Managing Money God’s Way

The second Biblical Financial principle was to start saving money.  Today we introduce the third principle which is the key to saving money.  This principle is very simple, but not always easy.  In order to start saving money you have to stop spending everything you make.

1. Understand God’s Ownership (Psalms 24:1)
2. Learn to Save Money (Proverbs 21:20)
3. You Must Live on Less Than You Make (I Timothy 6:7-8)
4. There is Life After Debt (Proverbs 22:7)
5. Establish an “On-Purpose” Cash Flow Plan (Luke 14:28-30)
6. Prioritize Your Plan Around the Four Walls (I Timothy 5:8)
7. Giving is the Goal to Financial Freedom (II Corinthians 9:7)

This is the single most important rule of money management.  You only have a finite amount of money, and when that is gone, you can’t keep spending by using credit.  The new definition of being able to afford something needs to become, “I have the money to purchase it”.  If you can’t pay for it, you can’t afford it.

Unfortunately, society has a different definition of what it means to afford something.  If you go to the loan officer, he or she will tell you that you can afford anything if the terms are right.  That is why so many people got wiped out in the sub-prime mortgage mess.  Someone convinced them they really could afford that great big house, they just had to get a loan with a Variable Rate mortgage.  Now that the rate has changed they can’t afford the payment, which means they couldn’t afford the house.

“For we brought nothing into this world, and it is certain we can carry nothing out. 8 And having food and clothing, with these we shall be content.”    I Timothy 6:7-8

The one thing that causes people to buy more stuff is a lack of contentment.  We just aren’t content with what we have. There is always something else that we ‘need’.  We keeping ‘needing’ things until we can’t pay our bills.  We aren’t the government so we eventually have to pay our bills.  The best way to make sure we can pay our bills is to spend less than we make and save the rest.

Unfortunately, what we see is that 61% of the families that use credit cards carry a balance from month to month, and the average balance is almost $10,000.  The amount of interest that these families are paying on the balance on credit cards is ridiculous.  These rates can go as high as 30%.  If the average family carrying $10,000 in credit card debt has to pay 30% interest, and they are making only minimum payments, it will take decades, not years, to pay of the debt.

Paul tells us in the book of Philippians that he had to learn to be content.  It doesn’t happen overnight, but just like trying to teach your puppy to sit or stay, we learn better with a treat.  Try living on less than you make for a single month.  I know that if you start saving and only buying things you can afford, you will learn to be content with what you have, and if you start spending cash instead of swiping a piece of plastic, I know you will make some changes. Trust me.  If you start laying down cold hard cash you will think twice about whether or not you really need that ‘thing’.

The Book of Proverbs has many great financial principles.  The second financial principle we want to look at in our series is ‘learning to save money’.  A lack of savings is the number one reason people go into debt.  They see something they want, they don’t have the money to pay for it, so they buy it on credit.

1. Understand God’s Ownership (Psalms 24:1)
2. Learn to Save Money (Proverbs 21:20)
3. You Must Live on Less Than You Make (I Timothy 6:7-8)
4. There is Life After Debt (Proverbs 22:7)
5. Establish an “On-Purpose” Cash Flow Plan (Luke 14:28-30)
6. Prioritize Your Plan Around the Four Walls (I Timothy 5:8)
7. Giving is the Goal to Financial Freedom (II Corinthians 9:7)

How much are we saving?

In 2005, according to the Bureau of Economic Analysis the personal savings rate in the U.S was -0.5%.  That means that as Americans we spent more than we made.  There is good news however, according to government calculations, the savings rate for the last quarter of 2008 was 2.9%, which was up from 1.3% from the previous quarter.

“There is desirable treasure, And oil in the dwelling of the wise, But a foolish man squanders it.”    Proverbs 21:20

Are you wise or foolish?

If we use this verse from the book of Proverbs and apply it to the typical family we could come to no other conclusion than we are foolish.  The other negative impact on families that don’t save is the lessons that our children learn.  Unless we as parents are teaching our children how to save and manage money, we are setting them up to continue in the debt trap as they step out on their own.  Right now if you were to ask the freshman class at any college in the U.S. how they are paying for their degree, the overwhelming majority would say they will graduate with guaranteed student loans, but no guarantee of a job.  I can’t see anything desirable about that.

How do we teach people to save? Most people would like to save, but they just don’t seem to have any money left at the end of the month.  What can they do? Tomorrow we will look at the key to saving.

Last time we looked at Baby Step 4, investing 15% of your gross income into Roth IRAs and other pre-tax retirement accounts.  Before we dive head first into step 5, here is a review of the Baby Steps we have covered so far:

Dave Ramsey’s 7 Baby Steps

• Step 1:  Emergency Fund – When It Rains It Pours
• Step 2:  Pay Off All Debt Using The Debt Snowball Method
• Step 3:  3-6 Months Of Expenses In Savings
• Step 4:  Invest 15% of household income into Roth IRAs and pre-tax retirement

Baby Step 5:  College Fund For Your Children

Now that you have your debt paid off, and saving 15% towards your retirement, it is time to start thinking about saving some money for your children’s education.  You should only start this step AFTER completing steps 1-4.  Here are some options for saving for that college education.

• Education Savings Account (ESA):  With this you can save $2,000 (after tax) per year, per child that will grow tax free!  Money must be used for education purposes only, otherwise a 10% penalty and taxes will apply.  Money must be used or rolled over to a qualifying family member by age 30 or a 10% penalty and taxes will apply.
• 529 Plan:  If you do not meet income limits for an ESA, or if you want to put additional money aside, you can use a 529 plan.  With this plan you can save up to $12,000 per year, per child.  The money must be used for higher education only, otherwise a 10% penalty and taxes will apply to the gains.  Many states offer a 529 plan, and you do not necessarily need to live in that state to use their 529 plan.
• UTMA/UGMA Plans:  This stands for Uniform Transfer (Gift) to Minors Act.  According to Dave, this one is not as good as the ESA or 529 plans.

Dave also notes several ways he would NEVER use to fund a college education.  These include:

• Insurance
• Savings Bonds
• Pre-paid college tuition
• Zero-coupon bonds.

Why Complete Steps 1-4 Before Funding College For My Children

Many people will disagree with this being step 5, and that you should only start this step after completing steps 1-4, but listen to the logic behind this.

Your kids can always help pay for their own college education or get scholarships, grants or loans.  But if you don’t pay off your debt and start saving for retirement, you might not be able to catch back up.  It is better to get your own financial house in order first.

Personally, I think that even if you are able to pay for your child(s) education, it is still a good idea to have them participate in paying for their own schooling.

What is your opinion of paying for your kid’s college?  Are you saving for their college funds now?  Should they even go to college?

It has been said that nearly half of American workers are living paycheck to paycheck.  Combine this with the news in recent months of housing foreclosures, late payments on credit cards, and other types of loans and it is easy to see why so many Americans are struggling with their financial lives.

What is Living Paycheck to Paycheck?

I am not sure if there is a true definition of “living paycheck to paycheck”, but I know I have been there myself.  If I can sum it up by example, it is the day before payday and I am breathing a sigh of relief after logging on to check my balance in my checking account (first time in 2 weeks) and realize that I am not overdrawn, and there is still a few bucks in the account.

The Statistics

• 70% of people in North America live paycheck to paycheck.
  - The Wall Street Journal
• 17% of Americans do not have enough savings to cover 1 week without a paycheck. 55% could not live for 3 months or less without a paycheck.
  - USA Today
• The estimated average credit-card debt per US card-holding households in 2005 was $9,312.
  - Time Magazine
• The personal savings rate in the US has now fallen to -2.2% — the lowest in 60 years.
  - The Department of Commerce

The numbers tell all.  Most of us spend everything we make each month.  In fact we spend more than we make, because we carry a balance on our credit cards.  I imagine a large percentage of us could save something every month if we just cut back on our lifestyle.

Save Something, Anything

I used to fall into the category of saving nothing because the amount of money I had left over at the end of every month was so small I thought it would not make a difference.  How wrong I was!  Even $20 a month adds up over time.  In just a few short months you could build up a $100 cushion in your emergency fund.  Here are a couple of ideas to get you started on the road to saving:

1. Find one or two monthly expenses you can live without and get rid of them.
2. Open a high-yield savings account.
3. Set up automatic transfers each month in the amount you saved by reducing your monthly expenses.
4. Earn extra money (work part-time, start a blog, etc.)

The point I am trying to make is to start saving something.  Saving nothing this month leaves you right where you started, living paycheck to paycheck.

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