We’re calling our latest issue “The Money Issue.” Our Mar/Apr 2016 cover story explores our relationship with money as Christians, and our identity in having, being and doing. Our At Issue page presents some hard facts on Canadian household debt, while our By the Numbers department focuses on even more money facts. Building on the theme, we asked FaithLife Financial to offer some guidance on digging ourselves out of debt. Read on for their good advice – and the good deal they offer at the end of the blog.
By Marta LoFranco
“The Good, the Bad and the Ugly” was a 1966 Western film starring Clint Eastwood. It was a tough-minded tale about pure human greed that depicts a loner, a bandit and a bounty-hunter who set out to find a hidden fortune. The title can certainly be applied to something we should all be concerned about – debt!
Many of us shudder at the word “debt.” While the world could not function economically without it, debt becomes a problem when it is abused.
Good debt: Good debt can enable us to achieve worthwhile goals in a financially sound way. A low interest mortgage on a house with manageable monthly payments is a good debt. It provides a place to live, to raise your family, and it’s a way to build equity. A student loan may also qualify as a good debt depending on the amount and the ability to pay down the loan after graduation.
Bad debt: Money owed for non-essential purchases is bad debt. Most bad debt is not built through large single purchases but from small multiple purchases that are forgotten until the monthly credit card statement arrives.
A loan on a vehicle can also be a bad debt because of interest costs and depreciation. It’s a better choice to make an affordable purchase based on need versus want. Paying off bad debt should be given first priority when it comes to improving your financial situation – and often the biggest reason is the interest rate.
Ugly interest: Interest that is paid against outstanding debts, especially credit card debt, is money spent for nothing. Credit card companies charge as much as 18 to 20 percent annually on outstanding balances. One large Canadian retail chain charges a hefty 28.8 percent on unpaid balances.
When we compare these rates with annual interest paid on high interest savings accounts of two percent or less, and fixed mortgage rates hovering below three percent, we see how costly these credit cards can be.
Credit is a loan, and all loans are defined as either secured or unsecured. The mortgage on your house is secured because the mortgage lender can claim the house and property if you fail to repay the loan. The security for the loan reduces the risk and justifies a lower interest rate. Credit cards represent unsecured loans. Only your promise to repay the money provides any assurance to the creditor. When the risk goes up, so does the interest rate.
How much debt is too much?
Many Canadians believe that as long as they can handle their monthly minimum credit card payment they are not in trouble. The general guideline established by mortgage lenders for maximum monthly payments to credit cards and all consumer loans (including car loans) is 8 percent of before-tax income.
For a family with a monthly gross income of $5,000, this means no more than $400 each month should be diverted to them. If your debt payments (excluding your mortgage) exceed 8 percent of your gross income, it’s time to take action.
And, from a biblical perspective, managing debt repayments to a lower level than the maximum allowed by lenders may represent an exercise of wisdom, so the time to take action may arrive even earlier.
A good first step is to find a qualified financial representative who will help you categorize your debts, assign measurable goals and set realistic plans to reduce and eliminate debt.
Research shows that debt does not have economic or social boundaries. There are people in every church and community who are struggling financially. A good budget is like a detailed road map. It keeps you going in the direction you’ve chosen and it points out bumps in the road – getting you back on track if you lose your way. Your budget is the map to achieve your goals, to curb spending and to help you stay out of debt.
FaithLife Financial has partnered with You Need A Budget (YNAB) to subsidize the $60 cost so that YOU, your extended family and your friends may access it for only $20. You will receive the software for your home computer with a FREE app for iPhone or Android. Make spending decisions based on the budget – not the bank balance!
To get the discounted rate, visit FaithLife Financial for a YNAB access code. Then, visit YouNeedaBudget.com/redeem to get started. The YNAB discount offer from FaithLife Financial expires May 30, 2016.
Marta LoFranco is Manager, Marketing & Outreach, FaithLife Financial. Subscribe to Faith Today now and receive Brian Stiller’s latest book for free.