Dealing with Debt // Living Generously, Part 5

A Different Perspective Official Podcast

Which one of us doesn’t know that unsettling feeling of getting the credit card bill in January after that Christmas shopping binge? Way too many people are spending tomorrow’s financial blessings today, living beyond their means and that’s ruining many a life.

Alex: Thanks for having me, Berni.

Berni: Mate, we’ve talked a bit about debt so far. But why, in a nutshell, is debt becoming such a bit problem in our society?

Alex: Well, really over the last 50 years, debt has exploded across the world. You know, most societies used to be nations of savers and now are nations of spenders. Certainly in the country we’re in it’s gone from people saving 16% of their income to, prior to the financial crisis, actually went negative.

Berni: OK.

Alex: Down to -3%.

Berni: Yeah.

Alex: So we’ve just totally shifted on it. And I think it’s because money and getting in debt has just become so easy.

Berni: It is, isn’t it?

Alex: Yes, I mean you can go to the bank, get a credit card. Apart from stating what your income is, they’ll give you a credit card. You know, pretty much on the spot.

Berni: I remember when I bought my first house as a young man, it was really hard to get a loan for a house.

Alex: Yes.

Berni: Whereas now, money is so readily available.

Alex: Yeah, I mean the scary thing I thought, prior to the financial crisis, is banks who’d actually lend people 100% of a home loan. In fact, one bank would lend 105% so that then you’re the government duties and things as well. It was just mind boggling.

Berni: And so debt’s become normalised, hasn’t it?

Alex: Yes.

Berni: The notion that we spend our whole lives in debt is kind of just, "Well, that’s the way it is."

Alex: Yes, exactly.

Berni: What’s the Bible say about debt?

Alex: Haha, well the Bible says quite a bit on debt. And it’s basically warning messages. So one of the passages talks about the fact that debt can lead to slavery. That to me is the one that always really hits me. And that is when you take on debt you run the risk of becoming enslaved to a financial institution.

And one of the things I see, particularly in this country, is some people spend 50% of their income in mortgage repayments. Now that to me is modern day slavery. Because when you allow for taxes and all the other expenses in life, and as Christians you know we’re called to be generous, but when you’ve got that much debt you’re essentially enslaved.

Berni: So let’s talk about that. That means you’ve got to travel further, commute further, work further, work longer, get the bigger job that pays the extra money so that you can service the debt.

Alex: Exactly right. Debt steals from your future.

Berni: Yeah.

Alex: Because ultimately you have to pay it back and you’re taking ... essentially spending future income. That’s the major problem with it.

Berni: But some people don’t even know they’re doing it because these days with credit cards and swipe and swipe that and whatever, a lot of people don’t even know that it’s happening until the statement comes – if they happen to open the statement when it comes!

Alex: Yeah, no, you’re exactly right, and it’s frightening. I mean the fantastic expression I heard from a Christian author once and that is that: ‘Debt in western culture particularly has become normal, harmless and necessary.'

Now you think about each of those. It’s normal because everyone does it. People think it’s harmless until of course they get into trouble, so that may take years before that actually occurs. And that it’s necessary so the classic one I have when I’m talking to people is they tell me, ‘If I don’t have debt I’ll never own a home, I’ll never have this, I’ll never have that unless I have debt.’ And so that’s become the pervasive logic. But the Bible of course says that’s not true at all. In fact, I believe there are considerable alternatives to debt.

Berni: Well, OK. Young couple gets married, wants to buy a house. How are they going to do it without debt?

Alex: Well, I think the first thing is you’re obviously going to save. And we’re going to go back to becoming a nation of savers. But there’s a fantastic passage in Deuteronomy which I’ll read you, from Deuteronomy 28 because I think it really paints a different perspective on money and where it comes from. It says this, it says:

The Lord will open the heavens, the storehouse of his bounty, to send rain on your land in season and to bless all the work of your hands. You will lend to many nations but will borrow from none.

Now, there’s a couple of things from that. Obviously this was talking to a specific group of people rather than necessarily just us today. But I think the principle here is what’s important. And that is that ultimately God is the provider and if God wants you to have something, He can make it happen very, very easily. It’s not difficult.

And God, I believe, if that we ... you know, we’re created to work, we’re not meant to, you know, just sit around doing nothing. We’re created to work and God ...

Berni: That’s the mistake I’m making!

Alex: And God can bless the work of your hands, what you’re doing, to provide for you. And that’s, you know ... the Bible says God gives us the ability to gain wealth. And so I believe you don’t necessarily need debt at all. In fact, by my own example I’ve never had a mortgage.

Berni: OK.

Alex: And I’ve bought my first place in cash.

Berni: OK.

Alex: Now most people say, ‘How, that’s impossible.’ Now it’s very possible by simply saving and following biblical principles working hard and setting money aside.

Berni: And I guess choosing where you buy. I guess ...

Alex: True.

Berni: You wouldn’t be able to do that in the middle of New York on 5th Avenue.

Alex: No, exactly right. And look, even in Australia and Melbourne, most countries it’s become harder. But certainly it’s the principle. And I’m not saying that debt is sinful, by the way.

Berni: OK, that was going to be my next question.

Alex: Yeah, no, debt is not sinful. I’m not saying that you shouldn’t have debt at all. Merely saying that you are very cautious, that you have an intent to pay it back very quickly. Because one of the things the Bible says is the wicked don’t repay. So there’s actually a moral burden on us to actually pay back the debts we take. And we should be ... have that intention of paying it back.

Berni: Because now you can just get an interest only loan, right. And kind of almost never pay it back.

Alex: Oh, exactly right. And the thing in the United States prior to their big crisis which was a housing crisis that sort of triggered it. They have what they call jingle mail, that is if you default on your home loan you just send the keys back. Whereas in many other countries they’re what we call full recourse loans which means they come for the house, the car, and everything else you’ve got to pay back the debt.

Berni: Right.

Alex: So ... but as I said, the biblical principle is we must repay. We have a moral responsibility if we borrow from someone we have to pay them back, alright.

Berni: What are the dangers you see in debt? I’m thinking of just an average couple who just have a little kid and they want to buy their first little home, nothing ostentatious, nothing ... what are the dangers around debt that we need to be aware of?

Alex: Well, the danger of course is that you entrap yourself into a set of circumstances that you can’t get out of. You know, you’ve got the mortgage. One of you loses your job and then all of a sudden it’s a big struggle. Puts enormous stress and pressure on the marriage.

So in terms of the practical way to manage that because obviously most couples want to borrow money and actually go out and buy something. So I say to them, ‘Look, make sure you borrow 20 to 30% less than what the bank will give you.’ Because the bank’s strategy is to actually get you into debt. They just want to make sure you can at least service it and pay it back. They want you to take on as much debt as possible. So the first thing is take on 20 to 30% less than what they offer.

The second thing is that make sure that your mortgage repayments are no more than 30% of your disposable income. And ideally for couples, try and borrow on the basis that you can service it with just one income. Because there’s a very good chance that after you get married all of a sudden kids come along and then you’ve got a new set of pressures and things like that and things that are demanding from your financial resources.

So there are a couple of little things that people can do. But the main thing is – don’t have an attitude where you need to buy the big house straight away and ... because many people they don’t want to start with a little two-bedroom unit, they want to go to the house and they take on too much debt too soon.

Berni: OK, very quickly. Simple strategies for getting out of debt.

Alex: Well first thing is make a list of all your debts.

Berni: Yeah.

Alex: OK. Once you’ve made a list put them in order of highest interest rate debt to the lowest. Because you want to pay off the highest rate debts first. I also say to choose the smallest debts, so the smallest, high interest debts which are most likely to be say credit cards. The reason why you want to choose the smaller one first is because you want to have a sense of achievement ...

Berni: Yes.

Alex: That you’re paying those off. So you’ve got your order, you know which ones you want to pay off first. Then look at your budget and say how much extra can we pay against our debts to actually pay it off quicker. So rather than just servicing it and paying the minimum actually pay off extra to get your debt down as quick as possible.

The other thing is potentially to assess some of your assets and say, ‘Do we really need this asset, is this something that we could sell in order to reduce our debt?’ So maybe you’ve got two cars and you go to one. Or your house is ... you don’t need it, it’s too big, you may ... or maybe you’re honest with yourself and you say, ‘Well, we over extended ourselves so maybe we should just downsize.’ All those sort of things to consider to get out of debt as quick as possible.

Berni: Some really good stuff there. We might continue this discussion on next week, what do you reckon?

Alex: Fantastic, look forward to it.