God's Solutions To Debt

This is a continuation of our finance series. Here are the others so far:

Managing Our Finances
Dedicating Our Finances
Spend Less Than You Earn
Giving As An Act of Worship
Saving and Investing

Before 1958, people were basically limited on how much they could spend by their paycheck. Then in 1958 Bank of America figured out how to create the all-purpose charge card, called the BankAmericard. Before then, each individual company had it's own card, but it was a pain to keep track of and therefore credit wasn't readily used. With this new card, people could instantly use it at 20,000 stores across California. Bank of America realized that like the telephone, the power of their card was the network: the more users the better. So they began to license their card and system to other companies in the US and eventually across the world. As this system got bigger and bigger BofA eventually gave up control of their system to a third party who's sole job was to manage the system. In 1976, that group brought all the independent licenses together and changed their name to one brand: VISA. Since then VISA has continued to be the largest credit card in the world. This, in part, lead to massive economic growth because people could buy something today based on future income earned.

On a personal level, when I started my shirt printing business I was mailed a credit card. It had great terms even though they knew nothing about me. Suddenly, my business had more credit than I did personally. It was crazy! Still, I used the card to buy the equipment and materials needed to get going. Within a few orders, I had made enough money to pay off my card and start saving for Legos. Had I not had the card, I'm not sure how I would have gotten going so fast. So I fully appreciate the power of credit and debt. However, I also know that there can be downfalls. Specifically, I'd like to talk about three potential pitfalls.

Expected Income

When you buy something on credit, you do it based on an expectation that you'll be able to make the payments later. However, there are a couple problems. First, sometimes we don't actually have as much as we think we should (due to a cut in pay or an increase in another expenses). When this happens, you fall short and a hole starts to get dug. This is the risk of credit. Unfortunately, our bet works out so often that we get lazy and make assumptions (yeah, I should have enough this month). It's when (and believe me, it's "when", not "if") we lose this bet that we get into trouble. By avoiding debt, you avoid this risk.

Fake Money

I remember when I first started working for Arby's my whole outlook on spending money changed. If something cost $20, it no longer represented a single green bill, but over 2 hours of my life! It really made me stop and think about each purchase because the idea of trading time for money was VERY real to me. However, over time I stopped making that comparison because I became deadened to the idea of trading time for money (just like watching violence on TV).

Making purchases with a card removed me one more step from that idea. Now instead of at least having to count out the bills, I swipe a card. It's painless and there's just a number on a screen for a few seconds. It many ways, it's fake money. It has no real meaning. I have to work REALLY hard to connect it to my time. As a result, it makes it easy to buy things. It's only $20? What's that? Nothing. Swipe.

One Master

Unfortunately, it is easy to get caught up in our debt mentally. We focus on having it, paying it off, and let it rule our lives. The Bible even points this out when it says, "... the borrower is servant to the lender" (Proverbs 22:7b NIV). As our debt increases, the likelihood of this happening increases. Since God wants us fully devoted to Him, you can see why debt could be an issue.

Given these pitfalls, it's important to try and reduce your debt as much as possible. We talked about 9 steps you can take to reducing your debt.

1. Pray: Part of dedicating everything to God is also dedicating your debt to Him. So start with prayer.
   
2. Develop a debt-free mind set: Decide you will no longer rely on credit cards and that you'll wait until you have the money actually saved.
   
3. List all your debts: Also write down the interest rate on each debt. It will help you decide which debt to pay off first. Then focus on paying off one at a time.
   
4. List everything you own: Is there anything you can sell which can be applied to paying off debt?
   
5. Establish a spending plan: Can you do something for less? Where are the areas you can cut?
   
6. Establish a debt-repayment schedule: know how far you have to go and see where the goal is.
   
7. Consider earning additional income: See my early post on Saving and Investing for some ideas.
   
8. Consider a radical change in your lifestyle: Many people temporarily lower their cost of living to become debt-free.
   
9. Don't give up!
   

Finally, I'd like to share two practical ideas.

First, here's what you do to escape the auto debt trap: Decide that you're going to keep your car three years after it's paid off. Then, continue to make the same monthly payment to your savings account. Then, when you're ready to replace your car (which could be another 5 years if you're really careful), you can use your savings plus anything earned from a sale on Craig's List, it should be enough to buy a good, low mileage used car. Then repeat the savings.

Second, learn to distinguish between good debt and bad debt. Good debt puts money into your account each month and/or goes up in value over time. An example of good debt is a piece of investment real estate because you earn money and it tends to go up in value (especially if you fix it up). Bad debt takes money out of your account each month and/or goes down in value over time. An example of bad debt is a car because you typically don't earn money off your car and it goes down in value the second you buy it. By learning about good vs. bad debt, you change your focus (like in step #2) on why you're making the purchase. You start to think about the financial impact instead of just the potential enjoyment or dissatisfaction of taking on the debt.

Debt can be a powerful tool, and something that destroys your life. When managing your finances, the 9 step plan can help you reduce your debt to a manageable level. When this happens, you open yourself up to more options and flexibility.

Never Eat Alone

Never Eat Alone, by Keith Ferrazzi, is a book about connecting with people. Ferrazzi himself is a master connector. A connector, as Malcolm Gladwell describes it in The Tipping Point, is someone who links the world together. Someone who has a knack for making friends and acquaintances. In real life, their social network is at least 100 people. On Facebook, it's probably closer to a minimum of 1,200 friends. I'm sure we can all think of one or two people like this (that's the nature of it... they're already you're friend). By the way, I just looked up his profile on Facebook and he has an extremely active Fan Page with about 8,900 fans.

In the book, Ferrazzi talks about the skills and habits he's acquired that has helped him connect with people. He starts off talking about how to create a mindset of a connector - to always be on the lookout to help someone. He emphasizes how critical it is to memorize people's names and something special about them. And how doing that can lead you to meeting people you never thought possible (by, for example, getting to know the gatekeeper of some super-busy executive). When meeting with someone, Ferrazzi likes to share his passions with them and learn about their passions. Then, take it a step further and try to figure out a way to help them with their passion. Can you do something yourself? Do you know someone who might be able to help? One of his favorite things to do during a meeting is say, "I know someone you absolutely must meet." Right then he opens his phone and dials the person and says, "I'm sitting with [name] and you have to meet him. He's interested in [his passion]. Would you be willing to meet with [name]?" Then, during the critical follow-up, he makes sure the two of them were able to get together. Ferrazzi also goes into detail about what he does at conferences and how he handles small talk. The big take-away I got was this: be an active person and invite people to join you. It's these activities, and shared experiences, that create the raw material to form a relationship. Oh yeah, and always follow-up.

Ferrazzi finishes up the book talking about larger issues. He talks about creating your own personal brand, finding people in your life to ground yourself, and pinging people constantly. It is packed with advice. In some ways it's like a textbook that can't be read casually because there's too much to take in. Actually, that would be my one criticism of the book: Since connecting comes so easily to Ferrazzi, he tends to touch on one piece of advice and then jump to the next instead of staying on a few topics and really diving down into the details of each one. My next steps are going to be to go back and focus on a couple areas I'd like to improve upon and learn how to do those better.

Overall, I thought it was a good book and worth my time. I'm glad I read The Fine Art Of Small Talk first because it gave me a solid rolling start into this book, and would recommend others read them in the same order too.

Saving and Investing

This is a continuation of our finance series. Here are the other's so far:

Managing Our Finances

Dedicating Our Finances

Spend Less Than You Earn
Giving As An Act of Worship

Saving and investing is a very important piece of our financial plans. Here's a classic exert from the Bible that speaks to the importance of saving and investing:

The servant to whom he had entrusted the five bags of gold said, "Sir, you gave me five bags of gold to invest, and I have doubled the amount." The master was full of praise. "Well done, my good and faithful servant. You have been faithful in handling this small amount, so now I will give you many more responsibilities. Let's celebrate together!" - Matthew 25:20-21 (NLT)

How we manage our money is practice for later. It's like when we practice our "times tables" in grade school - we did it so we could do more complicated math easier. As the passage indicates, managing our money, and investing it wisely, is very important. Before we can dive into the wonderful world of investing, we first need to talk about saving.

Saving

Part of being a good steward of your finances is saving. Believe me, this is tough to do because it requires patience and a very long term view. In our world where instant gratification is highly rewarded and encouraged, it's hard to go against the flow. For me, I have to remember the numbers are in my favor if I wait. Here's a simple example showing a $1,000 purchase. One is by saving for the purchase at 1% APR (currently ING is offering 1.1%) where you make the purchase when you have enough money (in month 11). The other is using a credit card at a rate of 10% to purchase the item right away (month 0). Both assume you are able to contribute $100 each month toward the purchase.

Making this purchase using a credit card will cost you $53 more - that's like an additional 5% tax on your purchase! Now imagine if the purchase was $30,000 and lasted about 5 years - the difference would be substantial! Of course, if you need the item right away, it might be worth going into debt. Deciding whether you need it, or want it, is very important. Jessi and I want another computer, and so we're going to wait and save for it (believe me, it's tough waiting, but it's worth it). Another huge difference, which you can't really quantify is that by saving you have options. For example, Jessi needed to pay to get official credit for a class she's taking to keep her teaching licence updated. We were able to take part of our computer fund money and use that to pay for her credit. That's peace of mind that is worth many percentage points!

We open saving accounts for everything simply because of this principle. We save for travel, car maintenance, Christmas and birthday gifts, impulse shopping (I know... ironic), etc. Basically, we save regularly for expenses that tend to happen in big chunks and are sporadic. This helps us avoid using our credit cards, earn a little interest in between, and thus actually save money. To be clear, it's hard, if not impossible to save for huge purchases. For example, we took out a loan for our duplex because otherwise we would have never saved enough, and the alternative, renting, wasn't really saving us money anyways. A car might be another example, but you really need to evaluate whether you want or need it to be new. OK, let's get more tactical.

The recommendation we were given for saving were these steps:

Step 0: Spend less than you earn - if you don't do this, nothing else matters.

Step 1: Pay off your consumer debt - specifically, pay off your credit card debt and personal loans. At this time I wouldn't worry about paying your car or home loan faster.

Step 2: Set money aside for an emergency - the amount you want to save will depend on your tolerance. Jessi and I are aiming for 3 month's worth of expenses, plus 3 months worth of rental income. What counts as an emergency? There's no strict definition, but you really want to only use it for things you need and don't currently have saved for.

Step 3: Save for major purchases - set up a separate savings account and add to them. It's so much fun to see the balance tick up! Great examples are computers, cars, furniture, appliances, TV's. For some of ours, we automatically deduct somewhere between $10-$100 monthly and then add on top of that as we're able.

Step 4: Diversify your investments to meet your long-term needs - start saving for retirement. By the way, when have you saved enough for retirement? When the principle and interest can pay all of your expenses from when you stop working to when you pass away. Do you know who much that is? Are you saving at a rate that will meet that goal? Obviously, the huge unknown is when you're going to pass away, but don't let that stop you (pick 120 years old if you want to be safe). I HIGHLY recommend getting together with an expert and figure out those numbers. The sooner the better too because you'll get to take advantage of compounding interest over time (more later).

Now it's time to switch gears to investing.

Investing

The very first thing we learned about investing this week was that there's no such thing as a perfect investment. In business school, they always said the perfect business was a mailbox where people show up and drop off their money on a regular basis. No work required, no risk, and a practical infinite return. Clearly this doesn't exist, but I think it can lay the framework for how you evaluate the types of investments you want to make.

When looking at investments, I typically think of two components, and two multipliers: (Money & Time) X (Leverage & Market). The choice of your investment will most likely be determined by what you have available.

Money

If you have money to spare because you spend less than you earn. Awesome! You can choose investments that require money. Classic choice = mutual funds.

Time

Maybe you don't have money, but you have time to spare and work on a side project. Sweet! Pick an investment that doesn't require much, if any, money. Instead trade your time. Classic choice = a job.

Leverage

This is the degree to which you can use other people's time and/or money. The more you can leverage those, the more powerful your investment will be.

Market

This is the risk side of the equation. Part of your investment's success is determined by the market in which your investment is in. Some markets are growing, some are shrinking, some have too many competitors, some are brand new. By doing your research, you can reduce much of this risk.

This is why starting a business can be so powerful. If you identify a need within a market and create something to fill that need, you can get a business loan from a bank and then with that money you can hire others to help you. That's doubly powerful! Of course, it requires a lot of your time and your money, so it isn't perfect either.

One of the reasons I decided to start up my shirt printing business was because I didn't have much money, but I had the time (sounds crazy for grad school... I know). Unfortunately, this business had zero leverage: it was only me and I used money I already had. When I started working full time, it didn't make sense to continue to invest in this business: I had less time and more money. So I changed my focus to investments that could leverage my money and my time. Now we own a duplex which is leveraging our money. We also have Univera which allows us to leverage our time as we build a team around us.

By the way, Jessi and I don't have any kids, and don't live near our family. So these investments make sense for us because we have a lot of time. Perhaps you work full-time and want to spend time with your kids. Investing in your company's 401K might be perfect for you. Later down the line, we'll probably change our focus as our situation changes (but that's not any time soon... for family who's reading).

Speaking of investing in your 401K, I can't talk about investing without bring up the power of compound interest. Compound interest is when you gain interest off of your interest - another example of leverage. Here's a table from The Automatic Millionaire which shows how profoundly different investments can be when you combine compound interest with time:

I realize that a huge drop in the stock market can negate most of these gains (that's part of the risk of that market), but assuming everything is the same, you're much better off investing a little bit up front instead of trying to play catch-up later in life. Much like giving, you should start investing now, even if it's only a very small amount.

There's so much to talk about when it comes to investing, and a simple blog post is just the tip of the ice burg. Hopefully, you've been intrigued enough to do your own research on saving and investing.

The Computer Market

I knew this day would come. Actually, I've been kind of excited dreaming about this day because of the possibilities. Though in all honesty, I wasn't really prepared for it when it happen. What is "it"?

A little while back I was traveling in Boise on business. While in a meeting I got a couple calls in a row from Jessi - a clear sign that something was up. When I finished my meeting, I called home to a crying wife. What in the world could be causing such a problem? As the title suggests, it was her computer. For the third time it has failed on her. When she tried to start it up, all she got was the blinking cursor in the upper left hand corner.

I've been saying for a while that I'd like to buy a Mac and that I was just waiting for one of our computers to die before I bought one. Normally, I'd suggest she just get the hard drive replaced, but this is the third hard drive for her computer and neither one of us really like the computer anyways.

So, after a little bit of research, I think we're going to go with the Mac Mini. It makes sense for us on a couple of levels. First, it gets us into the Mac ecosystem at a cheap price. Second, I already have a laptop from work and my own personal laptop, which means our mobile computing needs are met. Third, I already own a sweet monitor, keyboard and mouse (I got ergonomically aware once I actually had money to invest in it.) Fourth, Jessi doesn't do much heavy duty computing and really wants a computer that just works.

Of course, I've also been telling people that if they give me three cool iPhone App ideas, then I'd buy a Mac Mini and help program it. Now that we'll actually own one, that excuse won't really work anymore. I'm pretty sure one of the first things I will do is download the iPhone SDK and create a "hello world!" app.

Giving As An Act of Worship

This is a continuation of our finance series. Here are the other's so far:

Managing Our Finances

Dedicating Our Finances

Spend Less Than You Earn

This week (well... last week now) we focused on giving our finances.

Typically, before we even get started the question comes up of how much to give. Is it 10% or 23%? Is that net or gross? If you want to get old testament legal, the answer is just under 23% of your gross income. However, I think focusing on just the bottle line misses the point entirely.

Here's a question: How much of your money does God need? None. He's the creator of all things, and in charge of everything. If He wants something to happen, He's not constrained by money.

So given this, why give? If you think of giving your money as an act of worship, it makes more sense. I give God my time, my energy, my thoughts, and my money - all of my resources. The line, "Put your money where you mouth is" comes to mind. It's one thing to say you follow God, it's another to actually give your resources to Him. Yes, actions do speak louder than words.

I think another practical reason for giving is that serves as a reminder that you are just a manager of God's wealth. It's really hard to get into the Scrooge mentality if you're regularly giving. It helps to put your focus back on God instead of acquiring material wealth.

Finally, like it or not, our world requires money to function. This includes your local church and charities. It's through giving that these organizations are able to operate.

OK. Seriously. How much should you give? I'd like to echo the same advice my mom gives people when they're thinking about saving for retirement: It doesn't matter, just start. Maybe you can only give 1% or $50. Perfect! Start there. Maybe you can give over 10%. Wonderful! Give that. Decide how much you can give and start giving regularly. Then adjust as needed as your life changes. Remember, giving is an act of worship.