Jason McKnight

Here is the second of five parts on our financial journey.

Buy Now, Pay Later? (May 2010)

In last month’s newsletter, I began a series on how we steward the resources God has given us. If you didn’t get a chance to read it, do so (you can access it on line) because you will hear my heart for us as disciples living blamelessly. We talked at church last Sunday (4/25) about Grace’s financial situation. Please keep praying for that. But as we lean into God’s test of our congregation, let’s be diligent and prudent in our personal lives… leaning into his plans for each of us—to bless us and give us the abundant life (which is not the prosperity gospel, but does mean a life of peace and contentment).

This month we are going to tackle the area of personal finances that steals peace and contentment: the use/mis-use of debt. In the April 17 issue of The Economist, I read “Many Americans, lacking true upward mobility, bought its trappings, such as a bigger house or better car.” (p.29) The availability of debt is what enables so many to “upsize” their lifestyle, even when the income is not there.

So what can we do, as people of the New Creation, called to live by godly wisdom? Let me offer a three-fold framework, and then some miscellaneous suggestions

(1) How to recognize Trouble

Retailers today encourage debt as a normal way to make purchases. Furniture: “No payments until January 2011”. Cars: “zero down, 4.5% APR for five years”. Mortgages: “Get a 3.85% ARM”. Credit Cards: “what’s in your wallet?”. Everyday the world tells us that “debt is no big deal.”

Recognize this: those low percentages represent extra money that we have to pay in order to use the thing we’re buying. The true cost is the purchase price PLUS the interest. For a $15,000 car that we finance (5% for 5yrs) the true cost is $16,984. (Meanwhile the car is only worth 1/3 of the purchase price five years later!). $850 flat screen on “no pmts til January” sounds good, except, if you miss one payment there are 15-20% charges. Is the TV worth that extra $150?

Also recognize what one friend noted to me: that the ultimate cost of a car is not the monthly payment. It includes the insurance, gas, repair savings, etc. Project them out. Perhaps the $10,000 car is more in line with what money you have available for the “car” portion in your budget than the $17,000.

Recognize trouble before it gets you: the world (and my flesh!) wants us to buy more at any cost. We’ll say NO.

(2) How to stay out of trouble

That’s the crux: being able to say NO: keeping our appetites under control. This is a tough struggle. It’s so easy to throw in the pack of gum at the check-out line, or “supersize” at McDs, or buy both shirts because it’s a good sale. None of those will kill us, but together the habit will do us in.

One friend counsels us to ask 3 questions when considering any purchase (but especially those that are going on a credit card or loan): Do I need it?; and be honest on this one! Can I pay for it? Make sure you actually have the money. Am I free to pay for it? In other words, where is the money going to come from? Good insights. Great questions.

Helpful hint from another friend: Pay with cash, instead of credit cards. Studies have shown that we physically don’t want to part with cash, but don’t have that same qualm about plastic. I did not know this, but have intuited it, as I don’t want to “break a $20” for a $2 coffee.

The one major piece of advice my father-in-law, Irv Chambers, gave me (when I asked him for it): save up in advance for your cars. They would have a “car payment” line item in their budget, and make payments each month, but the money would go into their savings account. Then, they paid up front for their cars, and kept making their car payments… except it was for the next car. The difference? They earn interest on their car payments instead of paying interest on them! We started this about 8 years ago, with a measly $50/month. With each raise, we increase the amount that goes to the car payment. Genius.

(3) How to get out of trouble

Some of us are swimming (drowning?) under all sorts of debt. IF only we’d read these principles 5 years ago. Read on! All is not lost. Our God is a God of the second chance who restores the years the locusts have eaten. He’s also a God who hard-wired the world with principles for wise living—prudence and diligence tend to be rewarded. Remember Prov 21:5 – “the plans of the diligent lead surely to abundance.”

What do I do if I owe several different creditors? How will I pay them off? Three steps: (1) list ALL your debts on one sheet of paper—from smallest to largest. Write the amounts, the due dates, the minimum payments, etc. You must know what you are up against.

(2) Make the minimum payments on all of them; keep on the right side of the law, and keep your word. (3) Take the smallest debt first and allocate all extra money to pay it off. Get it gone, and you will be closer to getting all of them gone. Move on to the next smallest right away. You’re building momentum, you’re clearing the creditors out. It won’t be long before you’re down to 4 creditors instead of 7—you are getting the small ones out of the way.

You will likely have to make lifestyle adjustments to get rid of the debts. (It makes sense, since we made the wrong “lifestyle adjustment” that got us into trouble in the first place.) As you work your way out of debt, practice contentment—God will give you everything you need at just the right time.

Not all debts are our choice – for example, debt from medical bills. We can’t help when we break our arm or worse. However, nothing in God’s economy says that when bad things happen to us we are still entitled to everything else we want. If we have to pay medical bills, we simply have to pay them. Call the hospitals, and check into discounts, and work out a payment plan. They will work with you in most cases.

Miscellaneous suggestions

If you own your home: pay your mortgage bi-weekly instead of monthly - $350 every two weeks, instead of $700 each month. On our home mortgage that one simple step would reduce our payback by 5 years! Imagine having $700/m in your pocket five years earlier – that’s 700 * 60 months: $42,000 in your pocket. Not bad

Sit down with a friend: This month, Sue and I are going to spend an hour with a trusted, godly friend who can take a look at our budget, goals, decisions and action plan. What a treasure to have a fresh set of eyes on our budget (typically the most private area of our lives). We’ll see what insights he brings. But I can tell you, as I get everything together for him, I’m understanding our processes better.

Good Debt vs. Bad Debt: All of us would agree that it’s bad to carry balances on credit cards. Almost all would agree that a mortgage is a good thing (how would we ever save $100,000 while paying rent each month). What about in the middle? Car loans, education debt, lines of credit for home improvement, etc. I shy away from it. Some are necessary—you have to have a car for work, who has $12,000 sitting around. Wisdom says be as careful as possible about taking on debt. It means an obligation by you to another.

This is not the last word on Debt, but I trust that there is something for you to chew on here, or for you to teach your students/children. Disciple them into sound financial principles, parents! (even if you haven’t always practiced those principles). Also – do email any questions, feedback or further suggestions. Keep at it, and get ready—next time it’s Savings.

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