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Faith And Economics

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Teaching on Debt and Credit: The Pros and Cons, The Biblical Perspective, and How To Get Out Of Debt.

Teaching on Debt and Credit: The Pros and Cons, The Biblical Perspective, and How To Get Out Of Debt.

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Faith And Economics Faith And Economics Presentation Transcript

  • Debt and Credit The Pros and Cons of using (or abusing) credit  
  • Some basic concepts:
      • Equity : aka Loan to Value ratio: difference between value and amount owed
    •  
      • Debt to Income Ratio : Total of minimum payments divided by gross income
        • Example: $4000 monthly gross income with a $1400 mortgage, $300 car payment, and $50 credit card minimum=$1750 or 43.75% DTI
        • "Healthy" range is 30-40%, max usually 45-50%
    •  
      • Credit Score : aka FICO: how a lender sees you, based on:
        • payment history
        • debt to credit percentage: available credit vs. balance owed
        • collections, bankruptcies, etc.
  • Pro: Building Equity
      • Rent money goes to the landlord, but mortgage payments go to your equity ownership
      • Equity means that when you sell or refinance, you have a cash value in your home
    •  
    • BUT:
      • Equity can be abused:
        • Refinancing and taking the cash value out for other purchases  keeps you perpetually in debt
        • Constantly upsizing: using the equity to purchase a more expensive home and remaining in debt
      • The total cost of principal and interest is exponential
        • A $240,000 mortgage at 5% will cost you $411,278 over 30 years
  • Pro: Investing for the future
      • Value of education
        • The average increase in lifetime income for a bachelor's degree is over $300,000, another $180,000 over that if you have a master's degree
    • BUT:
      • The degree might not help if you are in the liberal arts fields
      • The financial position you are in at the end of school could cause more harm than the expected increase in income can help:
        • Example: a new worker with 7 yrs of schooling and an 85% debt to income ratio who was forced into credit counseling
    •  
    • What would it look like if we decided as a community and country that education should not be paid for with loans?
  • Pro and Con: Business Loans
      • Using capital to invest in growth: new products, innovations
      • Creates jobs and possibility for future profits
      • Most economic growth comes from small businesses
    •  
    • BUT:
      • There is a lot of risk in business loans: competitors, economic troubles, patents and permits
      • More small businesses fold then succeed in the first few years
      • Small business owners many times end up in personal financial trouble because of their business ventures
    •  
    • What if we focused on slower, more sustainable economic growth instead?
  • Con: Being held hostage to your debt vs. living in freedom  
      • Fear of layoffs and job changes
    •  
      • Ability to respond to God's call
        • Supporting others
        • Mobility: not upward, but outward
    •  
      • What is more valuable: money or time?
    •  
  • Biblical Perspective on Debt and Credit  
    • Romans 13:8: Let no debt remain outstanding, except the continuing debt to love one another, for he who loves his fellowman has fulfilled the law.  
      • Typically used to argue that all debt is sinful
      • Context is related to paying taxes and fulfilling the law
    •  
    •      Warnings on being in debt:
    •  
    • Proverbs 22
    •       7: The rich rule over the poor,        and the borrower is servant to the lender.
    •      26-27: Do not be a man who strikes hands in pledge        or puts up security for debts;
    •           if you lack the means to pay,        your very bed will be snatched from under you.
  • Biblical Perspective on Debt and Credit  
    • Taking advantage of others through lending prohibited :
    •  
      • Deuteronomy 23:19-20
    • Do not charge your brother interest, whether on money or food or anything else that may earn interest. You may charge a foreigner interest, but not a brother Israelite, so that the LORD your God may bless you in everything you put your hand to in the land you are entering to possess.
    •  
      • Ezekiel 18:16-17
    • He does not oppress anyone or require a pledge for a loan. He does not commit robbery but gives his food to the hungry and provides clothing for the naked. He withholds his hand from sin and takes no usury or excessive interest. 
  • Biblical Perspective on Debt and Credit  
    • The Year of Jubilee: Lev. 25, Deut. 15
      • A comprehensive economic system that began with the distribution to the twelve tribes
      • Returns property to original owners and cancels debts
      • Price controls based on number of years until Jubilee
      • Ownership stays with families over generations
      • Prevents the rich from taking advantage of the poor
    •  
    • How could the principles of Jubilee translate to our modern economics?
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  • Biblical Perspective on Debt and Credit  
    • Jesus' perspectives on debt:
      • Uses parables involving debt and lenders
      • Never calls debt or lending 'sin'
    •  
    • But Matt 6:24 reminds us that you cannot serve God and mammon-how does that principle apply to the use of credit?
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  • Getting Out of Debt  
  • Basic Principles
      • Start with a budget to get current spending under control
    •  
      • Set manageable goals
    •  
      • Have someone who keeps you accountable to your budget
    •  
      • Review your progress and readjust as necessary
    •  
      • Celebrate small achievements
  • Popular Methods
    • "Laddering"
    •  
      • Payoff highest rate debt first
      • Saves you money by reducing overall interest rate
        • Example:
          • car loan at 6%, $300 payment
          • student loan at 4%, $100 payment 
          • credit card at 12%, $25 payment 
          • credit card at 21%, $50 payment
    •          You would pay the minimums on all, but pay extra on #4 until it is at zero, then pay extra on #3, then on #1, then on #2
    •  
      • Promoted by Suze Orman, Clark Howard
  • Popular Methods
    • "Snowball Effect"
      • Payoff smallest balance first
      • Gives you small victories along the way
      • Increases the amount you are able to payoff each month
        • Example:
          • $10,000 car loan at 6%
          • $14,000 student loan at 4%
          • $1,000 credit card at 12%
          • $3,000 credit card at 21%
    •          You would pay the minimums on all, but pay extra on #3 until   
    •          it is at zero, then pay extra on #4, then on #1, then on #2
    •  
      • Promoted by Dave Ramsey
  • Once you are out of debt, don't go back!
      • Keeping debt off is like keeping weight off- it takes a long term commitment
    •  
        • Only have 1 credit card and pay it off every month
    •  
        • Be creative in your financing: buy used, barter, or trade
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        • Plan for major purchases-don't buy on impulse
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        • Have an emergency savings fund for unexpected expenses