Guest blogger: Richard L. Blake
For the introduction to this seven part series (this is part seven), see 3/11/2016 post “How to Manage Money”.
Get out of debt
This is part of the matter of budgeting and spending control but I mention it separately because debt is a particular problem for many. I want to plainly state that you should avoid debt. It is not that debt, per se, is sinful, but that it is burdensome. Proverbs says, “The blessing of the Lord makes one rich, and He adds no sorrow with it” (10:22). Debt and payments are sorrowful; they are a burden, not a blessing.
The primary pathway to indebtedness for most people is using credit cards. In the United States in 2015, for example, the average household credit card debt was $15,355. Here in Poland the average debt per card is $1,675, much better than the U.S. but still a threat to financial peace.
Credit cards facilitate impulse buying, typically for unnecessary and self-indulgent purchases. When using credit, consumers buy more, buy what they don’t need, and pay more for it.
The “buy now, pay later” mentality brings people into debt that often entails exorbitant interest. People decide to buy on credit, thinking they can afford to make the payments. A person who carries a $2,000 balance (at 19.5 percent interest) is told he can pay just $75. But he doesn’t realize that the first $32.50 of that $74 is interest! And if you carry a $7,000 balance on an 18 percent credit card and pay the 2 percent minimum payment each month, you’ll end up paying more than $20,000 for that $7,000. That’s selling yourself into slavery!
Some people use credit cards for the convenience, paying off the full amount each month so they don’t ever pay interest costs. I do this myself. While this has advantages, it also has drawbacks. Citibank, a global financial company, calculates that a consumer using a credit card will buy 26 percent more than he would if he were carrying cash, even if he pays it all off without interest charges.
Here is helpful counsel if you use credit cards:
- Never use credit cards for anything but your budgeted purchases.
- Pay your balance in full each month.
- The first month you have a credit card bill you can’t pay in full, perform plastic surgery—cut your credit card in half and don’t get another one.
If debt has you in its grip, resolve right now to do something about it. Make debt repayment a significant part of your monthly budget, paying off the highest interest balances first and then adding that monthly payment to the payments you are making on other debts. Cut all future expenditures to the minimum until you have paid off all debt. And especially, do not incur any new debt. Operate on this principle: “If I can’t afford it now, it isn’t God’s will now.”
This is a complex subject that is worthy of more time than we have now. Yet you must start now dealing with this danger. Proverbs speaks a relevant word to us about this: “A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences” (22:3).
Image title: Marines and sailors get paid twice a month to pay their bills, necessary expenses and travel expenses, regardless if they are driving out of town or driving to work. In order to have extra spending money for holiday gifts, personal attire or video games, a Marine or sailor needs to ensure they limit themselves to how much money they can afford to spend.
Any money management plan must also include savings. The Bible speaks plainly at this point: “The wise have wealth and luxury, but fools spend whatever they get” (Proverbs 21:20). A good biblical example of this is Joseph, who led the Egyptians to save the produce of the ground during seven years of abundance so as to be prepared for the future seven years of famine (Genesis 41:25-57). Saving plans for an uncertain future.
Saving is good practice for at least two more reasons. First, it brings needed discipline to our lives. It helps us to say “no” to impulsive and unnecessary spending.
Furthermore, saving helps to build wealth not only from mere accumulation of money but also from the amazing effect of “compounded interest.” Compound interest means that the interest you earn each year is added to your principal, so that the balance doesn’t merely grow, it grows at an increasing rate. This is one of the most useful concepts in finance. It’s the basis of everything from a personal savings plan to the long-term growth of the stock market.
The longer money compounds, the faster it grows. Money growing at 6 percent per year will double in about 12 years, but it will be worth four times as much in 24 years.
You may think the amount you can save is too small to matter, but it adds up faster than you think. If you were to save $5 per month, at 5 percent interest compounded each month and did that continually for 10 years you’d have put $600 into savings. But the account would be worth $776. And, even if you didn’t add a single dollar, it would be worth more than $1,500 in another 15 years.
Credit cards and other open-ended accounts use compound interest against you. That’s why “minimum payments” are likely to keep you in debt forever. But when you save, this principle is a great help to you. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Compound interest requires you to sacrifice today to reap a benefit tomorrow. It may be that you’ll have to adjust your lifestyle a little to save a few dollars today. But, it’s certain that the future reward will be greater than the sacrifice.
Please note this, however. Saving should come after giving. A good personal rule is to tithe 10 percent, save 10 percent, and live on 80 percent. And that’s just a place to start both in giving and savings. John Wesley, whom I mentioned earlier, offered this wise counsel: “Make all you can; give all you can; save all you can!”
The wise woman of Proverbs 31 “considers a field and buys it; out of her earnings she plants a vineyard” (verse 16). This is an illustration of investing. It is using a smaller sum of money wisely in order to get larger gain, or return on investment, at a later time. Sound money management would include investment of some of your savings in some venture after you have gotten your financial house in order, that is, after you’ve adjusted your lifestyle and have done all the things we’ve just mentioned.
Common places where you may invest your money include stocks, bonds, mutual funds, real estate, and business ventures (even your own). Other investment opportunities are also available. Be on guard against supposed “great opportunities” to get rich overnight. Those are nothing more than gambling. But if you will do your research carefully, pray diligently, and be willing to wait for the return, you can help to provide for your family in the future. Your gain can also free you up for other opportunities to give and minister—to lay up treasures in heaven. That’s the ultimate investment opportunity!
Before investing in any area, make sure you get wise counsel from people who are experienced and knowledgeable about that investment product. Never trust your instinct. And the more important the decision, the greater should be the number of counselors. “Plans fail for lack of counsel, but with many advisers they succeed” (Proverbs 15:22).