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Getting Out of Debt

Is Never Enough

Getting Rid of Debt Incorrectly

Can Worsen the Problem

ABOUT TEN YEARS AGO there was a movement sweeping through the Church to eliminate debt. Houses of worship sold books, held studies, and formed ministries around the push to get debt out of the “Body.” Millions of books on this topic sit on the shelves of millions of churchgoers around the world. Books were read and courses were attended.

Ten years later, where do we find ourselves? In more debt, in more foreclosures, in more bankruptcy, and in more depression.

The reason why should really not be a surprise to those with a calculator. (As a side note, I was predicting this unhappy result when the movement first began sweeping through the church. Not because I’m a prophet, but because getting out of debt is never enough!)

Isn’t it sad that getting out of debt is now considered a major accomplishment in life? Indeed, when you’re thousands or tens of thousands of dollars in debt, getting out of debt is a major accomplishment. But what makes it sad is that it is an accomplishment we shouldn’t be pursuing in the first place—for we shouldn’t be in debt! So crazy is this debt problem that there is even a radio show that has callers call in to celebrate the fact that they have finally made it out of debt. Again, congratulations, but it is sad nonetheless. Getting out of debt really means you are now at zero, back to owing nothing but also having nothing. So really we’re considering being broke a financial victory. In racing terms, it’s like celebrating that you finally made it to the starting line.

Let me again stress that if you are fighting to eliminate debt and you achieve your goal of getting back to zero, then I understand your reason for celebrating, but that celebration will be short lived. The reasons why we now find ourselves in more debt is because we are doing the same things that created the debt in the first place. No, I’m not referring to buying habits. People who believe changing their spending habits and “living below their means” is the path to sound financial stewardship don’t really understand the situation. Will the practice eliminate debt? Possibly, if you happen to remain living long enough to achieve this goal. When we look at how many years this can take, how unhealthy employment can be, and our own age and personal health, there are many who engage in this action yet never live long enough to experience victory.

Why You Aren’t Getting Ahead

Before we get to how we truly fx the problem, let us first realize how the problem gets worse. Many people have heard of the term “yo-yo diet” when it comes to losing weight. A yo-yo diet is when you reduce your caloric intake, burn more calories, and lose weight. Then, six months later you are ten pounds heavier than you were when you first started the diet.

Unfortunately, we experience similar results when we yo-yo debt. Millions of people who have eliminated debt in the past are now further in debt than they were when they first took the time and made the effort to eliminate their debt in the first place. They tried, and accomplished, getting out of debt—a great achievement, just like the man or woman who accomplished the weight loss. But just like with the weight coming back, so, too, does the debt.

To understand why the debt comes back we need to look at what course of action was taken to eliminate it in the first place. The first step most widely suggested and taken is cutting back on spending. A good start, no doubt. The second step usually taken is getting another job. Then comes eating franks and beans to cut spending even further, and then comes the spouse getting a second job as well.

The obvious problem with this is that it increases the number of evils and the level of risk in your life and the life of your family that are created by employment and time away from your priorities. More employment equals higher rates of heart attacks and cancer, divorce, pregnancy, and drug use among your children, and so on—all in the name of getting out of debt.¹⁵ I am all for getting out of debt, but at what cost? Having debt can create problems, too, no doubt about that, but sometimes our efforts to eliminate debt actually amplify the problems we are trying to avoid in the first place. If debt is causing stress in your marriage and the family is sacrificing more time together in order to eliminate the debt, which in turn creates more stress in your marriage, did you accomplish the goal?

Let’s say that you decide getting out of debt is so important that you are willing to take the risk and get those extra jobs, more hours, or what have you. Let us say also that you live long enough to see that debt eliminated. Your family sacrificed for the short term with the idea of having a better life long term. “Do today what others won’t so you can do tomorrow what others can’t,” right? For a time, maybe.

The Bible clearly points out that debt is something we should avoid, and I obviously agree that getting out of debt should be an individual and family priority. A person in debt is a person without options who is servant to the lender. What I don’t agree with is the method so commonly taught for how to get rid of this debt—employment.

For argument’s sake, let us say you don’t have to get two jobs, and your wife doesn’t have to get two jobs, and you don’t have to put in extra hours at work. Instead, you sold the boat you were making payments on, you told the kid down the street you would start mowing your own lawn, and you manage to get rid of the debt. Yay you! Now what?

This Isn’t Your Grandfather’s Dollar

Here enters the monster in the room: inflation. Inflation has had a practical yearly rate of about 10 percent for the past 100 years, give or take a point or two.¹⁶ Inflation is one area where most people, including those who think they know what the economy is all about, tend to make a huge and costly mistake. The worst thing you could do is Google “yearly inflation rate” because it shows us nothing. That number is a calculation that reflects only choice indicators in the market. As a matter of fact, even the way inflation is officially calculated by the government has changed, and if you took a 2 percent reported inflation rate today and used the calculation they used before, the rate today would actually be 6–9 percent.¹⁷ That is just as wrong, though, because even with the old math they were still only looking at certain market indicators, which they keenly selected and used in their calculations. Inflation is worthy of a book on its own and inflation isn’t the only factor that erodes monetary value; other things that have to be calculated and considered are GDP minus lending, cost of living, devaluation of currency, trade deficit versus issuance of currency, artificially low interest rates to spur lending (Quantitative Easing, for example), PPI, CPI, MZM, wage and price controls, and domestic price growth. Even Congressman Ron Paul (R-TX) stated in an interview with Yahoo! Finance that CPI is not what should be used to determine inflation and that the government’s inflation number is “rigged.”¹⁸ Congressman Paul, while grilling Federal Reserve Chairman Ben Bernanke on this very issue of inflation, explained how even if we were just to use consumer price index (CPI), we would be at 9 percent annually (even though it was “officially” around 1.5 percent).¹⁹

In addition to all that, we have debt on the issuance of currency that does not get calculated into the equation. When the United States puts a dollar into the market, not only does it devalue the other dollars in the market, but we also instantly owe a debt on that dollar to the Federal Reserve Bank that printed it.

We can see the effects of inflation easily when we look backward. For example, in 1977, when I was born, the average household income of $11,992 when adjusted for inflation, according to the Census Bureau, is now worth $51,939.²⁰ However, if inflation were really only 2 percent a year it would mean that today, adjusted for 2 percent a year inflation, we would be seeing average household income of only $25,118. Keep in mind, household is combined income of all working adults at the address. In 1977 most household income was made of just one income earner. Today it is usually two or more, meaning this is much worse than most of us realize.

Most of us over the age of thirty have lived long enough to experience cost-of-living increases, but because that cost-of-living increase happens on so many things over so many years, we tend not to notice it. For example, who remembers that in 1995 a gallon of gas cost ninety cents? Almost impossible to believe, but it is true! Twenty years later we would still be below $2 a gallon if inflation was really only 4 percent a year—$1.97 per gallon to be precise. How many of us would think Heaven had come to earth if we woke up today and gas was $2 a gallon! In 1995 you would have been yelling at the television if the price went as high as $2; now $4 a gallon is becoming the norm and $3.50 per gallon is considered the common cost. Sure, oil is a commodity and more than just inflation is responsible for increased prices, but that only goes to further the point of this chapter: costs go up without your control and inflation is just one aspect of those rising costs. You have no control over the rising costs; shouldn’t you have control over how your income can respond to those rising costs?

Consider this: A thirty-year mortgage that ends today started in 1985. Many people thought in 1985 that because they were making a decent wage and saving 10 percent a year, that it was the time to buy a home. But did they consider inflation? Did they think it was only 4 percent at the time and would mirror their rise in income? In 1985, the cost of the average home in America was $98,100.²¹ In 1989 the same house was $148,800. Inflation is 3–4 percent a year, huh? In your dreams. In just four years, there was a cumulative gain of 11 percent per year in housing cost.

Now, you might be thinking that wages went up enough to compensate, right? Not even close. In 1985 the average household income was $23,620,²² and in 1989 the average household income was $28,906. This means that while the cost of a home increased by more than 50 percent, income only went up about 22 percent—a 28-point gap. Another way to look at it: In just four years’ time, a house went from costing 4.15 times the average household income to costing nearly 5.15 times. That is a practical financial backslide in only four years.

But could I just be pulling out a rare anomaly from decades ago? Did this terrible pattern continue? Unfortunately it did! The average cost of a new home in America as of October 2014 (latest numbers available at the time of this printing) was $305,000.²³ Do not get excited and think, “Well, that is why it was smart to buy a house back then in 1985” because (1) the real estate bubble of 2008 shows otherwise, and (2) it is irrelevant, because this just further proves that income is not keeping up with increased costs.

Now, where are these people today? Those who took out a thirty-year mortgage in 1985 may now be underwater on that home, because in many cases their income did not keep up with costs and they used the equity in their home as a borrowing tool. What happens when you borrow and your source of income doesn’t keep up with the rate at which the prices escalate? You go backward. In addition, when pensions and investments haven’t kept up with inflation, long-term income in many cases hasn’t kept up with long-term costs. Second mortgages to cover repairs, medical bills, or a number of other costs just add to this problem, not to mention rising property taxes. It has gotten so bad that according to a July 26, 2012, NBC News report, home prices fell 60 percent from 2006 to 2011 alone. In Arizona, 43 percent of home owners owed more on their mortgages than their homes were worth. In Florida that increased to 45 percent and in Nevada 61.2 percent of homes had loans on them for more than the home was worth.²⁴ We could get into a whole conversation about smart versus not-so-smart real estate investing, but the truth here is that we cannot count on employment and our cost-of-living increases to keep us from drowning financially.

Through these examples we can see how household income has changed over the years and has not kept pace with rising expenses. Now, here is the real nail in the coffin: This is household income we are referring to! In 1985 a man could provide a home, a car, raise two kids, and have a stay-at-home wife all with the household income that he alone earned. Today the household income has two or three income earners and we still cannot make it. That means it is actually worse than I’m telling you!

These are just some common examples. We can look at food, clothing, rent, phone service, or what have you, and we also would find that your job is not going to be able to keep up with inflation. PERIOD!

Are You Counting on Your Retirement Plan?

Let me give you an example of an increase that is destroying family financial fluidity. Around the corner from me is a couple; he is a retired cop, she is a housewife. He is eighty-nine years old, she eighty-seven. They purchased their home in 1953, when he was twenty-nine years old and on the police force. The home cost $17,400 when he built it brand new. They thought it was okay, though, because he was bringing in nearly $70 a week after taxes. He listened to his financial planner talk about saving 10 percent and the “Rule of 72” (a method of calculating how much an investment has to gain each year to double over a given time period), and when he retired in 1970 with twenty-three years under his service belt, they had paid off their home. They were feeling good about it, too, because it was valued at $26,000 in 1970. Let us not forget that because of the mortgage, they paid more than that— $31,740 over the thirty years. Like most people back then, they believed that “real estate was always a good investment because it goes up.”

Now, in 2014 (just a few months ago) they had to move out of their home because they could no longer afford the property taxes of $250 per month—more than three times their house payment. Not to mention their retirement pension didn’t keep up with inflation. Inflation, in the form of increased property tax, has forced this couple who were “middle class” in 1953 to move from their home because they could no longer afford to pay for a house that has been paid off since Nixon was in office.

So what does this mean? It means that if you do not get a 10 percent raise at work, you are actually going backward financially! After five years with no cost-of-living increase, you went backward 50 percent in real monetary value. If you get a 5 percent raise each year, you’ve still lost 25 percent of purchasing power in five years.

This is why most people, five years after eliminating debt, find themselves yo-yo debting beyond where they were before. The first time they eliminated debt they found areas in their life to cut costs and found things to sell. Now, all the cuts have been made, the extras have been sold, and the limited money from employment is just not enough. There also has been a rise in people using credit cards, which were once used on needless spending, to purchase food and basic household needs.

Keep in mind that as time marches on, the problem gets worse. A family will face more increases in costs and less potential from employment between 2010 and 2020 than a family did between 1970 and 1980. We went from one-income homes to two-income homes between 1970 and 1980. We cannot add a fourth or fifth income to homes in 2020. We are maxing out the income potential of employment.

This is why getting rid of debt is never enough. Instead, we have to get ahead of the inflationary wave. The only way to do that is through entrepreneurship! If we try to get more jobs to pay off debt, we then teach our children to get jobs to pay off debt, or worse yet, to go into debt for an education to gain employment in order to pay off debt. What this all means is we are just delaying and amplifying the inevitable through this accepted system of debt, debt elimination, and employment.

EVANGELPRENEUR ACTION STEP

Getting out of debt should be a priority—a lesser priority than other things, but a priority nonetheless. First, take out a blank piece of paper and write down all of your debts. It is surprising how many people do not really know how much debt they have, as they are afraid to really sit down and add it up.

Your debt needs to be eliminated. Selling things you don’t need, cutting out expenses, and bringing in more money through entrepreneurship needs to happen. However, this next action step is for everyone, regardless of whether you have debt: Write down your income and, not accounting for the debt, write down your monthly expenses. Where are you? Now, be honest. Don’t just list expenses you can afford with what you have left. List expenses you know you have or need to have. For example, clothing, gifts, travel, entertainment, new siding for the home next year, new driveway in ten years, lawn care—I mean EVERYTHING! There is no way this should be under $70,000 (see “The Practical Poverty Level” in chapter seven) for the year.

With what you make, now do this: Write down a year fifteen years in the future. Under that year write “Expenses,” then take the list you have and increase the total by 50 percent. Then write “Income” and cut the total by 50 percent. And keep in mind that even these 50 percent adjustments don’t depict things as bad as they truly are. If the income does not cover the expenses, I don’t care how much debt you do not have—you need to change how you make money ASAP!