Proverbs 22:7 ESV “The rich rules over the poor, and the borrower is the slave of the lender.”
Ouch, that one stings a little bit doesn’t it? The borrower is the slave of the lender. Maybe if more of our government leaders spent more time reading their Bible’s we could avoid some of our current financial misfortunes. On the macro scale, this verse applies to our own country, continually borrowing to prop up a faltering economy. But it’s like building a 3-legged stool and one of the legs is made from balsa wood. You know, that really light, really breakable wood used in model airplanes. How much weight do you think that could support? The point here is our government is violating every basic economic principle and there’s no end in sight. We can’t continue to borrow money and increase our debt exponentially in the hopes that it will return a profit. It’s like borrowing $100, getting charged $30, in the hopes to make $50. In what world does that remotely sound like a good idea? But we just keep it up, borrowing more, spending more. Just yesterday Congress passed a $3.5 Trillion (with a T) dollar budget. Now let me ask you, if we’ve already had Trillions (with a T again) of dollars in bailouts and stimulus, wouldn’t it be a smart idea to tighten up the annual budget, instead of increasing it by 10% over last years budget? I mean, I’m just saying….
There’s nothing anyone can say or do to make those in Washington understand these principles, but the truth is the government’s financial management is really no different than our own household finances, though on a micro level. Would anyone reading this actually go borrow money on your credit card, with 20% interest, to pay your house payment? Ok, don’t answer that, but if you did, you’d lose money on both ends of the transaction. When you borrow money, you literally become slave to the lender. Just look at all of the foreclosures that took place over the last year. Continual borrowing is crippling. But here’s where we need a plan. A plan to relinquish the grasp of the lender, to no longer be their servant, nor to have money be our master. If you follow these basic steps, you’ll be on your way to financial freedom and become a better steward of God’s blessings, instead of viewing your financial situation as a curse. Ready?
Ok, first things first, I am not a financial expert, nor did I stay at a Holiday Inn Express. This is just my take on a few principles that I’ve read over the years and have used in my own life. I’ll be honest, a lot of them come from the principles of Dave Ramsey, though the plan below has some of my thoughts built in. Like him or not, his principles are on the money, pun intended. The first thing you need to do in this process is take out a sheet of notebook paper (or use a spreadsheet). At the top, list all of your take-home income (i.e. after taxes); we’ll assume here that taxes, healthcare/insurance, retirement, etc. have already been taken out. If not, you’ll need to account for them later. Next, list all of your debts, smallest to largest. This includes house payment, car payment, credit cards, student loans, any outstanding debts. Then list your utility bills followed by an estimate of your additional monthly expenses (if your insurance is not taken directly out of your check, account for it here). This is how much you spend on groceries, gas, medicines, things that you need in your daily life. This DOES NOT include movies, going out to eat, buying music, iPods, video games, etc. those are not necessities, those are luxuries and we’ll make a spot for them later. In my opinion, I think you should also include your tithing here. If you make it a priority early on and include it in your budget, you’ll be less likely to forget or omit it later on.
Ok, so now add up all of your expenses, I’ll wait here….Got it? If this sum is larger than your take home income listed at the top of your page, congratulations, you’re now eligible to run for Congress and you have a spending problem. My Rule of Thumb #1: If your car payment is greater than about $300 or if it’s greater than about 10-12% of your monthly take home pay, what were you thinking? It’s time to sell it. My Rule of Thumb #2: If your house payment is greater than 30% (though Dave Ramsey prefers 25%) of your take home pay, you fell for the Housing trap and there’s no bailout coming for you. This probably means you are house-poor and either need to put it on the market, reduce spending in other areas to compensate, or get another job. Hey don’t get mad at me, I’m just trying to help.
If you haven’t violated either of those rules of thumb and your expenses still outweigh your income, then obviously you either have too much outgoing debt, or you don’t have enough income. Convincing a lender to cancel or reduce your debt will probably prove to be a difficult or sometimes futile exercise, so you may have no choice but to get a second job to get ahead. To recap, in order to get your monthly income to be greater than your monthly expenses 1) Reduce your car payment by going with a cheaper, reliable used car. 2) Reduce your house payment. I realize this might be difficult, but sometimes to get ahead, we have to take a step backwards. 3) A part-time job might be the only other option to get ahead.
Once you’re at the point of [Income greater than Expenses], you’re making progress and you can now begin working towards financial freedom. Your next critical step is to save up $1000 towards an emergency fund, or as our grandparents used to say a “rainy day” fund. And let’s face it, the skies are looking pretty dark about now. The focus is on funding this emergency fund as soon as possible. To do this, take the remaining balance from Income – Expenses = Allocate to Emergency Fund. Easy enough so far, right? After this is funded with $1000, you’ve got a small security blanket and you can start focusing on your debt. Remember those debts that were listed smallest to largest? You now need to take the monthly amount that was going to your emergency fund and start applying it to your smallest debt, until it is paid off.
Example: It took you 5 months to save the $1000, by setting aside $200/month. You listed your smallest debt as a $5000 credit card with a minimum payment of $80/month. Using the above strategies, you were able to pay $200 a month extra and were able to pay it off. Your second lowest bill was $8000 remaining on a car loan with a payment of $250/month. Now you have an additional $280 to apply towards it for a total of $530/month! Continue this method until all of your debts are paid off, except your house (this comes a few steps later). Dave Ramsey calls this, the “Snowball Effect” because as you can see, once debts become paid off, the amount you pay on your next debt increases with each payoff.
The important thing to remember when listing your income and then subtracting monthly expenses, is to make sure that every dollar is accounted for. It’s ok to create small allotments for movies and an occasional dinner out, but if your focus is on paying off debt, these need to be limited early on. Once you get your debt under control, you’ll be surprised at the freedom you’ll feel and how you’ll be able to experience God’s financial blessings. Sometimes dealing with finances can be a bit confusing and overwhelming. I highly recommend attending the course entitled Financial Peace, developed by Dave Ramsey, or at least purchasing the CDs. To see the rest of this plan (without my opinions), including a 3-6 month emergency fund, paying off your house, investing, and giving, see Dave’s book The Total Money Makeover. I’ve included the link to Amazon.com below.
“Live like no one else, so you can Give like no one else” – Dave Ramsey