Chapter 2
A SCRIPTURAL VIEW OF DEBT
Chapter Goals/Competencies:
- Learn and use compounding to your advantage
- Avoid falling into financial traps.
- Follow important criteria for undertaking debt
- Test the merit of any financial undertaking.
The Nature of Debt
Key Scripture:
The rich rule over the poor, and the borrower is servant to the lender - Proverbs 22:7
The Deception of Debt
Remaining debt-free in a society that encourages spending has become increasingly difficult. The majority of Americans go into debt a little at a time. Before they realize what has happened, their payments have expanded to gargantuan proportions, their paycheck has shrunk, and monstrous debt looms over everything—demanding to be fed. Even the government’s deficit spending reflects the debt problem at the heart of many Americans.
The media has been prominent in helping Americans "meet their every need." As a result, many people have fallen prey to advertisements. It is important to remember, however, that these promises are always geared to serve the advertiser, not the consumer. Advertising plays on a person’s susceptibility to temptation, a need for significance, a desire for instant gratification, and a hope to get a "good deal." While a product or service may make you feel good temporarily, not one of them can ever meet the deepest needs of your life.
Another part of the problem of easy debt is the misconceptions that are often encouraged by some financial experts regarding the use of debt. Some of these misconceptions are:
1.Borrowed money is always paid back in the future with cheaper dollars.
This is true if two basic assumptions prevail. The first is that you can borrow at a fixed rate so your interest rate will not increase with inflation; the second assumption is that inflation will continue. But counteracting these assumptions is the reality of a fluctuating economy. In periods of inflation, interest rates rise, and lenders promote adjustable rate mortgages. A lender can change points and fees to increase his own income, pushing much of the risks to the borrower. So while you may repay the loan with cheaper dollars in the future, the premium rates of interest will cost you more than any benefits you may receive.
2.All your tax interest is deductible.
Not all interest is one hundred percent tax deductible. Consumer interest (credit cards, car loans, installment loans) is certainly not, and investment interest has some limitations. The only exception is a home mortgage loan, but even that has limitations over certain amounts. It is important to remember also that taxes are not offset dollar for dollar by the amount of interest. A partial benefit on tax deductions is actually all that interest may offer.
3.It will cost more later.
This statement should evoke the question, "Do I really need it?" You cannot assume that prices will continue to rise. Making a purchase on the basis of its future cost is a very short-term perspective and may prove to be a financial disaster.
4.Make the magic of leverage work for you.
The idea is that using debt to purchase gives a far greater return than if you paid cash. During inflationary times many people (even huge lending institutions) have gone bankrupt trying to make leverage work for them.
The Magic of Compounding
Compounding has been called the eighth wonder of the world, because it changes a single dollar saved for the future into multiplied dollars. It does not work dollar per dollar or arithmetically; rather compounding works geometrically. So the earlier you start saving the greatest amount at the highest interest rate, the greater the final product of compounding.
An excellent example of compounding is the effect of impulse spending over a long period of time. If you spent $2.74 a day on things you did not plan for or did not really need, you would spend a phenomenal $40,000 over a working lifetime of forty years. That $40,000 placed in an IRA at 12.5 percent interest would grow to $1,000,000 in the same forty-year period.
If you think of the $2.74 as interest paid on borrowed money, the $2.74 spent each day on interest does not cost you only $40,000. In actuality you will have paid the lender $1,000,000. The opportunity cost of consumption states that if you spend today, you give up multiple dollars out of the future. Spending $1000 each year unnecessarily actually costs you the earnings on that $1000 each year—approximately $1,000,000 over a lifetime.
Compounding can work for or against you, depending on your status as a lender (saver) or a borrower. The adverse effects of compounding can best be demonstrated by the following example: If you have a thirty-year mortgage on your home at a 10 percent interest rate, you will actually pay back over three times the original amount borrowed.
Borrowed $100,000
Interest rate 10%
Monthly payment $ 877.57
Months paid x 360
Total paid $315,925
To reduce this high interest cost, many financial planners encourage homeowners to make extra mortgage payments if they are able. Biweekly payments instead of monthly payments or simply making an extra monthly payment each year will reduce home mortgage interest costs by tens of thousands of dollars. Carefully review these charts on compounding.
Debt Misconceptions
Some very common misconceptions concerning debt are:
It’s a sin to borrow. Although the Bible gives many warnings about being in debt, borrowing money does not violate any commandment. However, Scripture clearly indicates that borrowing is not God’s financial ideal. "Trust in the Lord with all your heart and lean not on your own understanding" (Prov. 3:5).
It’s wise to borrow. Many Christians believe that leverage (using a small amount of equity or assets to purchase an asset worth substantially more) is the way to prosperity. But the Bible warns against using debt to accomplish economic goals. "If you lack the means to pay, your very bed will be snatched from under you" (Prov. 22:27).
God will bail you out of debt. God does not promise to overcome the results of your unwise behavior. Instead he allows you to live with the consequences of natural laws when you violate them. "I will repay them according to their deeds and the work of their hands" (Jer. 25:14).
Debt is an exercise in faith. God does not need a lender to meet our needs. This is a presumption on God and not an act of faith. "So do not worry, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For the pagans run after all these things, and your heavenly Father knows that you need them" (Matt. 6:31-32).
It’s a sin to loan money. Although it is not a sin to loan money, the relationship between the borrower and the lender greatly changes. If you are considering loaning money, first determine if the need is legitimate (shelter, food, clothes). If it is and you can afford it, give the person the money. "You must not lend him money at interest or sell him food at a profit" (Lev. 25:37). If you cannot afford an outright gift, reconsider the matter seriously before making a loan.
Life Application:
what are your long-term financial goals? Prayerfully consider your answers as you fill in Worksheet 2-A, "Long-Term Goals." Add other categories that may be your personal financial goals.
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