Starting a new family is tough these days – financially. When considering the purchase of a home, we should apply these criteria as for undertaking any debt loan. First of all, does it make economic sense to incur a home loan? To determine this, there are two rules to follow:
The cost to borrow (after-tax interest) must be less than the economic benefit received (interest, yield, and/or growth in value). Rule two: there should be a guaranteed way of repayment.
Secondly, if you’re married, are both spouses free from any anxiety regarding this home loan? The principle indicates that there must be unity between the spouses. Can the home loan be undertaken with peace of mind? If you experience a lack of peace when you picture yourself taking on this home loan, do not enter into the debt.
Thirdly, ask yourself, what personal goals and values am I meeting with this home loan that can be met in no other way?
These criteria are practical, pragmatic, and biblical and should be applied unemotionally to every debt loan opportunity. The counsel to young couples who are considering the purchase of a home or those intending to purchase a new home, is never to become so attached to the home that they could not give it up if the debt could not be paid. Jobs are not nearly as secure today as they were in the past. Inflation will certainly go up, and fixed low interest rates may very well be a thing of the past.
The psychological burden of home mortgage debt is more severe than most people think, especially if a woman whose centre of influence and security is in her home is involved. Studies have shown that having mortgage debt is a stressful factor and that degree of stress relates to the amount of the mortgage.
The question of whether or not to pay off the mortgage, if that is an option, is really an economic, psychological decision. Economically, it may not make sense to pay off a low interest rate mortgage, even if one has the funds to do so. However, psychologically, it may be, by far, the best course. Again, I would remind you that finances are nothing more than a resource to accomplish other goals and objectives – they are never an end in themselves. Therefore, even if it does not make economic sense to pay off a mortgage, there may be higher priority goals and objectives that need to be met. Money then becomes merely the resource to meet those goals. The decision does not have to be always an economic one. That counsel is, of course, good for all decisions.
But we’re not just talking about having children, raising kids. How about multiplying your finances? There is an interesting phenomenon in money management that makes it seem as though money is growing on trees. It’s called interest compounding.
Compounding is when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding (i.e. the interest is compounded). The principal amount, for example, may have its interest compounded every month: in this case, $100 initial principal and 1% interest per month would have a balance of $101 at the end of the first month, $102.01 at the end of the second month, and so on.
It’s interesting to realize that this principle has its source found in His Word. Dishonest money dwindles away, but he who gathers money little by little makes it grow. Did you catch the basic concept there? Gather money little by little, and thereby make it grow. By the way, did you know that if you invest any amount into a deposit at 6% interest, your principal amount will double in 12 years? In other words, your $20,000 will double to $40,000 in 12 years. Your $100,000 will double to $200,00 in 12 years.
That’s precisely what compounding does. Whether you start with $100 or $1000 or $10,000 or more, the results over time invested at a reasonable rate can be phenomenal. The factors in compounding are time, amount and interest rate. But the most important key to compounding is being debt free. That’s because compounding will work against you the moment you take a loan.
As managers, we’re charged to manage His resources as efficiently and effectively as possible. The story of the talents which we read earlier, indicates that investing money wisely – and reaping the benefits financially – is a practice He encourages.
And that makes the magic of compounding a concept that’s crucial for us to understand… put to work, and it can help produce a positive cash flow.
A positive cash flow margin is also absolutely essential if you are to accomplish either long-term or short-term financial goals. Without a cash flow margin, you cannot accumulate in order to meet long-term goals. In addition, each of the four other short-term goals – tax reduction, increased giving, debt reduction, and increased living expense – can only be met by having a positive cash flow.
In order to reduce taxes, either additional expenditures must be made for such things as increased giving, IRA’s, tax sheltered investments, and the like, or income must be reduced. Either increased deductible expenses or reduced income will result in tax reduction. However, both require that there be a positive cash flow to begin the process.
Without a positive cash flow, increased giving is not an option. Once there is a positive cash flow, however, and it is used to increase giving, that decision results in decreased taxes because charitable contributions are deductible. There are many people who plan all of their tax reduction through giving. However, they had to have a cash flow margin to begin the process.
Obviously, if you want to reduce your debt principle payments, you must have the excess cash to do so. If you are “going in the hole” by overspending, then there is no way to get out of debt until you generate a positive cash flow. After debt retirement that extra amount can be used to reduce debt further, which in turn increases the cash flow.
The first key to riding any financial crisis is to be debt free. The only absolute way to become debt-free, in the first place, is to have a financial plan prepared at the beginning of each year that does not allow for the use of debt, and that you will stick to through self-discipline.
The major problem most people face is how to get out of the debt that they are already in. there are only two ways to get out of debt after making the decision to avoid the use of debt: Examine the assets you have to see which ones could be sold in order to reduce debt; and in the absence of assets to sell to eliminate debt, set up a repayment schedule and strictly adhere to it.
To learn more, you can download the Financial Freedom Small Groups kit.