Vampire Problems

draculaWhat kind of problems require faith?

David Brooks has highlighted a problem he calls a Vampire Problem. Say you are thinking about becoming a vampire, but you’re on the fence. The drinking blood, sleeping in a coffin, no playing golf during the day…it’s a tough decision. Adding to the problem, once you become a vampire there isn’t any going back. Brook’s point is that the most important decisions in life, who to marry, when and how many kids to have, what job to take, these types of problems are ‘vampire problems’ – they have two main characteristics:

1.) There isn’t any way to fully know what life will be like if you make that decision.

2.) Once you make the decision, you can’t go back.

These type of problems can’t be solved with logic, knowledge, analytics, research, or education. As the article points out: “’You shouldn’t fool yourself…You have no idea what you are getting into.’” These type of problems require faith.

Following Jesus is certainly this type of problem. He promises that (1.) You’re spiritually dead right now and you can’t know what it’s like to be alive but (2.) you can be alive with a life that’s better than you can ever imagine and once you are alive you won’t ever be the same.

A lot of financial problems are like this as well. There isn’t any way to fully know the outcome of a decision you need to make. Can I afford to have a child right now? If I take this 2nd job, will I have enough time and energy for my friends and family? If I commit to paying off debt will I still be able to have fun? Will this investment pan out? Which of these two jobs should I take? Is it worth it to move to a new city to go to grad school? Should I fix this old car or buy a new one?

The good news is that faith isn’t blind. It’s an action in the direction of my hope. That’s why all my financial (and life) choices need to start with an act of the will. I need to have hope in my heart that I can be debt free and that it will be worth it before I can start taking actions in that direction.

Faith is the action toward the thing I’m hopeful for. What are your financial hopes for 2017? How about 5 years and 10 years from now? Let’s write those down as we head into a new year. Do you hope to be debt free? To pay off your student loans? To have a fully funded emergency fund? To pay for graduate school? To land a specific job? To start a business?

CHANGE

ODM Logo“Will” has been homeless since he was 12 years old. In the last couple of years he’s made tremendous progress including doing really well at his job. Contrary to what you might assume, housing is usually one of the last pieces of integrating into what you might consider ‘normal’ life. For example, Will got an apartment earlier this year but has continued to sleep outside – Urban Camping – because he feels claustrophobic in the apartment and it’s such a departure and separation from his community and life as he has known it for so long.

That story was told to me last week while visiting Open Door Ministries where I serve on the board. For someone that’s integrated into mainstream society, this story seems impossible to believe. But as I thought about it, I realized how hard I really struggle to make personal change. I’m the same as Will. The reality is, the areas of my life that I’m working on are just less visible and more socially acceptable.

Despite practicing financially healthy habits for years, doing a monthly budget remains one of the biggest challenges for Noelle and me. We have tried any number of different methods, but the busyness of life and lack of urgency causes us to miss self-imposed disciplines that would lead to a healthier life.

Regardless if it’s doing a monthly budget or sleeping under a bridge, change is hard. It takes a tremendous effort to break life-long habits. Let’s do it anyway.

Emotional reaction to financial risk

Recently while driving I glanced back in the rear-view mirror to see the familiar sight of a police car merging behind me in traffic. Police rearviewEven though I was pretty sure I was breaking the speed limit by the socially acceptable amount, my heart still raced.

Why does that happen? Why does our “fight or flight” kick in at the prospect of a very affordable traffic ticket?

The bigger question: Why doesn’t our heart race the same way when faced with a financial risk over 100x greater – taking out a car loan or $40k in student loan debt?

The short answer is that we are very poorly designed to properly calculate risk.

Debt in Relation to Income

Dollar signMillions of dollars are being spent researching the issues around student loan debt – preventing unhealthy amounts of it and creating paths for students to graduate with less or no debt.

One thing that we hesitate to talk about is the following truth:

Debt only makes sense in relation to Income

Our income will dramatically affect our opinion of our debt. A friend of mine graduated from an Ivy League law school and his first job after passing the bar was with a white collar, downtown firm on a partnership track with a starting salary of $140,000. He lived well below his means (drove his old car for 5 more years) and he was able to pay off his student loans within a few years. His debt was manageable in relation to his income.

You might say ‘obviously’, but it isn’t obvious. Income simply isn’t talked about much in and around graduate school or in the many conversations about addressing student debt.

$500, $5,000, $50,000, or $500,000 of debt all may be disastrous or manageable BASED ON INCOME. If you are going to have a $250 student loan payment, you need to understand how much of your income that will consume. $250 is a percentage of your take home pay. Putting your debt in relation to your income is one reason we have tried to develop rules of thumb like this.

There is a reason we hesitate to talk about income – it can vary widely. Some variables are based on things we can control and some are not. Some of those variables that can drastically change your income potential are:

  1. Geographic

A friend of mine was offered a pastoral position in downtown San Francisco that had a starting salary of $100,000 a year. After doing some research and running his budget he discovered that even with that salary he couldn’t afford to live within 30 minutes of the church. A pastoral position in Lawrence, Kansas may pay significantly less, but cost of living is much different. Student loans aren’t geographic – they travel with you.

  1. Employee Personal Capacity

Employees have very different capacities – speaking specifically of things that are in our control.  Some people are just naturally better or have worked hard on areas of personal development such as likeability, work ethic, punctuality, working well with others, and creating positive results. 70% or more jobs are landed through personal networks, so a future employee needs to be able to build and maintain relationships. These skills will have a huge impact on future income opportunities and student’s personal networks and skills vary widely.

  1. Macro Economics

Our economy is still driven by supply and demand. If there are more attorneys’ then jobs, the cost of labor (salaries) goes down. If overall church attendance in your denomination is declining, then there are fewer dollars and jobs available. If the markets do well and overall charitable giving goes up across the country it will generally increase salaries. Furthermore, certain skills pay much better in the marketplace. In America today, a pastor who is a dynamic public speaker will earn more than a less dynamic shepherd that loves his flock just as much or more.

  1. Gender, Race, Height, Etc.

Unfortunately in the broken world in which we find ourselves, there are significant wage discrepancies for things that are well outside the control of the employee. It seems insane, but age, race, gender, and even height will play a significant impact on our ability to earn.

Some of these variables are hard to talk about. The reality is that it isn’t right or fair that some of these variables are out of the control of the employee.  It’s easier to avoid discussing injustice (or to rant against it) then to pragmatically address what to do in light of it.

For these reasons we have dropped the ball on having honest discussions with students about understanding their future income. Some of us can do different things to maximize our income potential. That may be learning a new skill or focusing on skills that pay more in the marketplace.

Others shouldn’t focus on maximizing at all. The world truly needs homemakers and small town pastors. For those called into those types of occupations, we need to talk about debt in light of their future income.

BUDGETING BASICS

Jar of money

When I meet with students and young couples, the number one thing we work on is putting together a super quick, easy, zero based budget.

Despite my love of finance, I’m more of a ‘Free Spirit’ than a ‘Nerd‘, so budgeting has always been a challenge for me. This year, practicing the discipline of doing a zero based budget every single time our family has  income is going to be my most important financial priority.

I’ve long believed Dave Ramsey is the most PRACTICAL financial teacher in the world. He doesn’t just teach you financial principles, he actually lays out a plan that everyone can follow to get there. You might disagree with his plan (Baby Steps), but the reality is that most financial teachers won’t actually put their principles in simple black and white instructions, and most of us don’t actually have a written financial plan we are truly following.

If you are going make a new years resolution to do a better job budgeting this year, here is a PDF outlining Ramsey’s basics for budgeting and answering the most common questions.

DOWNLOAD:  DAVE RAMSEY guide-to-budgeting

Photo: taxcredits.net

The Volatility of Time

changingWhen times are good, be happy;
but when times are bad, consider this:
God has made the one
as well as the other.
Therefore, no one can discover
anything about their future.

Should I pay off my mortgage or invest in the market?

I’ve been asked variations of that question many times over the years. I’ve read many of the experts and thought about how to apply that in practical principle to my own life. The easy answer is: It depends on what the market will do. The difficulty of predicting the future is the uncertainty of it all….

Of course the root of this question applies to all personal debt, especially ‘good debt’ like student loans – both how much is ‘safe’ to take out, and how quickly should it be paid back. The problem with debt is the inflexibility of paying it off. I have a short equation to help us understand this:

DEBT + TIME = RISK

We talk at length here about debt, and we’ve discussed risk, but most of us don’t understand how Time adds to our risk. Risk is the great part of personal debt that we don’t understand for two main reasons:

  • Over time (1, 5, 10 years) when we don’t have any major pain from debt, we get comfortable with it so we stop feeling it as risk
  • Our brain is specifically bad at predicting how we are going to feel in the future

To understand risk better, we need to understand the Volatility of Time

There is a time for everything,
and a season for every activity under the heavens

If we were to oversimplify the future, we would say it will contain good times and bad. Some times are even the best and worst at the same time, as Dickens famous novel opened. What we often fail to feel is what the author of Ecclesiastes was articulating – that life and seasons and times are full of good and bad. This is the way it is and will be but the current season won’t last forever.

Without wisdom, we humans are spectacularly bad at understanding the ebbs and flows of the times in our lives. When times are good, we double down on risks. I’ve helped a lot of people buy a house with twice the square footage after landing a higher paying job. Or when the housing market goes up, I’ve helped homeowners sell their recently appreciated house and roll the equity into a down payment for an even larger house. Of course, both of these came with much larger mortgages. It would be easy to put these people on blast if I didn’t do it myself. Working on 100% commission for over a decade, I’ve had my income either double or go in half four times. Wanting to live at peace inside that volatility has offered me a lot of time over the years to think about that means.

In addition to assuming good times will last forever, we often fail to understand the economic cycles that can undermine our ability to pay debt over time. Here are a couple of cyclical things that happen that are completely out of our control:

  • Wholesale industrial change (Newspaper jobs, factory jobs, etc.)
  • Our physical health
  • Regular economic cycles (recessions, booms)
  • Geographical shifts in availability of jobs (moving into cities, west, etc.)
  • Cultural changes (see: declining denominational participation)
  • Political stability (taken for granted in this country for several generations)
  • Supply and demand of labor (a law degree isn’t that valuable if there are more attorneys then jobs)
  • Individual companies closing (causing job loss)

All of these things are cyclical, but it’s highly likely that one of them will cause a change/gap in income in your future. It’s been widely reported that the average person will have seven careers in their working lifetime.

Now listen, you who say, “Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.” Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes.

Living with wisdom requires living in light of both good times and bad. The danger of debt is that it presumes upon the future. Its risk is higher if you carry large amounts of it over longer times.

Because time is a variable, you can greatly reduce the risk debt brings into your life a couple different ways:

  1. Exit Strategies

Good investors figure out how many ways they can ‘get out of a deal’. If you buy a building and the market changes you can rent it, renovate it into a different use, sell it for a loss (but get out of the deal), find different investors, hold it until the market changes again, or even give it back to the lender and declare bankruptcy. The more exit strategies you have UPFRONT, the more you can mitigate the risk. Many of these strategies involve getting out NOW, should the times change in a way where you don’t want to/can’t hold the debt for long periods of time.

This is one of the scary parts of student loan debt. Because you can’t declare bankruptcy and there isn’t a sale-able asset securing the debt, your ability to get out now is severely limited.

  1. Aggressive repayment

When you pay off a debt quickly, you acknowledge time in the equation. It’s why wealthy people say the number one key to building wealth is getting and staying out of debt. Without debt, your ability to navigate a future bad time is greatly improved.

Larry Burkett told a story years ago in one of his books (that I can’t find, but am remembering from memory) of a small business owner that used a line of credit at his local bank to help smooth out cash flow. He owed around $100k on the line of credit, but didn’t consider it much of a risk because he also had around $100k in cash at the bank. This arraignment worked quite well for some period of time. Unfortunately bad times hit during the savings and loan crisis of the late 80’s and his bank was shuttered. If I’m remembering the story correctly, as the books of the bank were settled his note was called due immediately by the auditors. Unfortunately, his $100k in cash was tied up in the assets of the bank and wouldn’t be available to him for months (if not years) until all the bank’s assets (his debt) were liquidated to pay the bank’s liabilities (his deposit). Even though he didn’t lose any money (FSLIC insured his deposit), what he thought was liquid (his cash deposit) became illiquid, and what he thought he could pay over time (his debt) became due immediately. Time caused a financial emergency.

I experienced a much smaller version of this same thing when my employer when out of business about 10 years ago. Our daughter had just been born but the medical expenses of her birth were not paid by my company/insurance because the assets of the business were frozen until all its accounts could be settled. My wife and I ended up paying about $4,500 to prevent the hospital from sending the accounts to collections. A year or two later, that money was released from the company and by God’s grace we were refunded all the money we had paid.

Time presents risks that are very difficult to prepare for. The point of calling it an ‘emergency fund’ is that we don’t know what the emergency will be, but we are prepared because we know there will be one over time.

Take a lesson from the ants
Learn from their ways and become wise!
Though they have no prince
or governor or ruler to make them work,
they labor hard all summer,
gathering food for the winter.

The lesson of this proverb – the seasons WILL change. Make a plan and execute it while you have the opportunity. When times are good, reduce your risks. When times are bad remember that no season lasts forever.

Does the amount of debt I’m considering only work out if everything goes well? How aggressive should I be in paying off debt once I graduate? Make a financial plan that accounts for all seasons, both good times and bad.

How am I reducing my financial risks over the next 1 year, 5 years, 10 years?

WAIT UNTIL I’M DEBT FREE?

debt-freeOne question I hear regularly: Should I wait to do X until I’ve paid off this debt?

Dave Ramsey has weighed in on this on a number of occasions. His answer: When it comes to getting married or having kids, generally there is no such thing as a ‘perfect’ time. These life changes are more important than your financial goals, so they move up the priority ladder of your life. Here are two examples of his advice on that:

http://www.daveramsey.com/index.cfm?event=askdave/&intContentItemId=120070

http://www.daveramsey.com/index.cfm?event=askdave/&intContentItemId=128732

I consider this an extension of Jesus parable of serving God OR money. You can’t serve both. Getting married or having children is in a very real sense “laying down your life” – it is the life of a servant that Jesus calls all his followers toward. Your personal financial goals aren’t as important as the life of your future child.

For that reason I advise continuing to pursue financial objectives while life changes happen.

The other context for this question usually involves a large purchase.

“Should I pay off all my debt (or car, or student loans) before buying a house?”

That’s a very different question. That question is a disguise for “Can I increase my lifestyle?” Ramsey has a pretty strong opinion on this one: Pay it all off first. Examples of that:

http://www.daveramsey.com/index.cfm?event=askdave/&intContentItemId=8340

http://www.daveramsey.com/blog/make-it-happen-dream-house

http://www.daveramsey.com/davesays/column/column/dave_says_2012-05-22/

Dave Ramsey isn’t alone in this opinion. In America we are experts at creating necessities from what are truly lifestyle upgrades. I have really heard sensible people in my social circle use the following:

“I need a safe reliable car for my new child.”

“We need a 4th bedroom – our family just doesn’t fit in this house anymore.”

“We needed to be in this school district for our kids.”

“I need this (gigantic gas sucking manhood ensuring) truck for work.”

There are unlimited varieties of these statements, but if you’ve traveled anywhere outside the USA you know this is crap. Millions of people live without these silly luxuries every day. It really is justification of the lifestyle choices we want to make.

If you want a bigger house in a different school district with a nicer car in the garage – I encourage you to go for it. It isn’t immoral to own these things. But there is an appropriate time to acquire them: When you can afford to pay for them.

Going back to our original question: Should I wait to do X until we’ve paid off this debt?

It may be helpful to think through your scenario with the following question: Does this decision demonstrate my servant-hood toward myself/you/us? “Do you want to stand out? Then step down. Be a servant.”

Freedom!

freedomFreedom is a critical concept to the follower of Christ. Paul says that while we WERE slaves, now we “have been set free”.

“It is for freedom that Christ has set us free. Stand firm, then, and do not let yourselves be burdened again by a yoke of slavery.”

This quote from Galatians 5 has Paul telling the church that our spiritual freedom can and should wash over our physical lives. True freedom begins on a spiritual level and manifests in increasing waves in the physical world. “Whatever you bind on earth will be bound in heaven.”

It is not a coincidence then that the scriptures use the very vivid image that the “borrower is slave to the lender”. Regardless of our current financial situation, I don’t see any scenario where we don’t strive toward a goal of debt free living. This isn’t a criticism but an aspiration. Whatever situation we find ourselves in currently we should be asking: Do I have it as a written goal with action steps to be debt free?

“You will know the truth, and the truth will set you free truth will set you free.” Are you more financially free now then you were 1 year ago? How about 5 years ago? Will you be more financially free 1 year from now? How about 5 years from now? HOW? Write it down.

15 Risks and Understanding Layers of Risk

ball-and-chainA couple recently came to me to seek financial counseling, and as I met with them I struggled in the moment to properly communicate the financial risks they were encountering. Dave Ramsey has a saying: Personal Finance is 80% Personal and 20% Finance. What he’s communicating is that this thing called LIFE isn’t a math equation or a formula – it’s a very personal journey.

This couple had taken on an enormous amount of risk, but they didn’t see it because unlike one large risk (50k in credit card debt for example) they had layered lots of smaller risks on top of one another.

Our brain is really ill-equipped to understand risk at all, much less how lots of different risks interact with each other. One of the main points author Michael Lewis made in his book “The Big Short” was that Wall Street investment banks – who’s only job was to understand and mitigate risk- didn’t understand how all their risks layered onto each other.

We’ve developed a lot of tools to help us mitigate risk in the 20% ‘math/finance’ portion of “Personal Finance”, but there isn’t a lot of understanding and tools around the 80% ‘personal’ side.

What is personal risk?

We understand from Jesus parable of the talents that we can’t go through life without taking any risks. Taking no risks in life is actually cowardly and a big risk in itself. We take both eternal and temporal risks – a great teacher once told me that we take risks in the direction of our hope.

Financially, we also take a lot of risks, calculated on a hoped for return. We put money in the markets with the hope of it returning to meet a future need. We also are born into and voluntarily take on a variety of financial risks. The couple I counseled had six of these risks at the same time. To help us understand this idea I’ve compiled an incomplete list here:

BIG RISKS:

These are risks of which any singular one of them can make life very challenging.

  1. Lower income: A lifetime of low income (as much of the 3rd world faces) makes meeting life needs very difficult.
  2. Debt: The Bible warns about debt being bondage – and “It was for freedom that Christ set us free”.
  3. Lower education: Wisdom is knowledge rightly applied. Without knowledge, there it’s hard to succeed in life.
  4. Substance abuses:
    1. Gambling
    2. Alcohol and drugs
    3. Pornography
  5. Dumb Friends: “Do not be misled: ‘Bad company corrupts good character.’”

LIFE HAPPENS:

These are risks (often by no choice of our own) that we encounter that add a layer of complexity to our financial picture.

  1. Having children very young: See the statistics on teen moms
  2. Being a Minority
  3. Come from a poor/broken family

These circumstances all permanently change our worldviews and relationships with money.

ATTITUDES

There are also a variety of ‘mindsets’, worldviews, or attitudes that can have a dramatic effect on our ability to navigate life’s financial complexities.

  1. ‘Love of money’: Paul warned “Those who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge people into ruin and destruction.”
  2. Dreamer, serial entrepreneur: There are a lot of unemployed musicians, screenwriters and artists of all kinds that are waiting ‘to be discovered’. Success virtually never happens this way. If you’re wired this way, there are a number of amazing books like “The War of Art” that detail the path from dreaming to working.
  3. Aversion to Authority: This is me. If you have a strong aversion to authority, it is very difficult to have a boss, work inside a team, and generally succeed in most forms of employment.
  4. Materialism/Spending: Thomas Stanley’s life work (Stop Acting Rich, Millionaire Next Door) was dedicated to proving through statistics that the average millionaire didn’t care about material status symbols and instead focused on Needs versus Wants. In fact, he pointed out, a high status symbol job (doctors or attorney for example) was actually a hindrance toward long term financial success.
  5. Entitlement: Thinking the world owes you anything is a wonderful way to be disappointed the rest of your life.
  6. Being Lazy: Proverbs 10:4 “Lazy hands make for poverty, but diligent hands bring wealth.”
  7. Assuming on the future: Jesus told a parable about someone that grew rich and assumed on the future. Paul and Solomon warned against it. The reality is we don’t know our future health, the political or economic conditions that the future holds.

It’s important to note that none of these fifteen risks are a death knell in and of themselves. They are all addressable through well documented strategies. The point of this article is that we often layer several of these risks on top of each other and we don’t have any clue about the combined risk they play together. In fact, ‘layers’ gives the image that they add up one by one. Risk’s actually multiply together.