This Week’s Financial Strategy – Recognizing the Dangers of Debt

January 22, 2011

An excerpt from Follow the Money Weekly Radio with Jerry Robinson – 1/22/11

To hear the entire program, click here.

by John Bearss

Transcript

Hi Jerry. As we start the new year it has been exciting to see how many people are taking advantage of the Christian Financial Advisors Network.  I have talked with many people around the country who do not have a financial advisor or would like a second opinion on the advice they are currently getting.

And just so that people know CFAN is a 100% FREE referral service. Once you meet with your CFAN advisor, any fees that an advisor might charge will be explained well in advance, and we will be more than happy to discuss with you your concerns, answer your questions and help you establish solid Christian financial principles that will help take you through the times ahead.

Today, I would like to ask the question What Are the Dangers of Borrowing Money?  I understand that most people need to create some debt.  For example, most people can not afford to outright pay for their home so they need to create some type of a mortgage loan.  You may need a car to have the ability to earn an income.  So all debt is not bad debt, but the abuse of debt can be detrimental to your family’s survival.  It is important to make sure that you can afford to pay your debt back in a successful manner.  So as you consider what items you are willing to go into debt over make sure that you have the ability to pay for it.

Some of the areas that I have seen people get into real trouble is when they don’t consider the difference between need and want.  I believe it is paramount to understand the difference.  Need items are those items that you need for you and your family to survive.  The want items are typically the excess items and unfortunately a one day shopping spree can create a major problem.

Let me give you an example, I talked with a lady just the other day that had excessive credit card debt.  She told me that she bought a sweater for $50 and she had a coupon for $10 dollars off.  She was so happy with herself because in her mind she saved $10.  So I asked her the question, did you need the sweater or did you just want to have it?  Well you know the answer to that question, she wanted it.  So right there you know that she spent $40 needlessly.  So I asked her how she paid for it?  The answer was on her credit card.  Then I asked her if she would pay the credit card off at the end of the month?  Well because of the prior expenditures she had on her credit card the answer was no.  What people fail to recognize is that if you can not payoff your credit card debt at the end of each month you are paying substantial interest on that purchase and the item that you purchased cost you more.

If you make purchases on credit and pay them off over time, you end up paying the original purchase price plus a fee (interest) for the extension of credit. This means the cost of acquiring the goods is greater. In other words, it isn’t really a sale if you buy that suit at 10 percent off using an 18 percent credit card.

Let me give you another example:

Suit$300
10% off($30)
Sale price$270
Credit card balance$270
Paid off at$15 per month
Total of all monthly payments$317
Total interest paid$47

These are just a couple of scenarios, but some folks have actually gone out and run up not only credit card debt, but also created second or third mortgages on their home with bigger ticket items like buying boats or motor homes.  Not that these items are bad, but if you are creating unnecessary debt that weakens your financial position, then these might not be considered wise purchases.

The Bible does not forbid indebtedness, but it does warn about it’s abuse.  For instance, in Proverbs 22:7 it points out that the borrower is in danger of becoming a servant to the lender.

So, where are you currently when it comes to having debt?  Do you really understand the difference between need and want?  And are you disciplined enough to execute that understanding?

I trust this financial insight has been helpful and I look forward to the next time when I can help you provide the foundation for a lifetime of financial independence.

About John Bearss: John R. Bearss is a Retirement Specialist with the Christian Financial Advisor Network. He has been helping clients and financial professionals understand financial strategies for 24 years.

Disclaimer: John Bearss is a registered representative of and does offer securities through Sicor Securities, Inc.  Lifetime Decisions Management, nor it’s representatives provide legal or tax advice.  Please consult your CPA or qualified tax advisor before making any decisions. Lifetime Decisions Management, Inc. is not a subsidiary of nor controlled by SICOR Securities, Inc.

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