Get Out and Stay Out of Debt
God will use money to enhance and direct our lives; Satan will use it to put you in bondage. The most common financial stress in the lives of Americans is debt. The Bible does not forbid debt but strongly warns of its baggage and bondage. Below are ten key principles to help fight against the bondage:
- Do not purchase anything on the assumption that a future increase in salary will compensate for payments.
- Attempt to keep “debt-to-income ratio around 36% which includes no more than 25% for mortgage.
- Recognize that debt mortgages the future; if you take debt today, you must pay it tomorrow; who knows what tomorrow will bring. Repaying it becomes your #1 financial priority; you no longer have freedom of choice. (James 4:13-14)
- Do not co-sign another person’s note or guarantee someone else’s loan. When co-signing a lender is saying the borrower’s financial condition is so unstable that the only way they will extend a loan is for someone else to guarantee it. Therefore, ask yourself, “if a lender won’t take the risk, should you?” Crown Ministries reported that a Federal Trade Commission study found that 50% of those who co-signed for bank loans ended up making the payment. “Do not co-sign another person’s note or put up a guarantee for someone else’s loan. If you can’t pay it, even your bed will be snatched from under you.” (Proverbs 22:26-27)
- Budget before you borrow; never borrow without measuring your ability to repay the loan. Debt is best used for non-regularly recurring expenses such as college tuition or major purchases like a car or house.
- If in debt, understand why minimum payments are not good enough. Often the minimum covers the interest, little (if any) is paid toward the principle.
- Create an accurate assessment of your debt. Rank debt from highest interest rate to the lowest; pay minimum payment on all debt except highest interest rate debt. Apply extra funds toward highest interest rate debt.
- Repay debt and do so promptly – “the rich rules over the poor, and the borrow becomes the lender’s slave.” (Proverbs 22:7)
- To be informed with money one must differentiate between “good” debt and “bad”debt. Typically, purchases that immediately decline in value or have no potential to increase in value is considered “bad” debt. Conversely, debt that creates value (such as student loans or home mortgages) or debt that is tax deductible is considered “good” debt.
- Compounding can be your best friend or worst enemy; make your money work for you, not against you:
- Invest $10,000 in the market at 10% for 10 years, you’ll earn $25,937, a gain of $15,937.
- To pay off $10,000 in credit card debt at 20% for 10 years you’ll pay $61,917, a cost of $51,917.
This is a hypothetical example and is not representative of any specific investment. Your results may vary.