Avoiding Financial Black Holes
You've probably heard the humorous definition of a boat. It is a hole in the water into which one pours money.
Of course, we could cite many pertinent examples to describe drains on our financial resources. The prophet Haggai described such drains as putting one's money in a bag with holes in it (Haggai 1:6). Similarly, astronomers speak of "black holes" in outer space that suck up matter, and even light, from nearby areas of the universe.
In this chapter we identify financial black holes that can undermine your financial planning and help you consider ways to avoid them.
Credit cards are a wonderful convenience. Besides eliminating the need to carry cash, they make it possible to buy goods and services at distant locations by means of the phone and Internet.
If one pays off all his credit-card charges each month, he incurs no additional cost. The charge for the service comes from fees assessed to merchants who accept the card in lieu of cash or a bank check. When a cardholder does not completely pay off his balance each month, however, these cards quickly turn from practical conveniences into financial black holes.
Improper use of credit cards costs many people dearly. According to a recent report, the average American consumer owes $7,000 in credit-card debt—an amount sometimes referred to as "revolving credit" because consumers typically pay only the interest and a bare-minimum amount of principal and in some cases never fully repay the owed amount.
The implications behind such debt are sobering. High rates of interest —up to 25 percent—voraciously consume incomes. Those with such debt flirt with financial disaster and often find their financial goals stymied or seriously delayed. Many consumers find themselves saddled with so much debt that they cannot borrow a penny more. When this happens they may be forced to pass up lifelong dreams, as well as once-in-a-lifetime opportunities, just to make the minimum monthly payments on credit-card balances.
In the United States credit-card debt is the fastest-growing portion of consumer debt. It is no coincidence that bankruptcy filings are growing alongside consumer debt. To round out the significance of credit-card debt, consider the picture for many American families: "Total household debt—including credit cards, car loans, mortgages, and student loans—topped 100 percent of disposable annual income late last year for the first time" (Paul Lim and Matthew Benjamin, "Digging Your Way Out of Debt," U.S. News & World Report, March 19, 2001, p. 54).
The average American now spends more than he earns. Credit-card debt is perhaps the most visible symptom of a bigger problem. How do people find themselves caught in such circumstances?
The spending trap
For many young people, running up debt begins innocently enough. Entering college, many high-school graduates find they must finance their education through student loans. Colleges and universities, operating as businesses, help new students apply for and receive educational loans with favorable terms.
Not to be left behind, credit-card companies pay colleges and universities significant fees to allow them to offer students their services. These companies have learned that young people feel great loyalty to their first credit card, so it is simply good business to be the first to issue one to a young person.
Young adults, of course, are not the only ones caught in such circumstances. Adults in their 30s and older have likewise given in to the allure of easy credit. Advertisers tell us we "deserve" their new and improved products, and most of us willingly believe them. The desire to enjoy life to the fullest with the latest entertainment, clothes and gadgets can be irresistible. Taken too far, our desire for the biggest and best can lead us to break God's commandment against coveting (Exodus 20:17; Deuteronomy 5:21)—placing an object of desire in a more important role than God Himself.
Unemployment can also suck people into the vortex of credit-card debt. If one has no savings, adding debt to one's credit cards is often the quickest way to cover basic living expenses. But, then, when they do secure a new job, many find their credit cards have reached the maximum limit, and repayment schedules become a severe burden.
Although most of us don't like to consider such negative possibilities, we cannot avoid financial disasters by ignoring reality. The Bible has good advice for anyone thinking of doing just that: "A prudent man sees danger and takes refuge, but the simple keep going and suffer for it" (Proverbs 22:3, New International Version).
The Bible's guidelines on debt
Since God created us, He understands how we think. God reveals in His Word a simple but profound truth about debt: "The rich rules over the poor, and the borrower is servant to the lender" (Proverbs 22:7). When we fall into debt, we serve those we owe money to. In the case of our credit-card masters, we serve them well. After all, what investor doesn't like to receive a 25 percent return on his investment?
The way to financial freedom is through repaying debt, then avoiding indebtedness whenever possible. Though it may make sense to finance essential items of long-term value such as homes, cars and education, credit-card debt is something most people can fairly easily avoid.
How to pay off credit-card debt
If you find yourself making interest payments every month on your credit cards and want to eliminate this type of debt, your first step should be to assess your income and expenses. Total your monthly expenses and subtract them from your income. This is your disposable income after expenses, the amount you have to spend or save.
The next step is to stop charging items on your credit cards. Pay cash for goods and services, then analyze your credit-card debt. Determine which cards charge you the highest rate of interest. If you carry a balance and have credit cards with high interest rates, you are wise to look for a card with a lower rate and transfer your balances. Some cards will give extremely low rates for up to six months to attract new customers. You may wish to transfer your balances several times until you have your balance paid off.
If you are struggling to pay off credit-card debt, consider selling items you no longer need or replacing expensive luxury items (such as a pricey vehicle) with a less costly one. Many consumers find they can eliminate luxuries such as cellular phones, multiple phone lines (and optional calling features), cable television, high-speed Internet access, multiple vehicles and seldom-used sports equipment such as boats, all-terrain vehicles and snowmobiles.
Use the cash raised or saved to pay off credit-card balances. When your finances improve and you have money in the bank, you can then purchase another luxury item if you think it's a wise choice. If you must finance a large-ticket item and you have a stable, reliable source of income, consider taking out a home-equity loan on your residence instead. You'll likely find the interest rate to be much lower.
After obtaining as favorable an interest rate as possible and eliminating costly luxuries, rank your credit cards in order of their interest rates, and use your disposable income to completely pay off the card with the highest rate. Once you pay that one off, close that account and destroy the card. Then focus your attention on the next card, and continue doing the same until you have paid off all your credit cards. Once your credit-card debt is gone, you're much better off with only a few cards—not the dozen or more carried by so many people.
The right use of a credit card
After you've paid off all your credit cards, it's time to consider how such cards can be properly used. After all, they are extremely convenient tools. How do credit-card-savvy consumers manage their cards?
The most important step in responsible credit-card use is to pay off the balance every month. When people make only the minimum payment (often 2 percent of the balance), the cost of each item charged to a card almost doubles by the time the debt is paid off. Think of the card as using cash that is reserved each month for the items charged. This way no interest accrues, and the cards become legitimate and helpful financial tools. They become our servants rather than the other way around.
In the long run we are much better off waiting until we have saved up the purchase price of an item before buying it, instead of financing it with a credit card. For those who need to borrow money, other options (such as mortgages, home-equity loans and car loans) are often available with lower interest rates than those usually offered through credit cards.
Finally, if you choose to use credit cards, select cards that charge no annual fee and ones that pay you a cash rebate (sometimes up to 2 percent) of your annual purchases.
The improper use of credit cards is one of the most common financial black holes. However, we must not overlook other decisions and expenses that can contribute to a slide into financial ruin.
Some creditors impose late fees for bills that are not paid on time. In the case of utilities (including electricity, gas and water), reconnection fees can be charged if services are shut off because bills have not been paid. These kinds of fees can be avoided simply by making sure bills are paid when they're due.
Instead of preparing and eating meals at home, many people eat out in restaurants regularly. Growing numbers of eating establishments are taking advantage of this trend. Even grocery stores recognize and respond to the public's desire for convenience foods that require little preparation.
Although such convenience is attractive, especially when a husband and wife both work outside the home, this practice almost always adds considerable expense to the food budget. Sometimes eating out is justified as a helpful change of pace or for other good reasons, but we should take care to minimize the practice.
The most economical way to make one's food budget stretch the farthest is to buy food in bulk and prepare it at home. This principle also applies when we take lunches to work instead of purchasing them in company cafeterias or restaurants. Eating out is enjoyable and may be a good decision for special occasions, but we definitely pay a price for this pleasure.
Doing things that are fun is an important part of life. Every budget should include some funds for this purpose. Unchecked or unwise spending in this area, however, can quickly devastate even the most carefully prepared budget.
Recognize that entertainment is temporary. Once it's gone it's gone, and you may have little or nothing to show for it. Before you invest your hard-earned money in tickets to a concert or play—or in cable or satellite television, the latest music CD or a movie on videotape or DVD—ask yourself whether this is the best use of your money. What lasting value will you derive from spending your money this way?
Keep in mind, too, that entertainment does not have to be expensive. With careful planning you can incorporate activities such as visiting parks, hiking and attending free concerts into an entertainment budget. Public libraries are a great source of entertainment that is both free and educational. In addition to vast numbers of books, many libraries offer music CDs, books on audiocassettes and numerous informative and educational videotapes.
Another common problem is impulse buying, which is simply uncontrolled spending. When people spend impulsively, they are tempted to conclude that budgeting does not work for them or that a budget ruins their fun. Budgets, however, are simply plans for spending our money, and when following a budget we alone still choose how we will spend it.
Impulse buying is the reason for many sales. Advertisers understand that the desire for instant gratification is a powerful pull, so they often urge us to buy their products so we will feel good about ourselves. We may even be told that we "deserve" to have their products.
Instead of making snap decisions, the Consumer Credit Counseling Service (CCCS) of Sacramento, California, recommends setting spending limits we will not exceed unless we first think about the decision overnight. Nor should we indulge in shopping as entertainment. The CCCS also suggests that consumers check off a short list of questions before making a purchase (see "A Buying Self-Test").
Identifying financial black holes
One of the easiest ways to identify areas that drain our financial resources is to analyze the things we buy. By keeping records of our expenditures for one or more months and totaling them by category (housing, food, clothing, entertainment, etc.), we can see which areas consume the most money. These are the areas we can then examine for ways to economize and manage our spending.
Since runaway credit-card debt is something that calls for immediate and decisive action, what do we do when we suddenly realize our budget is full of black holes?
In case of emergency
Occasionally everyone incurs unexpected expenses. Cars and appliances break down and we must repair or replace them. Expensive medical emergencies can strike without warning. Although our savings can cover temporary situations, habitual excessive spending requires special attention.
What can we do when we find ourselves in a prolonged financial crisis? Here are steps that can help resolve some long-term difficulties.
The first step for someone who wants to structure his life according to God's instruction is to ask Him for wisdom in setting financial priorities and for the self-discipline that he will need to carry out a sensible plan of recovery. James 1:5 advises reliance on our Creator: "If any of you lacks wisdom, let him ask of God, who gives to all liberally and without reproach, and it will be given to him."
When our spending exceeds our income, common sense tells us of only two solutions to the problem. We must either increase our income or decrease our spending. In some cases we might be able to increase our income by taking a temporary second job or starting a part-time business. These solutions will require a lot of time and effort, but we may have little choice.
If we cannot increase our income, the alternative is to cut our expenses. We can do this by controlling the typical financial black holes we previously identified in this chapter and by carefully analyzing each expense as it comes along. It's possible to reduce the cost of food, clothing and housing.
Luxuries are natural candidates for drastic reduction or elimination.
Ideally, when facing a cash-flow crunch, we should do our best to increase income and decrease expenses. Striving to incorporate both of these principles yields the fastest results.
Some people who face financial difficulty assume bankruptcy is the simple solution to their problem. Generally speaking, however, one should declare bankruptcy only as a last resort.
Many times alternatives to filing bankruptcy are viable solutions to financial problems. Timely communication with creditors can result in temporarily lowered interest rates and payments. Sometimes a consolidation loan, in which all outstanding debts are lumped into a single loan and retired with a single monthly payment, can be a remedy if the interest rate is lower than that of the other debts.
Sometimes creditors will accept settlement plans in which they receive a percentage of the balance due (usually after the account is past due) as payment in full. In such cases a creditor may decide that partial payment is better than no payment.
In addition to studying personal money management, one can often find nonprofit organizations such as the above-mentioned Consumer Credit Counseling Service—(800) 251-2227 in the United States—with free or low-priced services to help find alternatives to bankruptcy and work out financial-recovery plans. An article in Consumer Reports magazine, July 2001, points out that not all counseling services are equally helpful (see "Credit Counseling Services").
When bankruptcy is the only option
Sometimes people fall so far into debt that they have no choice but to file bankruptcy. Consumers should consider this solution only after exhausting all other methods for resolving financial problems because the Bible instructs us to pay our debts and bankruptcy has a negative effect upon one's ability to obtain future credit. Because laws vary from country to country, appropriate legal advice should be sought if one chooses this course of action.
Although bankruptcy can be an embarrassing course of action, we should understand that God recognized there would be times when people made mistakes or encountered circumstances that brought them to financial ruin. We can learn lessons and rectify mistakes through all of life's experiences.
In compassion, God revealed to the nation of ancient Israel important principles designed to help those in financial crisis. These included not looking disparagingly on the poor (Leviticus 25:35) or charging them interest (Exodus 22:25). Portions of fields and vineyards were to be left for them to glean (Leviticus 19:10; 23:22). Israel was to take care of its poor (Leviticus 25:35).
Moses explained financial principles this way: "If there is among you a poor man of your brethren, within any of the gates in your land which the LORD your God is giving you, you shall not harden your heart nor shut your hand from your poor brother, but you shall open your hand wide to him and willingly lend him sufficient for his need, whatever he needs. Beware lest there be a wicked thought in your heart, saying, ‘The seventh year, the year of release, is at hand,' and your eye be evil against your poor brother and you give him nothing, and he cry out to the LORD against you, and it become sin among you.
"You shall surely give to him, and your heart should not be grieved when you give to him, because for this thing the LORD your God will bless you in all your works and in all to which you put your hand. For the poor will never cease from the land; therefore I command you, saying, ‘You shall open your hand wide to your brother, to your poor and your needy, in your land'" (Deuteronomy 15:7-11).
This same passage of Moses' writings tells us that in ancient Israel creditors were to cancel the debts of debtors every seven years (verses 1-4), giving each resident of the land an opportunity to be free of the burden of perpetual indebtedness. God knows that unforeseen problems, poor financial decision-making and poverty are perpetual problems and made provision for people to start afresh. Likewise, bankruptcy may be the only option one has to start over.
Although times have changed since God inspired Moses to give these instructions, the principles of treating the needy with dignity and respect remain.
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