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I’ve been doing some research today on an investment I’m thinking of making. I’m not asking for investment advice here! But I am reflecting on one of the church mantra’s I’ve heard over the years — stay out of debt. Debt for a home, car, or school is OK, but one should avoid other forms of debt. I seriously question if the church is giving sound advice on this one. For several reasons.
1) My wife was raised with the attitude that debt is to be avoided at all costs. To the point that when I paid for something on a credit card which required only principal payments, and no interest for a year, she went and paid it off the month after I made the purchase — thus giving up one year of free interest on the item. She hates debt and pays off ANYTHING that is debt, even when it makes no financial sense to do so.
2) She, and her parents, have made bad financial decisions that could have generated wealth due to their fear of debt. For example, I had to fight and kick and scream to convince her it was a good idea to borrow for a tax sheltered investment which provided an immediate return of about 25% in tax savings, leaving us with an asset that could pay off the loan if we ever got into financial trouble and needed to pay it off. Plus we could afford it.
3) And, anyone with a bit of investment savvy knows that certain types of investments are best paid with debt that generates tax deductions.
Now, one has to be responsible with debt, and make sure you don’t do it so much you can’t sleep at night, or that you have no reserves, but in my opinion, well thought-out use of debt is a smart business move, and part of generating wealth.
So, is the church really doing us a service with this unqualified teaching that one should not go into debt for things other than houses, cars, and school tuition?
Avoiding debt, like other good advice such as avoiding excess alcohol, is wise in my opinion. It is easy for a wealthy organization with a billion-gajillion dollars to say, “Stay out of debt, ALWAYS”.
But for those of us that don’t have that much, sometimes debt is an option, if carefully used. It can also be a very stressful, overly burdensome pressure in people’s lives if not used wisely (see Joseph Smith’s experiences).
A smart friend of mine that was financially-savvy told me that debt for things that can be an investment (such as education, real estate, business) can be worth considering under the right amount of risk tolerance. Debt for consumerism, including cars that devalue quickly, should be avoided at all costs.
In the situation where you had a year’s worth of “free” interest…usually nothing is “free”. It means they put the interest factor into the price of the product you bought. Many times, you tell them you’ll pay cash for it, and ask them to reduce the price, and they will do that.
I think the person that has no debts or obligations to others is rich.
Actually, the thing we bought was the same price as it was offered every where else (after an exhaustive Internet and local store search) so it was actually a good deal. You put the money you would have put toward the full purchase price against mortgage debt, and save, in our case over 5% annual interest. Plus it increases cashflow for opportunities that come along. I agree that debt for luxury consumer items is not a good use of money, and never do it, but borrowing for tax sheltered investments, real estate, and other items that generate a return is good busjness practice — provided one is careful and makes sure you don’t go so far into debt you can’t sleep at night.
I think there is even some scriptural evidence that taking risks is OK in the sight of God, given the parable of the talents. The master was angry with the person who didn’t take any risks with the talent he was given and ended up with nothing to show for the time and money invested but the original investment.
Naturally, I don’t believe that such blank advice to avoid debt at all costs is good advice. In fact, it can be a losing proposition to borrow for education and even a home at certain times, so the advice is certainly not as sound in all situations as some would have us believe.
My take on this is that the church gives this counsel as a general rule. The church always gives counsel that will preserve the church. I think the brethren know that there are very financial savvy people out there and that they will use financial leverage (read: debt) when appropriate. For the general membership though, the counsel to stay out of debt should keep family financial pressures from getting out of control, and reduce the risk of tithing loss. During the tithing lessons, I have a hard time with those people that say they paid tithing without knowing how they were going to eat that month, because I’ve been in a position in which it was pay tithing and begin accumulating debt on a credit card, or skip paying tithing – and I chose the latter. After a few weeks of guilt I realized that it was the right thing to do for my family. I see value in the law of tithing, but I think it’s very easy for people to find themselves in a position of accumulating debt to pay tithing. That’s essentially paying interest on tithing. That’s a bad deal.
But I think the advice to stay out of debt is much like a lot of other advice from the church, and is geared towards self-preservation.
Imo, this a case of “teach them correct principles (stay out of debt) and let them govern themselves (go into debt for some things).” To me, this highlights the importance of the personal clock — the internal compass that has you worshipping God according to the dictates of your own conscience. That is the great equalizer when the Church comes out with blanket adice that is too absolute. There are two ways to manage your money. You either pay interest or collect it. Those that accumulate wealth generally collect more than they pay by far. I think it is extremely wise to try and avoid debt as much as possible. The world is in the mess it is in, precisely because so many people and governments have taken the opposite course.
I agree that debt isn’t a great thing — when it owns you. But when you control it, and use it to generate wealth, it’s a great thing. As an example, recently, I made an investment and used ALL of my own money. The investment does generate a return before tax of maybe 8%, which is not stellar, but much better than a savings account. I sleep well at night knowing that no debtor is coming after me for payments, and I pay no interest.
However, if I had’ve used only a bit of my own money (the minimum) and used debt for the rest, the return on my personal investment would have been 40%. Basically because, even though the income from the investment is lower due to interest paid, the remaining income is divided by a smaller denominator — my own money.
The money not used on the investment, would be mine to use for payments I could make in the event the investment didn’t generate enough income, I lost my job etcetera, and I could also use that money to make other investments, and also generate a return of 40%.
So, in this case, provided you have reserves to cushion problems (the investment stops generating income, you have a personal calamity, job loss etcetera), I think debt can be instrumental in generating wealth.
Now, is this something I would preach over the pulpit? Definitely not if I was a large organization with a strong interest in reducing fast offering deficits. But is it something that really puts your money to work? Is sure does.
SilentDawning wrote:As an example, recently, I made an investment and used ALL of my own money. The investment does generate a return before tax of maybe 8%, which is not stellar, but much better than a savings account. I sleep well at night knowing that no debtor is coming after me for payments, and I pay no interest.
However, if I had’ve used only a bit of my own money (the minimum) and used debt for the rest, the return on my personal investment would have been 40%. Basically because, even though the income from the investment is lower due to interest paid, the remaining income is divided by a smaller denominator — my own money.
I am wondering how closely related this is to speculation. If a person goes into debt to make an investment that they can flip and make an almost immediate return, than with some savy and a healthy dose of luck they will come out ahead. But sometimes the investment goes south and still leaves you on the hook for repayment of the loan.
I would think that the better use of debt would be a small business loan that is set up so that if the business fails, your personal assets are not left on the table.
Overall, I think that the percentage of people that struggle with debt is greater than those that manage to use debt for wealth generation – thus the Church’s financial advise would seem to be sound more than 50% of the time.
SilentDawning wrote:I agree that debt isn’t a great thing — when it owns you. But when you control it, and use it to generate wealth, it’s a great thing.
That isn’t debt. It’s investing with “leverage.”
Like almost everything, people run into trouble when they combine absolutes with binary thinking. When the Church says “stay out of debt,” I think they are preaching to the masses, to the people who are thinking mostly about credit card purchases for living expenses and spending beyond one’s means.
They aren’t preaching to finance managers and investors. But hey … the same basic concepts still apply in those situations. Taking on too much risk is in a lot of ways not much different than spending beyond one’s means. It’s just a different form of poor financial decision making that leads to trouble.
Quote:I am wondering how closely related this is to speculation. If a person goes into debt to make an investment that they can flip and make an almost immediate return, than with some savy and a healthy dose of luck they will come out ahead. But sometimes the investment goes south and still leaves you on the hook for repayment of the loan.
See, this is one of the advantages of being an overanalyzing person like I am. It is that I’ve thought about the worst case scenario and have a plan for what happens if all Hellman’s Mayonnaise breaks loose. What if I make the investment, saddle the debt, and then lose my job? What if I get sick and have huge medical bills? What if my wife and I lose our jobs at the same time?
I have to have at least two ways of maintaining a lifestyle that keeps me afloat without any miracles, using existing resources, or I won’t make the investment.
I think Brian’s comment above is bang-on — the Church is talking to the masses. Investors and people who make a living assessing risk and making investments also do make mistakes — but I remember what one person said –make sure you don’t take so many risks you can’t sleep at night. And for me, always have a fallback position.
I agree with Brian too. The church is Quote:…preaching to the masses, to the people who are thinking mostly about credit card purchases for living expenses and spending beyond one’s means.
For any specific investment, I never make the final decision based on my own thoughts & ideas alone. I always have one or two people that I can go to, present my idea(s) & get feed back about if it’s a good idea or not. Sometimes the answer is no after all my preparation, thoughts & ideas. There is usually something I’ve missed. Infact, I can’t remember one investment decision I’ve made that wasn’t talked about throughly with someone else first.
Mike from Milton.
I think that’s OK, provided the person you are talking to has the right knowledge to give an informed opinion. Everyone is more than willing to give an off-the-cuff opinion. But an informed opinion is worth its weight in gold. And hard to find on specific investments. An impartial, third party opinion is even more valuable as it eliminates all the noise that comes from talking to someone who is both selling you something, and giving an opinion at the same time. So, in summary, teach the correct principle and watch the people people govern themselves. To me, it really is that simple in this case – and, in this case, I really like the way the Church addresses it. It’s the results of the governing themselves that I often don’t like – but I still want the Church to focus exclusively on teaching the general principle.
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