Upside Down and Under Water

The basic advice when it comes to financial well-being is to say, "Don't spend more than you make." But... this is America. It's no wonder our country is in such financial difficulty. Americans are so used to living life on credit (myself included) that it doesn't even shock us, as it should, when the government does the same thing. We demand instant gratification which transcends our entire culture. It's like a pyramid scheme that will eventually catch up with us.

In 2006, the United States Census Bureau determined that there were nearly 1.5 billion credit cards in use in America (The New York Times, February 23, 2009). The current average credit card debt per household with credit card debt is $15,799 (creditcards.com). On top of this is all our other debt, such as pay day loans, consolidation loans, home equity loans, student loans, and on and on.

So, here's what we do; not that I'm an expert or that this is the only way to do it. This is just what has been working well for us. We're like most of you in that we have a home mortgage, auto loans and credit card debt and we pay at least our minimum monthly payments. Whenever we have extra money, such as a tax refund, we put the money on our debt and we do it in a certain order. The debt with the least value and/or most interest gets paid first. In our case it's credit card debt because it has the highest interest rate and, once it's paid off, there will be nothing of value that can be liquidated. Next are our cars as they will depreciate even though they will have some value (more on cars later). Last is our mortgage as it has a low interest rate and the value of our home appreciates (under normal conditions). In addition, interest paid on mortgage debt is tax deductible.

For some of you the order of the debt you pay will differ. If you have a pay day loan, that will likely be the first that should be paid. And, if at all possible, avoid obtaining these loans in the first place as the interest rates are extremely high. A student loan usually has a low interest rate and, therefore, could be paid off later rather than sooner.

One big expense almost all of us have that could be managed better is our cars. This is where I've lost a lot of money. To begin with, don't buy a new car unless you're wealthy. It is simply never going to be a wise choice as the mark-up is tremendous and so is the depreciation. Getting a car even one year old saves thousands. And, even when you buy a used car, the best choice is to buy from a private seller. Dealers have to buy cars at wholesale or less and sell them at retail or higher in order to make money. In every instance, without exception, they will try to give you less for your trade-in than it's worth and sell you their car for more than it's worth. So, if you have the time, sell your car privately and buy your next one the same way.

When it comes to savings, I recommend keeping the amount of savings low until all your debt is paid. Let's say you have an extra $100. If you save it you may be lucky enough to get 2% interest resulting in $2 in interest paid to you every year. At the same time you are paying at least 8% on your credit card debt. If you paid the $100 on your outstanding credit card balance instead of saving it, you would save $8 in interest per year, or $6 more than you would have made had you saved it (there's a racket in there somewhere).

In addition to all this, don't forget to tithe. I believe that God has protected me and my family, even when we were reckless with our finances, and I believe it's because of faithful tithing. How much should you tithe? The Old Testament indicates that 10% should be given (Deuteronomy 14:22,23) while the New Testament tells us to give what we have decided in our hearts to give and to be cheerful about it (2 Corinthians 9:7).