Monday, February 8, 2010

Is debt against Biblical principles?

By Dan Danford

This past week, we posted a tweet on Twitter (our ID is @family_finances) having to do with debt. We received a reply from @questforsouls asking "yet debt, any debt is sin according to the bible! Is it smart to encourage debt?"

First, let me clarify something. I don't necessarily encourage debt. I think that debt can be a better alternative, in some cases, than being cash poor. It's also necessary to build your credit score. For most people, it's a reality, and as I've always said, smart debt can be good. The key is distinguishing between smart and dumb debt. Smart debt: buying a home with a sensible loan. Dumb debt: credit cards.

As a Christian, I also consider the morality of how we handle money to be a big part of what I do. I am re-posting this essay about the morality of money. I would really love to know what you think - so please post a comment if you have an opinion on this topic.

The Morality of Money
Ideas About Christian Responsibility and Family Investing

Money is central to our living, but with it come several questions about the relationship between money and faith. As a lifelong Disciple of Christ, I have wrestled with issues of faith, and have grown in my own faith. For nearly two decades, I have been a professional financial advisor in the fields of trust and investments. During that time, I have dealt repeatedly with faithful people who wrestle with some of the same questions I’ve considered. Is it possible to be financially successful, and still be faithful? Is money a force – does it have its own morality? How should a Christian view money?

Over the years, the same basic questions have come up repeatedly, and as I’ve grown both in my faith and understanding of finance, my answers have grown as well. What I offer here is the way I answer those frequently-asked questions today.

Is there a morality of money? There’s no question about it. Money is a tool that can be used for good or evil. But, money isn’t the root of all evil; Paul tells us in Timothy that the love of money is the root of evil. In the hands of the wrong people, money can be very destructive.

Jesus told a parable about the rich young man. His point about being rich seems pretty clear. It’s clear that money can be a huge distraction in a Christian life. But, Jesus didn’t say that it’s impossible for a rich person to enter heaven. He said that it’s hard for a rich person to enter heaven. Actually, as I recall, he said it was easier to pass through the eye of a needle.

Why? What makes wealth such a destructive force? It’s not wealth per se. It’s power. Our society – most societies, really – reward great power to people of wealth. Look around. Who are the celebrities of our age? In large part, celebrity belongs to people of power. Power belongs to people of wealth. Wealth has always allowed people to engage in bad behavior without serious consequences. That’s why money can be such a distraction.

Is it better – holier -- to be poor? I don’t think it’s that simple. There are good people who have money and good people who don’t. I think maybe there’s a feeling among some people that being rich is bad. Some of that may come from Christian tradition, or maybe it’s a way of rationalizing our own lack of money. Anyway, I can’t remember any direct endorsement of poverty in the Scriptures.

A different way of looking at things is that having more allows us to give more. I mean that. Many hospitals, colleges, and museums owe their existence to a wealthy family or families. The same with church buildings and outreach ministries.
We can be even more philosophic about this; perhaps people have more because God gave them a gift for commerce. Why is making money different from singing, or painting, or other personal gifts? And, shouldn’t we use all gifts and the powers they grant for good purpose?

So, let’s agree that we should stay focused on matters of good purpose. Are there special problem areas or challenges? A huge area is the extra responsibility that comes with having extra money. In my business, I’ve been blessed with clients who understand this and take stewardship seriously. Yet, I’ve also seen horrible examples of waste that make me sick. Of course, people have a legal right to use their own money any way they choose. Yet, it bothers me to watch them squander it or use it on ridiculous excess.

It bothers me in the same way it would bother me to watch someone burn hundred dollar bills. That money might have been used for good purpose.

What kind of financial things offend you? On a large scale, I hate watching people waste an inheritance. With rare exceptions, wealth was created by somebody’s discipline and hard work. I think there’s a certain respect owed to the wealth’s creator, even if we didn’t particularly care for them or some of the things they did. Most times, the money can now be used for good things, say college expenses or to do something worthwhile in the world. ’m not against enjoying money, it just bothers me to watch it shrink through waste, abuse, or neglect.
This may not seem such a big issue, but it is. Baby-boomers stand to inherit trillions of dollars over coming decades. This huge transfer of wealth has already started. What we do with those dollars can have a huge impact on our collective lives.

What do you mean when you say that you hate watching money shrink through “abuse and neglect?” There really are well-known principles for managing money. Investing isn’t that complicated, and anyone wanting to learn the rules can read some good books or attend a college finance class. It’s an in-exact science, though – like predicting the weather, perhaps – where the principles have great value even when they aren’t absolutely accurate every single time.

Most people investing outside these principles fall into two basic categories. One group tries to avoid all risks; the other group seems to seek them out. Both groups take a serious chance of abusing or neglecting their money.

Start with the latter. Some people are drawn to high risk investing for the same reasons that they love roller coasters or high-stakes gambling. They love the thrill. They may be investment hobbyists, or they may rely on outside advisors, but they seek extraordinary investment returns by taking on extraordinary risks.
By risk, you mean the short-term chance of losing money. Surely, an aggressive approach would seem to have some merit under the economic laws of risk and reward. Of course it does. There’s a strong case for owning some speculative investments as part of a diversified portfolio. Higher-risk opportunities can boost overall returns and lower volatility. But, they should be part, not all, of an investment portfolio.

Jack Bogle, founder of Vanguard Mutual funds, summarized this in an interview I once saw. He was asked whether a certain undervalued fund might offer high future returns. “I think that’s a good bet,” responded Bogle. “I just don’t think you ought to be betting with your retirement money.”

Isn’t that true of most family investing? Remember, any investment which offers the prospect of high returns also offers the reverse – that is, high potential losses. Should high potential losses be the right choice for your entire family investment account? Again and again, I see people chase absurdly high risks for entertainment purposes or as some personal adventure. Family resources are far too important for that.

So, you’re saying that people should avoid risks with family money. No, not at all. I think people should avoid unreasonable risks with family money. There are many good ways to document and reduce certain investment risks. Investors should take time to learn and understand potential risks and rewards, or find someone knowledgeable to help. When you skip this step, you’re gambling. And, in my opinion, gambling has no place in family finance.

You say that too little risk is also an abuse. What do you mean by that? There’s a powerful psychological tilt away from risk. Risk aversion, it’s called. Yet, a corollary to what I said earlier is that family investors should accept reasonable risks. Risk and reward are absolutely related, and investors who accept reasonable risks enjoy good long-term returns.

There’s more to it than that, though. There’s another parable in Matthew speaking exactly to this point. It’s called the Parable of the Talents and it recognizes our human tendency to avoid risk. Three servants are entrusted with a master’s money. Two of the three invest the money wisely, and earn the master’s praise. The third, fearing loss and recrimination, buries the money and returns it without interest. The master is furious at the servant for not trying to do better.

Though the illustration is about money, the point is much broader than that. Generally, most people agree that the story is about using personal gifts to the glory of God, and about taking risks when using those gifts. Whatever the gift, we risk the Master’s wrath when fear keeps us from trying to reach our full potential.
As families, we face many options with our money. But, options offering the lowest risk also provide the lowest potential rewards. Choose them, and you’ll have less money for college, retirement, or charity. Unnecessarily less money. Less than our full potential.

Since some options offer reasonable risks and reasonable returns, choosing not to use them is neglectful, too. I make similar points with nonprofit boards or churches. Ignorance of investment principles isn’t mentioned in the parable as a good defense.

You’re saying that since we can learn better, we should learn better. Is that it? Sure. Most of us agree that it’s wrong to skip child safety restraints in a car; in fact, it’s illegal in most states. The seat belt isn’t a guarantee against injury, but it statistically reduces risk for the child, and increases chances for survival in an accident. Why shouldn’t we use the same statistical standards when investing a college account? Or a church endowment fund, for that matter.

It’s a stewardship issue. Most states have enacted the Uniform Prudent Investor Act as law governing proper guidelines for investing someone else’s money. These rules are based on statistical principles of investing. It’s ridiculous – and irresponsible -- to ignore the evidence simply because it makes us uncomfortable.

Millions of people do have fun managing their money. Yet, you’ve just implied that family investing is too serious for that. Can you elaborate? One day last fall, a local stockbroker jumped on the adjoining machine at our YMCA. We talked about a variety of things, including the college personal finance classes I teach. Eventually, we got to the semester-long investment project where I have students choose and follow one common stock and a separate mutual fund. “Well, the stock sounds like fun,” he said, “but mutual funds are boring.”

I’ve pondered his comment since that day. Maybe mutual funds are boring, but they’re still the right choice for many investors. Chances are good that a college student will own mutual funds long before they own a common stock. Truly, the most important issue isn’t how much fun a choice is, but how effective it will be in helping to meet financial goals.

Investing isn’t recreation. Choices made today necessarily change our personal future. They help determine our future living standard and our long-term ability to do something for others. And, considering all that, bad choices are simply more critical than good choices.

Look at it this way; a very good investment may mean the difference between driving a Buick or Mercedes in retirement. The Mercedes is a nice bonus, perhaps, but it’s just a marginal increase in living standards. Maybe you’ll be able to buy a newer condo or live in warmer climates a few weeks longer each winter. Hardly life-changing.

But, bad investment choices can have devastating results. No college fund for the kids. No retirement account to augment Social Security or Medicare. No extra money for the little things that keep life meaningful or – even – fun. Where do most people adjust the budget when they end up short – the monthly rent, or gifts to charity? Obviously, the downside of making investment choices is more important than the upside.

It’s not that investing can’t be fun. It’s that it isn’t necessarily fun. There’s a huge difference. It’s serious because choices made today have far-reaching consequences for our families and how we use the financial gifts we have. Are we doing all we can financially to meet our full potential? I just want people to give financial choices the respect they deserve.

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