Economics for Life #3 – Personal DebtJune 22, 2011
The mythical cable guy was also visiting this home and I happened to arrive at the same time. Since cable guys only come once or twice in a person’s life, this was a major miracle in itself. I was ushered into the living room where the husband, wife and three kids were sitting. They all ignored the cable guy as he did his work. And I was pretty sure why he was there – to remove all their cable services.
This couple had called me a few days before and asked if I would come over and advise them with their finances. They were in desperate straits and didn’t know what to do. As we began to talk, the wife mentioned that at least she hadn’t lost her job with the State. The husband couldn’t claim the same thing. He was a health professional and even though most people in his field are employed, he could not find a job. Additionally, they had debts they needed to clean up. I calmly asked how much debt they had. They explained the house payments, the car payments (both of them), the student loans and some personal loans from siblings. All in all, it seemed much larger than they were letting on. But, the desperation on their faces told me there was more to the story. I waited them out and the full truth emerged finally.
“We also have a few credit cards we owe money on” he offered. I didn’t say anything because I wanted him to say it.
“Well, maybe it’s quite a bit of money. We have four cards and they are now all maxed out”. He paused to catch his breath. “We owe about $80,000 on all the cards. What we want to know Pastor is what you think the Bible says about declaring bankruptcy”. I have to admit, mentally I was prepared to hear what I hear from many people – that they owed about $20,000 (which would have been steep enough). But even I was overwhelmed by the magnitude of their debt. I almost cried when I realized how much they had sold their lives to their creditors and how awfully ashamed they must be to admit that to another person.
“There’s one more thing Pastor….we owe another $14,000 to the IRS”. At that, the husband looked deflated. Mom pulled the kids closer to herself, sitting as far into the couch as it would allow. She looked like death was visiting the house.
“It may seem hopeless now” I began, “but God can help with anything. At least I see you’re doing the little things right to begin with”. I pointed to the cable guy removing the service from their house.
“What does he have to do with our debt?” the husband asked.
“With all you owe, it is a really good idea to pare down all your expenses to the absolute bare minimum. I’m just relieved to see you getting rid of the cable.”
“Pastor, we aren’t getting rid of it. We’re installing a new service that allows us to record more shows.” As those words struck me, I found it hard to know what to say first. I just sat there staring at them. Finally, I said something.
“You’re doing what?!”
He looked confused. “Pastor, we owe several hundred thousand dollars. An extra $45/month is not going to change anything.” That’s where he was wrong. I spent the next two hours explaining debt to him. It would have been much easier to explain debt if our country had not based its economy on debt, but I didn’t have that option. Our nation’s leaders have set such a wretched example for him to follow.100 years ago, this family would have been thrown into debtor’s prison for their debts. Actually, I doubt they would have had much debt since other people in debtor’s prison would have served to warn them off accruing that much of a financial burden.
In my explanation to them, I clarified the following four misunderstandings about debt.
- There is no value at all to buying something you cannot immediately pay for. The ONLY exception that rule is buying something that will gain or hold value over the time of the debt. Until now, only houses and gold have held their relative value to the debt people take on to acquire them. Now, with house prices tanking semi-permanently, only gold will hold its value.
- The more debt you acquire, the less able you are to meet your life’s goals. When you owe money, it severely limits your ability to call the shots in your future. Someone who owes little or nothing can move at a moment’s notice and follow their calling and hearts.
- Most people get into debt because they don’t want to wait for anything. Instant gratification is now seen as the American ideal. Even though you will pay 50% more for a car bought on credit than with cash, most people will not save for five years to buy a car they want now. However, if you buy a car with cash, you can buy another car in five years with cash, another car after that in four years and every three years after that and pay 40% less than if you had acquired debt to buy them.
- Our economy only runs smoothly when its citizenry is out of debt. If you have the book “Rich Dad, Poor Dad”, please burn it now. The book falsely teaches that rich families become rich by borrowing money to invest and then living on the profits. That system only works for a very few and for the majority ends up very badly. That is the definition of a Ponzi scheme. You’ll have to look that one up yourself. Here is the truth. When a country’s citizens are out of debt, they buy more things with cash because they aren’t using their money to pay interest on their debts. Look at that example of our country. Right now, 40 cents of EVERY tax dollar is being spent on servicing our debt. Those 40 cents could be spent on work projects, improving education, or lower taxes. All those things would strengthen our economy. “Rich Dad, Poor Dad” ideas are what propels our nation into the poor house.
After I explained this to them, they teared up and asked me what they could do to get out of debt. I am glad they asked, for I was not going to waste my time telling them if they really didn’t want to change their ways. I gave them the five rules that the late financial counselor Larry Burkett used to tell people about how to stay out of debt.
- If you have a credit card and have ONE MONTH you do not pay it in full, cut it up and never use it again. Preloaded credit cards and debit cards can serve in an emergency just as well as credit and you can’t go into debt with either.
- Pay off current debts consistently. If you have more debt than a year’s income, cut all but the most essential expenses. Aim to devote 30% of income to debt reduction, even if it means eating a lot of Ramen noodles.
- Pay off smaller debts first. That will give you encouragement to keep paying off debts.
- Resist the temptation to declare bankruptcy. That easy way out will only lead you to repeat the same bad habits.
- Have savings accounts devoted to the purchase of big ticket items: cars, furniture, education, travel and gifts will all be more meaningful if you have to wait to pay for them.
Debt reduces your impact in this world. America’s debt is the one thing causing us to plummet in our influence on the world stage. You don’t want to be the same.