Tag Archives: Debt

Lending Money – Advice from Scripture and the Catechism

At Mass on last Sunday, February 19th, the following passage from the Gospel of Matthew caught my ear:

Give to the one who asks of you,
and do not turn your back on one who wants to borrow.

This passage stood out to me because at first glance it stands in contradiction to another passage, Proverbs 22:7, I’m relatively familiar with due to Dave Ramsey quoting this passage:

The rich rule over the poor,
and the borrower is the slave of the lender.

I’ve adopted Dave Ramsey’s advice regarding lending money to others:  Mainly, I prefer to give, rather than lend, money to family, relatives, or friends who are in need, as I don’t want to create an obligation for them and have them indebted to me.  Note that I have to see a strong need present in order to consider giving money to friends, family, or relatives.  Dave often sites the “Thanksgiving dinner situation” where one relative owes money to another, resulting in increased tension between the two due to debt.  I want to avoid this situation in relationships with people I care about.  Proverbs 22:7 certainly supports this philosophy.

Given that Matthew 5:42, though, exhorts us not to turn our backs on the one who wants to borrow from us, how does this not create a contradiction, and where does this leave us when someone wants to borrow from you?  When I need clarification on scripture, I go to the Catechism of the Catholic Church, and it provides some clarity in this case.

VI. LOVE FOR THE POOR

2443 God blesses those who come to the aid of the poor and rebukes those who turn away from them: “Give to him who begs from you, do not refuse him who would borrow from you”; “you received without pay, give without pay.” It is by what they have done for the poor that Jesus Christ will recognize his chosen ones. When “the poor have the good news preached to them,” it is the sign of Christ’s presence.

We are called to help the poor and give and lend to them.  The Catechism also calls us to be prudent in giving and lending:

1806 Prudence is the virtue that disposes practical reason to discern our true good in every circumstance and to choose the right means of achieving it; “the prudent man looks where he is going.”  “Keep sane and sober for your prayers.”  Prudence is “right reason in action,” writes St. Thomas Aquinas, following Aristotle.  It is not to be confused with timidity or fear, nor with duplicity or dissimulation. It is called auriga virtutum (the charioteer of the virtues); it guides the other virtues by setting rule and measure. It is prudence that immediately guides the judgment of conscience. The prudent man determines and directs his conduct in accordance with this judgment. With the help of this virtue we apply moral principles to particular cases without error and overcome doubts about the good to achieve and the evil to avoid.

San Damiano Cross

In my multiple years of serving dinner at a local homeless shelter, l learned that the Dallas/Fort Worth homeless population struggles mightily with mental illness and associated alcohol and drug addictions.  Although these homeless certainly are poor, prudence has us put “right reason in action” and consider that our giving and lending could potentially enable their addictions.  As a result when interacting with the homeless, I prefer to give them food or supplies, or offer to take them to buy a meal.  Further, I give monthly to Catholic Charities, who has expertise in providing services to the homeless while not enabling bad behaviors.

Matters are more complicated, though, when considering lending to family and friends.  As I mentioned before, I have to see a significant need (major health issues, hunger, etc.) as well as effort to improve financial habits that may have placed them in their precarious situation.  A friend recently asked to borrow money from me in order to take a vacation, saying “I would have my money back in five days, so what’s the difference?”  I didn’t lend them money, and certainly didn’t give them money, as I reasoned she should be a good enough steward of her money so that she isn’t living paycheck to paycheck.  More to the point, a vacation isn’t a need.

As in many cases where scripture is difficult to interpret, seeking the guidance of the Church will provide clarity.  The virtue of prudence provides further clarity in this case, as well.

Is College Worth It?

The cost of a college education and the associated debt that often accompany a college degree were both hot topics during the recent presidential election cycle.  The price of college tuition has soared and greatly outpaced both incomes and inflation.  One fringe presidential candidate even campaigned on promises of “free” college education for all (rant:  We’ll be taxed all the more to pay for this “free” college).

There is a camp that believes all people should go to college no matter the circumstance.  This view, though, doesn’t address the financial implications of attending college and also discounts various nuances, including whether a person would like to pursue a trade or career that does not require a college education. Additionally, some individuals may not succeed in a traditional classroom or school environment. They may benefit much more from an apprenticeship or hands-on training environment where substantial education costs are not incurred.

Tradesman can expect to make respectable salaries, too. Salary.com indicates a plumber earns, on average, in the range of $36,568 to $51,610 annually as of January 30, 2017. Welders make on average $32,409 to $42,798 as of January 30, 2017 according to salary.com. US median household income is $55,775 as of 2015 according to census.gov, the United States Census Bureau, so these salaries are certainly competitive when considering they are earned by individuals (as opposed to households).

I have an undergraduate degree in a STEM major and a Masters in Business Administration with an emphasis in finance and real estate.  My undergraduate college was a liberal arts college and, while as a student I questioned the value of all those “useless” electives, I now value all the writing practice, communications skills, and soft skills I gained.  My MBA was 85% paid for by my employer and provided me with a ton of business, finance, and investing knowledge that I am leveraging to continue investing in equities, start real estate investing, and potentially start a business with a colleague.  Was an MBA needed to continue investing in index funds, start investing in real estate, and open a business?  Certainly not.  Having the MBA 85% paid for, though, by my employer made this a great opportunity and helps me understand most aspects of running a business, and this knowledge was conveyed to me by terrific professors and the learning was facilitated by classmates who had expertise in many fields, including investment banking, real estate, energy, supply chain management, and management.

So, is college worth it?  It depends on many factors.

If you’re going to college, here’s how you can increase your return on investment:

  • Advanced Placement Exams.  Take advanced placement (AP) courses while in high school. You can then sit for AP exams in various subjects.  Depending on how well you score you will earn a corresponding amount of college credit.  Each hour of credit you earn will save you hundreds of thousands of dollars.
  • CLEP Exams.  College Level Advanced Placement (CLEP) exams function similarly to AP exams and allow you to earn college credit.  As with AP exams, CLEP exams can save you hundreds or thousands of dollars in tuition.
  • Get Community College Credit.  Community colleges have tuition that is much cheaper than 4 year universities.  If you’re already attending a 4 year institution, look into their transfer credit policy and see which hours (especially basic credits) can be taken at the local community college and transferred.
  • Finish College.  According to a recent LinkedIn article, graduates with a bachelor’s degree earn over $1 million more in their lifetimes relative to those who only hold high school diplomas.  If you start college but don’t finish, and if you also incur student debt, you’re putting yourself in a hole that will be difficult to escape.
  • Choose Your Major Carefully.  Certain majors are more in demand by employers and certain majors typically result in higher starting pay.  It’s one thing to finish school with $200,000 in debt but a $100,000 starting salary as an analyst at an investment bank.  It’s a completely different ball game finishing school with $200,000 in debt but starting your career making $30,000 as a social worker.  Notice that I’m *not* saying don’t become a social worker (or any other major, for that matter).  Before you choose a given major, know reasonable starting salaries and how long it would take to pay off debt if you choose to carry debt. Educating yourself on your degree’s financial ROI will help you save yourself from the potential surprise and grief of monster debt when you graduate.
  • Have Your Employer Pay For It.  Many employers will subsidize part of your college education, especially if it relates directly to your job, while other employers, especially universities, will pay for your entire education.
  • Choose a College with Successful Career Placement.  I credit esimoney.com for this great, and often overlooked, idea.  A college education is a step toward employment, so visit the career services offices at your prospective school and ask the placement rate for students in general and, more importantly, for students in your major.

There’s no easy answer regarding whether college is worth it for a given individual.  If you’re considering a trade as a profession, college may not be the route you choose.  If you decide to attend a college or university, there are many factors to consider that can help you increase your return on investment.

Three Lessons from The Millionaire Next Door

The Millionaire Next Door is my favorite personal finance book because of three life-changing lessons it imparts, all supported by mountains of research data gathered and analyzed by two professors, Thomas Stanley and William Danko.  These lessons provided me with a financial enlightenment when I was first learning the basics of personal finance, and I suspect many of you will find at least one of them encouraging, challenging, or both.  These lessons taught me to have a new attitude regarding personal finance, and I hope they do the same for you or your loved ones.

Lesson 1:  The majority of millionaires differ radically from what the media and marketers have you believe.

I grew up on a steady diet of TV and, as you know, advertisers and marketers feed you a stream of images and depicting what the rich are supposed to look like.  Of course, their message equates buying their products and increasing consumption with living like a millionaire.  The Millionaire Next Door shatters the notion that the average millionaire consumes the latest and greatest.

In reality, the average millionaire lives a nondescript life and lives in an average neighborhood. This is logical, as over-consuming would lead one to have less money to save an invest.  Stanley and Danko acknowledge that deca-millionaires, the extremely rich, can afford to consume and live up to the images portrayed by advertisers, but this segment of the population is extremely small.  You are more likely to find the ex-millionaire who has spent their fortune away than you are to find a deca-millionaire who can afford to live an extravagant lifestyle.

Lesson 2:  You will not acquire financial independence as long as your sole source of income involves trading time for money.

Many Americans grow up with the idea that working an 8-to-5 is the only way to pay for life. This mentality is one I grew up with and fails to consider what happens if injury, chronic illness, or another circumstance interrupts your employment.  More importantly, this mentality forgoes any consideration of financial independence, as it assumes one must be an employee their entire life in order to sustain a lifestyle.

You will never acquire financial independence without acquiring assets that appreciate without realized income.

-The Millionaire Next Door

Having assets (savings, investments, businesses, etc.) work for you allows you to achieve financial independence as these assets working for you reduce or remove your dependence on realized income (income you earn via employment).  The more assets you have working for you, the more likely you are to achieve financial independence more quickly.  Think of Dave Ramsey’s debt snowball here, but instead of debt, consider an “asset snowball.”

Lesson 3:  The American dream is alive and well.

We’ve all heard in the media many times that it’s impossible for the little man to get ahead, with stagnant wages, a tepid economy, and any number of other reasons.  The Millionaire Next Door provides all Americans with hope:  The vast majority of millionaires are first generation millionaires, having built their fortunes without the benefit of an inheritance.  That’s right, most people who become millionaires are not trust fund babies and do not have a leg up on the rest of us.  The majority of them live below their means, save, and then invest their way to wealth. The American dream is indeed alive!

Psychology and Fear in Personal Finance

Be fearful when others are greedy.  Be greedy when others are fearful.

-Warren Buffet

Warren Buffet is one of the most successful investors of recent times and provided this great quote in 2008 during the height of the subprime mortgage crisis.  During the 2007-2009 bear market, the S&P 500 lost over 50% of its value and many people close to retirement had to delay their exit from the 9 to 5.  In hindsight, as we sit in the middle of a bull market in 2016, Buffet’s quote is great advice, but how are you supposed to separate yourself from emotion when your nest egg loses over 50% of its value?

S&P 500 2007 - 2009 Bear Market
S&P 500 2007 – 2009 Bear Market (courtesy of Yahoo Finance)

There is no easy answer here, as personal finance is indeed personal, but you can certainly make good, informed decisions in the middle of emotionally charged circumstances.  Buffet was right about the subprime mortgage crisis and the need to buy while prices were low (i.e., while the market had lost lots of its value).  He likely looked at the history of the market and understood that it would bounce back.  As of September 16, 2016, the S&P 500 sat at 2,139.16 versus its lowest value during the subprime mortgage crisis of 676.53 on March 9, 2009.  As you can see, the market has more than returned.

S&P 500 - 2007-September 16, 2016
S&P 500 – 2007-September 16, 2016 (courtesy of Yahoo Finance)

How do you disarm fear and anxiety in personal finance?  Educate yourself.

Peace I leave with you; my peace I give to you. Not as the world gives do I give it to you. Do not let your hearts be troubled or afraid.

John 14:27

How should you manage fear and anxiety when making financial decisions?  Start with education, then don’t stop educating yourself.  Read personal finance books (I highly recommend The Millionaire Next Door), visit personal finance blogs (Afford Anything is my current favorite), and listen to personal finance podcasts (Marketplace is great for keeping up with current financial events; Afford Anything has a great podcast, too).  I’ve found that I pull pieces of information from each of these sources and, as a result, have molded a personal philosophy.

The key lesson here is that education will help you see that American equity markets have more than recovered from the multitude of previous crashes and bear markets.  Buffet understood this and saw that equities were simply on sale.

How else do you disarm fear and anxiety?  Understand risk and reward.

I recently listened to a personal finance podcast where I heard an interesting anecdote involving fear.  A caller indicated they hadn’t invested in the stock market for retirement due to their fear of losing money.  While the caller certainly is correct that avoiding the stock market and investing in something safer, like CDs or cash, will help you avoid risk and the large losses that can accompany risk, he is also missing the other half of the equation:  In finance risk is necessary for growth.

While the caller will seemingly preserve capital by avoiding the volatility of the stock market, their capital will erode over time due to the effects of inflation.  The eroding power of inflation will decrease buying power if not offset by gains.  One option for generating more gains than cash but experiencing less volatility than the stock market is the bond market.  The bond market, though, experiences a good amount of volatility, too.

While someone can certainly go to sleep peacefully knowing they will avoid the volatility of the stock market and keep their money safe (at least until inflation eats away at it), it would be rash to do so without being aware of the rewards that accompany carrying risk.  Over the past 30 years (specifically from January 1, 1985 through December 31, 2015), the compound annual growth rate of the S&P 500 was 8.2% with dividends reinvested and adjusted for inflation.

S&P 500 - CAGR for past 30 Years
S&P 500 – CAGR for past 30 Years (courtesy of MoneyChimp.com)

As you can see, $1 invested in an S&P 500 index fund on January 1, 1985 would have returned over 1,100% in 30 years.  While I can see how avoiding significant losses would allow someone to sleep peacefully, avoiding a significant amount of the S&P’s gains during this time period would cause me to lose sleep at night.  My advice to the caller:  Educate yourself about risk and reward, then understand how accepting additional risk could result in your nest egg multiplying in size.

Great Personal Finance Podcasts

One of my favorite things to do on long drives is listen to personal finance podcasts.  There are a handful that I have found (so far) to be better than the rest:

My favorite podcast is Afford Anything with host Paula Pant, as she combines an entertaining delivery with great guest speakers.  Paula encourages listeners to both increase their incomes while decreasing their expenses (increasing the “gap”).  Her focus on increasing income differentiates her from many, many other personal finance bloggers who put a great focus on limiting expenses and frugality.  I certainly think both are important, but Paula’s focus on making the gap bigger blows past the flawed binary view on many blogs that we should focus on either increasing income or reducing expenses, but not both.  Paula provides a ton of insight, too, into real estate investing.  I definitely, definitely recommend the Afford Anything podcast.

The Mad Fientist podcast focuses on reaching financial independence.  The Mad Fientist provides some original (to me) ideas:  How to use a health savings account (HSA) as a “super IRA” account; how to minimize taxes when investing in retirement accounts.

The Dave Ramsey Show podcast is targeted more toward people trying to get their financial house in order, but it is still very motivational.  Dave Ramsey releases three hours of the show every weekday, so there’s plenty to listen to.  My favorite segments are Dave’s millionaire theme hours, where millionaires are interviewed and insights are provided into their spending, saving, and investing habits.

Measuring Progress – Tracking Net Worth

As we budget, save, grow our income, and practice self-control in spending, it’s important to have a method for tracking progress.  After all, if we are indeed working to improve our financial lives, shouldn’t we have a way to measure our improvement (or regression)?

I have a coworker who has turned into a terrific friend and we’ll often talk personal finance in our downtime.  He shared with me his primary method for tracking progress in his financial life:  Tracking net worth.  This was definitely a “light bulb” moment and something I started doing (in November 2012) after we had the discussion.

In summary, you list your assets, list your liabilities, and take the difference, which gives you your net worth.  I calculate (actually Microsoft Excel calculates) my net worth every month and this lets me see how I’m doing financially.  Increasing the value of my assets or decreasing debts will send my net worth in the right direction.  Alternatively, keeping monthly tabs on my net worth lets me see where I might be slipping and hurting my net worth, giving me the chance to correct bad habits.

The following is the Excel spreadsheet I use to track my net worth:

Net Worth Spreadsheet
Net Worth Spreadsheet

If you would like to download this spreadsheet, click here.  The spreadsheet includes some simple formulas, including what percentage each asset comprises of each asset category.  Columns F, G, and H detail my net worth history and columns J through P detail what comprises the net worth value.

Categorizing your assets and liabilities can turn into an exercise, as you’ll need to consider whether certain items are assets, liabilities, or both.  For example, you could list your home’s equity as an asset, but you’ll also want to list your mortgage as a liability due to it being a debt owed to the bank.

As you keep track of your net worth, I think you’ll find a sense of accomplishment if you’re growing your net worth.  This will provide added motivation to steer your financial ship properly.  If you’re going in the wrong direction, use this as a tool to help identify what’s driving your loss and what you can do to fix it.  Good luck!

The Debt Snowball

One of my favorite concepts from Dave Ramsey’s Financial Peace University (FPU) is the debt snowball.  The debt snowball is the second of Dave’s baby steps to financial peace and is a technique for paying off debt that pays off the smallest debt first, the next smallest debt next, and so forth.

The debt snowball starts with you listing all of your debts.  You then pay the minimum on all your debts except for the smallest debt.  With the smallest debt, you pour all of your excess cash to paying it off.  An example:  If you have a $40,000 student loan, a $2,500 credit card bill, and a $15,000 outstanding balance on a new car, the debt snowball technique has you pay the $2,500 bill first, the $15,000 bill second, and the $40,000 last.  While you’re paying the $2,500 credit card bill, you continue making minimum payments on the two other debts.  The end result is that you pay off the smallest debt quickly.

You may have noticed that I made no mention of considering interest rates when determining which debt to pay first.  From a mathematical perspective, it certainly makes more sense to pay off debt with the highest interest first.  Dave Ramsey teaches, though, that if personal finance was strictly a mathematical issue, hardly anyone would be in debt.  On the other hand, Dave recognizes that personal finance has a large behavioral and psychological component to it.  By paying off the smallest debt first, you receive a psychological victory that rewards your discipline.  Having achieved this small victory, you’re then more likely to stick to your debt reduction plan.  You then focus on the second debt and gaining another psychological victory.

 

Student Loan Debt Affecting Parents and Grandparents

A recent Wall Street Journal article indicates that an increasing number of parents and grandparents are being affected by student loan debt:  http://blogs.wsj.com/bankruptcy/2012/10/29/soured-student-loans-bankrupt-parents-grandparents.  From the article:

As young graduates and former students struggle to find work, their student-loan obligations are increasingly falling to the family members who agreed to back the debt in the event of default.  Bankruptcy lawyers report that a growing number of student-loan co-signers, especially grandparents, are trying to get rid of the loan obligations using bankruptcy, hopeful that they’ll find a sympathetic judge or a lender who’s voluntarily willing to lower payments.

Unfortunately, borrowers usually don’t receive favorable rulings in bankruptcy court, so parents and grandparents who co-sign for their children’s’ and grandchildren’s student loans are often left footing the bill.  This puts retired parents and grandparents in difficult predicaments due to being on fixed incomes.

My advice to parents and grandparents considering co-signing on student loans:  Don’t do it, especially not if it’s for an undergraduate degree.  If your prospective college student wants to attend a private undergraduate university but cannot afford it without sizable student loans, take a look at the many great public universities.  Remember that while higher education can be financed via loans, you can’t take out a loan for retirement.

Avoid Getting Into Debt

I periodically post finance-related verses from the Bible and the Catechism of the Catholic Church.

As I finished up mid-morning prayer from the Liturgy of the Hours yesterday, I came across scripture that relates directly to personal finance.  From Romans 13:8-10 (or you can visit the Universalis web site for the full mid-morning prayer:  http://www.universalis.com/20120924/terce.htm):

Avoid getting into debt, except the debt of mutual love. If you love your fellow men you have carried out your obligations. Love is the one thing that cannot hurt your neighbour; that is why it is the answer to every one of the commandments.

After spending seven and a half years paying off student loans and finally becoming debt free last year, I felt a weight lifted off my shoulders.  For the five years I was in college plus the seven and a half years after, I had become accustomed to sending a check to Sallie Mae once a month.  Also, during that time period, on numerous occasions I calculated how many years and months remained until I was payment-free and could cash flow that money elsewhere.  While I incurred the debt in school, I didn’t realize that I was also adding stress to my life.

Needless to say, I agree with Romans 13:8-10 :)  My experience with student loans taught me that debt involves more than making somebody else rich with all your interest payments.  Debt also adds stress to your life and this stress is an intangible aspect of debt that one must account for when making financial decisions.