt-free.
  9. Don't give up!

Finally, I'd like to share two practical ideas.

First, here's what you do to escape the auto debt trap: Decide that you're going to keep your car three years after it's paid off. Then, continue to make the same monthly payment to your savings account. Then, when you're ready to replace your car (which could be another 5 years if you're really careful), you can use your savings plus anything earned from a sale on Craig's List, it should be enough to buy a good, low mileage used car. Then repeat the savings.

Second, learn to distinguish between good debt and bad debt. Good debt puts money into your account each month and/or goes up in value over time. An example of good debt is a piece of investment real estate because you earn money and it tends to go up in value (especially if you fix it up). Bad debt takes money out of your account each month and/or goes down in value over time. An example of bad debt is a car because you typically don't earn money off your car and it goes down in value the second you buy it. By learning about good vs. bad debt, you change your focus (like in step #2) on why you're making the purchase. You start to think about the financial impact instead of just the potential enjoyment or dissatisfaction of taking on the debt.

Debt can be a powerful tool, and something that destroys your life. When managing your finances, the 9 step plan can help you reduce your debt to a manageable level. When this happens, you open yourself up to more options and flexibility.

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