Principle #2: Before You Add More Debt, Ask Yourself These Questions
The Sound Stewardship Principles™ are at the heart of how we serve. Over upcoming months, we’re going to break down each of these principles in greater detail and take a closer look at what we believe leads to financial success.
At Sound Stewardship, we have seven principles that are crucial to long-term financial success. The second of these principles is “avoid using debt.” This is a crucial building block to financial freedom, which in this case is simple: not being enslaved to a monthly payment.
Debt. It’s a tricky subject. A lot of people ask me, “But isn’t there good debt?” referring to mortgages or student loans. My answer? It’s complicated. There can be appropriate debt, but we still want to do our best to become debt-free.
Choosing debt-free alternatives
In every purchase, ask yourself, “What is the debt-free alternative?” This might mean buying a 2006 VW instead of getting a loan for a 2018 BMW, because you can cover the cost with cash. This might mean encouraging your child to go to a state university, instead of a private one that will require tens of thousands of dollars of student loans. These are big decisions, and it’s easy to give in and think taking a loan will be worth it, but at Sound Stewardship we believe that there’s nothing more worth it than financial freedom.
Is there such a thing as good debt?
I have a home mortgage, so I’ll admit to you that I’m not 100% debt-free. But I also have a plan, a detailed and active plan that will have my mortgage paid off in a matter of a few years. Yes, there is such a thing as appropriate debt, and we think of it in three categories:
- Buying a residence that has the ability to appreciate. Homes, when purchased wisely, most often appreciate in value over time. As opposed to cars and electronics that depreciate the moment they’re in your possession.
- Educational debt, but with a caveat. Only take an education loan when you know it will lead to income creation that will allow you to quickly pay off the debt.
- Business-related debt, or debt that leads to income creation. Crunch the numbers in advance to make sure its worth it and will allow you to pay off the loan as soon as possible.
The Biblical basis
Proverbs 22:7 states, “The rich rule over the poor, and the borrower is a slave to the lender.” The writer doesn’t pull any punches here! As long as you have debt on the books, you’re probably not freed up to do what God wants you to do. There is no judgment here, just an acknowledgment that debt prevents us from serving as best we can, and so it’s our calling to be freed from it.
Debt interest and the new tax law
If I haven’t convinced you yet of the importance of avoiding debt, here’s a fun fact that many people aren’t aware of (and yes, to me all financial facts are fun facts). Did you see our recent post about charitable deductions and the new tax law? This applies to debt, too. The new standard deduction thresholds are so high that the average person won’t be itemizing, which typically included their mortgage interest. This means that most Americans will no longer benefit by taking on more home-related debt when it comes to reducing your taxes.
For those struggling with debt, here are a few guiding questions we often ask to build a plan to pay it off.
- How can you increase your income? This includes major changes like seeking new employment or getting a specialized certification/degree.
- How can you decrease your expenses? Yes, this might mean dropping cable or starting to buy generic brands at the grocery store.
- What can you sell to create quick cash to knock out some of your debt? Sell something as big as your home or car, or as small as electronics or clothing to knock out some smaller bills.
- Are there services that you can provide for a neighbor, in exchange for a service you need instead of purchasing it? For example, you could offer to mow the lawn of your mechanic neighbor when you need your car fixed. Think of what you’re good at and find ways to offer it to others for a service in return.
Don’t keep debt in the dark
There’s one thread that weaves its way through all of our principles, and is very strongly bound to this one: your experiences growing up and what you saw modeled financially in your household have a tremendous impact on your financial actions today. So getting debt-free can take a lot of self-assessment and understanding of your own motives.
Debt is often a topic we keep in the dark. We don’t talk about it with our friends or family, often not even with our spouse. But there’s no shame in having debt, only a call to action. As we always say, every financial decision is a spiritual decision. So bring this one to the light, seek God’s wisdom in how to move forward, and know we’re always here to help.
Read more from the Sound Stewardship team on financial freedom:
- Principle #1: The means to financial freedom
- The Only Way To Get Wealth
- The Least Sexy, Most Important Money Skill
- The Three Most Common Money Mistakes
- Cultivating the Art of Contentment