Friday, February 12, 2016

Can We Borrow Ourselves Rich

An economist was evaluating the deficit spending that our government has been doing during the Bush and Obama administration. He made an interesting observation. He said that we have gone from an economy that creates capital and produces real value through manufacturing and commodities from farming and mining, to an economy where we just pay each other for services and we just move money around, while producing less and less value. He said we are trying to "borrow ourselves rich". Well I don't know if he is right or wrong about our economy. At least the farm economy is still producing real value.

But lets look at this from a personal stand point and ask ourselves if borrowing will help us prosper.

Proverbs 22:7 says, "the borrower is slave to the lender". The Bible teaches that the only real prosperity happens when we adjust our lifestyle to live on less income than we make over a long period of time. We need to give, save and invest from the margin between our needs and our income.

Proverbs 10:22 says, "The blessing of the Lord makes one rich, and he adds no sorrow with it." There is not one time in scripture where God blesses his people through debt. Debt, all debt, can carry much sorrow with it.

Now that we have laid the Biblical foundation. Let's look at some of the issues with borrowing.
  1. Cars - historically new cars have lost about 60% of their value in the first 4 years. That means if you buy a new $30,000 car every 4 years you are loosing $18,000 or $4500 per year. Over 40 years, if you invested this money you would have several million dollars. By borrowing for a new car and not saving to buy a car the opportunity for prosperity that is lost is millions. Yes, you need a car, but how about paying cash for a good used car and paying yourself a car payment for upgrading and replacement. (See America's Love Affair, Thinking Differently, Drive Free Cars, Retire Rich & Live Generous, for details.) So a quick analysis shows that borrowing to buy new cars does not increase our prosperity.
  2. Student Loans - an education is a great asset and investment. But you don't have to borrow to get an education. Attend a school you can afford. This means between scholarships, work and savings, you can pay cash for college. (See Why Not Borrow, A College You Can Afford, Choose a College, The Role of Parents,  Now What, $10,000 Summer,  for details.) We counsel many young couples who have $30,000 to $100,000 in student loans, who will be making payments for decades. Get the degree, but don't mortgage your future, massive student loans do not increase your prosperity.
  3. Credit Cards - banks who issue credit cards have very sophisticated marketing plans. Do not fall into the trap of letting credit cards compensate for your inability to plan ahead. One of the first things we tell people is to build a 3-6 month emergency plan that can cover everyday emergencies and a short time of unemployment so they don't have to rely on credit. Trying to be sophisticated and get points or other incentives is like playing with fire. Paying with plastic causes most people to overspend by 18%. Don't do it. No one ever got to be a millionaire with credit card points or airline miles. Credit cards do not increase your prosperity. 
  4. Homes Loans - we all need a place to live and home ownership is part of the American dream. We want you to own a home but we don't want your home to own you. Here is how to prepare financially for home ownership. You should have a 3-6 month emergency fund, eliminate all consumer debt, and save for at least a 20% down payment (30% is better). If a loan is necessary, then borrow for a maximum of 15 years and PITI (principle, interest, taxes and insurance) should be no more than 25% of your take home pay. If you follow these guidelines it is acceptable to borrow money to buy a home and avoid the sorrow of the borrower.
Talk to your neighbors that bought their homes in 2007 at the peak of the housing bubble with zero down at 40% of their take home income to see how much angst occurs by not following the above guidelines. Those that did not follow the above conservative guideline found that home ownership was not a blessing and did not increase their prosperity.

The economist that I referenced at the beginning of this article said the US government is just now paying off the borrowing during the Reagan years, 30 years ago.

Don't let this scenario happen to you. Spend less than you make. Get on a budget, build an emergency fund. If you have consumer debt, get it paid off. If you have a 30 year mortgage, refinance to 15 years or less. In 3-5 years most families can get their financial house in order. We can help you through Financial Peace University.

I wrote this post for the February 2016, of Autumn Ridge Church Magazine. It also appears on the ARC Financial Blog.

No comments:

Post a Comment