Take a page from Scripture and be cautious when borrowing money
When you borrow money, have you ever stopped to think about whether the debt you are taking on is working for you or against you? That’s an important step in sound money management, but very few people take the time to consider that question. Certainly Scripture warns us in multiple places to be cautious when we borrow. One example comes from the Book of Habakkuk: “Woe to him who stores up what is not his: how long can it last! he loads himself down with debts. Shall not your creditors rise suddenly? Shall not they who make you tremble awake?” (Habakkuk 2:6-7) Or consider Proverbs 22:7, where we read that “the borrower is the slave of the lender.”
Given the caution provided in Scripture, when does it make sense to borrow money? I primarily consider whether the debt is “productive” or “unproductive.” Debt is productive when it is used to purchase an appreciating asset, when it can be obtained at reasonable interest rates, and when the borrower can afford to take on this new obligation. Debt is unproductive when it is used to purchase depreciating assets or consumable items, when interest rates are too high, or when it results in payments that you can’t afford.
Let’s consider a few examples. Does it make sense to take out a mortgage for a primary residence? In many cases, yes. Over the long term, housing prices historically appreciate at about the rate of inflation. You get the benefit of living in the home while it appreciates in value, and the government provides an extra tax deduction for the interest you pay. However, it’s easy to get into a situation with housing where the debt becomes unproductive as a result of borrowing more than you should. When this happens, the payments take so much of your income that you can’t properly meet your other responsibilities. An ever-present financial stress results that isn’t good for anyone, especially for a marriage relationship. So when buying a home, make sure it’s affordable. Remember too that I’m a fan of paying a home off in less than the typical 30 years. By doing so, you create a lot of financial freedom and flexibility down the road.
Cars and credit cards
Another purchase that Americans regularly borrow for is their car. But does borrowing for a car fit the productive debt model? Does a car appreciate after you buy it? Of course not! So why do we habitually borrow money to purchase our automobiles? Because we find it hard to save, and because it’s so easy and tempting to borrow. Here is some sound advice. Start saving now for your next car and plan on spending no more than you have set aside. You may end up with less car, but you’ll be free of debt, and in a better position to meet your other, more important obligations.
What about credit card purchases? If you pay your cards off in full every month there is no problem. You really aren’t incurring debt. But if you carry balances over from month to month, this is some of the most unproductive debt available. Does anything you buy with your credit card appreciate in value? My guess is you can barely remember what you bought on your credit card last month, let alone any of it appreciating in value. In a recent survey prepared for the National Foundation for Consumer Credit, 40 percent of credit card holders admitted that they don’t pay their balances in full every month. In fact, the average household carries about $8,000 in credit debt from month to month. At 20 percent interest, that’s $1,600 per year that could be used for other family needs.
So the next time you consider borrowing money, ask yourself whether it is a “productive” or “unproductive” use of debt. If it’s unproductive, take a deep breath and wait to make the purchase until you have the cash. God love you!
Northwest Catholic - October 2014