Choosing to Spend

Scriptures:  Luke 14:28; John 13:29; 1 Cor 6:20

Spending often falls into two categories: discretionary and non-discretionary.  Yet do we place too much of our income into the non-discretionary category? How much money really is in each and how do we manage between these two categories?

When I looked this word discretionary up in the dictionary, I noticed that the base word is discreet and not discrete. While discrete is synonymous with distinct, discreet is synonymous with discern, from which we get the word discernment.  And so it is with discretionary, it is a decision left to our own discretion, our own judgment.

Our discretionary spending is the amount we choose to spend in a particular category, only dictated by our tastes and judgment.  We are not legally responsible to pay the amount, it is simply our choice to buy or not. Lots of items fall into this category.

On the other hand non-discretionary spending takes the choice out of our hands and therefore we are contractually or under the law to pay.  In this category there are very few items, specifically taxes and, I will say, the tithe.

But you might be tempted to say that your mortgage is a non-discretionary expense because you are contractually obligated to make a payment every month.  Didn’t you just say that non-discretionary expenses are contractual expenses?  Yes, I did but I will also say that it was first a discretionary decision to purchase the home in the first place!

Therefore, we have to be very careful with all of our decisions since we may be locking ourselves into an unmanageable, unsustainable financial situation.  For some, they have learned that their choice of home was a poor one financially and they found themselves either having to sell their home or have it foreclosed. Others just struggle month to month, barely having enough money to put food on the table or clothes on their backs.

Where you live is a discretionary choice. You can choose to live in a particular city, county, or state.  This not only determines the size and price of a home but it also determines how much state and local taxes you pay and so, to some extent, even your taxes have a discretionary component.  Many soon-to-be retirees often review the taxes they will pay in a particular area and then choose to buy a home in that area.

Taxes come in many forms but most us understand them to fall into three categories: income taxes, property taxes, and use or sales taxes.  When I moved from New Jersey to Colorado, I lowered my property tax bill from $8000 to $2000 per year for a comparable property & home.  I also lowered my state income taxes by at least two percentage points.  All this extra cash went a long way to paying off our home mortgage. 

Therefore, don’t feel like you are locked into a tax or mortgage situation because all of these are only partially non-discretionary expenses.  You have a choice of where you live and how large a home you live in.  Choose carefully and you will create a sustainable financial foundation for yourself. 

And yes, there are many ways you can legally reduce your income tax liability but I will leave this to the tax professionals.  But you may want to read my blog article, Six of One, Half a Dozen of Another, where I speak to the myth of losing your tax deduction when you pay off your home mortgage.

Bottom Line:

·         There is only one non-discretionary that goes without a choice or decision and that is the tithe.  If you are not tithing to your church please carefully and prayerfully decide how you will start doing so.  And while we are not bound to the law any longer but under grace, remember that the word tithe means a tenth. 

·         While taxes are mandatory, how much you pay in taxes is determined by where you live – choose wisely, especially those looking into retirement.

·         Contractual payments all begin as discretionary choice, first and foremost the decision to go into debt.  Make sure that the non-discretionary debt payment you are choosing to make yourself liable for is something you can sustain for the term of the contract.  Don’t bite off more than you can chew. 

Everything else is discretionary.  You choose to spend the money you are given according to all of your decisions, which are based upon needs and more likely wants. When you create your budget, be sure to know what is reasonable to spend in each category of your budget.  Spending 20% in a particular category may be considered excessive when compared to others.  See the article Benchmarking Your Budget. 

Finally, I will ask you to sincerely consider the price that was paid by our Lord for your salvation.  This has to be one of the most precious and costly discretionary expenses anyone has ever paid.  He didn’t have to do so but He did out of His deep love for us.  If you haven’t ever considered this, I urge you to do so today.  Your life will never be the same when you do.

Promising to …

Scriptures:  Eccl 5:5; Ps 101:7; James 4:17

When you sign a contract you are making a vow.  God holds us accountable to our vows.  What should our attitude be each time we make a vow?

I suspect most of us don’t think of the agreements we make each day as making a vow, but this is exactly what we are doing. Agreements are promises to act, serve or meet some condition in an agreement.  And so if we are making a vow then we must be prepared to make good on our promise!

Yet, for many of us, our promises go unsatisfied.  Sometimes we are on the receiving end (or should I say the un-receiving end) and sometimes we are the ones who are not delivering on our promises.  Either way, promises are broken each day and unfortunately we have simply come to accept it as a way of life – but should we?

God says, in no uncertain terms, we should be sticking to our agreement and we are to deliver on our promises. He even says that it’s best not to make a promise (vow) than it would be to make one only to break it. 

In the financial world, we often are promising to pay a creditor according to a set of agreed upon terms.  This is essentially the definition of the promissory note. We are agreeing to pay according to the terms and conditions of the agreement.  We do this every time we sign up for an application for a credit card, sign a rental lease for an apartment, or sign the many documents for a mortgage.  All of these are promises to pay the creditor according to the agreed upon terms.

For the most part, we are generally satisfied with the terms of the contract and more than willing to make good on our promises – that is, until something happens. This something can be the realization that we could have had a better deal, or we find ourselves jobless and unable to pay our bills on time. 

Finding a better deal is always a worthwhile goal.  We call this due diligence – doing all of the necessary research work prior to signing any agreement. I would even go so far and say many of us take pride in our ability to find the best deal possible.  But if we have signed an agreement then we must abide by the terms of that agreement, no matter how much of a better deal we find elsewhere.

Now there are lots of agreements that allow you to bail out when you discover you have a bad deal.  Some of these exit or termination clauses cost you money, others do not. 

For example, if you are looking to buy a house, you have the option to exit the contract if you discover issues during the home inspection as long as abide by the timelines set forth in the contract.  I have done this with a home I was interested in purchasing. After the home inspection I learned that there were more issues than I was willing to accept as part of the contract.  I therefore exercised my right to exit the contract – even though it cost me the expense of the home inspection, which was much better if I had gone thru with the deal.  The bottom line is that I operated within the bounds of the agreement and kept my promise.

Exit clauses are often found in the PENALTIES section of an agreement.  If you place you money in a CD or a 401(k) you know that there are withdrawal penalties if you need your money sooner than the agreed upon terms.  And these penalties can be substantial. 

And penalties aren’t just for exit clauses.  They are used throughout an agreement to deter a party from not keeping to their agreement. 

Late fees on your credit debt are a common example of a penalty for breach of contract.  We hate late fees but we must remember we agreed to pay them when we are late with our payment.  We shouldn’t complain.  We should keep to our promise and pay them.  Then we should take steps to pay on time and if we can’t, negotiate with the creditor for different payment terms if we need them.  Yes, you can do this as the creditor is often willing to do so since they would prefer to be paid than to have you default on your debt.  And we should always pay our debts, regardless of what may have changed for us, so take the necessary steps to keep to your agreement or make new ones.

Bottom Line:  If you sign an agreement, live by the terms of the agreement.  Remember that a borrower is slave to the lender.  Always have integrity.  And if you don’t like the terms of the agreement, then don’t sign, especially if you can’t negotiate a mutually beneficial set of terms.

Now I would like to switch gears here and talk about the promises we make to others that often don’t have a signed document to go along with them.  The first that comes to mind is the most important vow I ever made, the one I made to my wife when we were married. 

In my last article, When Two Become One, I talked about how important it is to develop a budget that both of you can live by. At that point, you made an agreement, a promise to your spouse! You have to live by that promise or suffer a lack of integrity and hurt the trust and love you have from your spouse.  Be strong and of good character – keep your promises!

Lastly, I want to make note of the fact that we also make promises to God that should also be honored.  And if we find that we struggle with keeping our promises to Him or others then we need to pray that God strengthen our integrity and to create in us the power to do what is right. 

When Two Become One

Scriptures:  Gen 2:24; Eccl 4:9-10; Luke 12:15-21

Are you thinking about getting married?  Have you thought about how the two of you manage your finances?  As a married couple, how aligned should you be with your spouse? 

Note: While I am writing this article for those considering marriage, realize that these truths apply throughout a marriage.  So, whether you are married for one year, five years or 55 years or just thinking about getting married, please read this article and apply it in your marriage.  It works!

Most of us have heard the statistics – one of the major reasons for divorce is financial troubles and issues. Yet none of this seems to have an impact on us.  We get married without much thought to how we will stay married. And too often we become one of the statistics.

To beat these statistics, all that needs to be done is talk about how you will handle your finances as a couple and to agree to live by certain principles.  It sounds simple and in many ways it is, but you have to do it, especially living by the principles. You can’t say one thing and do another. Being true to oneself and each other is a significant part to your overall plan.

So where do you begin?  It begins with the notion of becoming one as it is stated in Genesis.  The two will become one.  This means in all aspects, which includes your finances.  You cannot become one if each of you is still spending like two.  So it begins with your finances.

Begin by putting down on paper a budget.  This will mean talking about what each of you is bringing to the marriage:  your income, your possessions, your debts, and your ideas & goals about your future. Building a budget includes understanding what your goals are as you live your lives together.  It also means learning together.

One of the significant goals of a budget is to create a plan that demonstrates you are spending less than you make!  Yes, less than you make because how else would you save any money for the future spending or emergencies. 

Another goal of your budget is to get out of debt and stay that way for as long as you can.  If you are getting married and you have debt coming into the marriage, then it should be your joint priority to get out of debt quickly.  Debt creates stress and strain on the relationship and so this must be handled first.  Start with credit cards and then move on to consumer debt (student loans, car loans, etc.) 

And when you get out of debt, celebrate the fact together. You achieved this as a team and so do forget to reward yourself when you achieve your goal.  It shouldn’t be extravagant where you go back into debt, but something that says: Well done!

Your budget should demonstrate patience and contentment too. You should realize that comparing yourself to others, in particular to your parent’s lifestyles or your friends, is not a good way to demonstrate patience.  You can’t be going out to eat all of the time.  Going on extravagant vacations or buying sporty cars only feeds your impatience.  Saving for your major purchases is an essential way to demonstrate patience.  And in the time it takes to save for something you may discover it really isn’t all that important, which is a seed of contentment for the things you have now.

When building your budget remember to seek counsel.  The fact you are reading this article is a testimony to seeking counsel.  But don’t stop here (this article) or here (Crown’s marriage articles).  Talk to your parents – after all they got to where they are because of lots of trial and error.  Soak up their wisdom and apply it to your lifestyle.  And remember, they didn’t get to where they are in their first year of marriage or even their fifth – it took them years and years. 

Finally, when you have completed your budget, benchmark it.  Just because you have a budget that shows you plan on spending 20% of your discretionary income on entertainment doesn’t mean that this is a wise plan.  For this you may want to read my previous article on benchmarking your budget.  A budget has to be both created and reasonable. 

Becoming one financially takes lots of time and communication.  It requires becoming like-minded.  You have to act and live as one.  This is easy when you have clear goals in mind. 

Now like-minded doesn’t mean same-minded.  Each of you brings something to the table.  In the workplace there is the saying: “If you were both the same, then one of you is not needed.”  Since you are both in the relationship together and neither of you is not needed, use your differences to come up with creative solutions to your financial goals and challenges.  What’s critical is to agree on the goals and together negotiate the means of achieving the goals. 

Lastly, I would say to put a lot of thought into your wedding vows.  These vows represent the commitment you are making to each other. If you have “… for richer, for poorer …” in your vows, really know what this means, especially the poorer part. Paul wrote in Philippians that he learned to be content.  He wasn’t blessed with contentment, he didn’t receive it as one of his spiritual gifts; he learned it!  You cannot live with your spouse without learning this very important truth.

And when you commit to living according to sound Biblical financial principles, you can expect that your marriage will grow stronger and stronger. 

Buying for Less

Scriptures:  Luke 10-12; 1 Chr 21:18-25; Jer 32:9-12

How often do you negotiate the selling price of your big purchases?  Are you bold enough to ask for discounts or a lower price before you purchase an item? 

Most of us can quote chapter and verse (and there are a few) the phrase: ask and you will receive.  But too often we are timid to explore the possibility of getting a better price for the things we need to purchase.   I am not suggesting that the Lord would or wouldn’t want to be involved with our purchases.  Bottom line: it’s His Will that will be done. 

Yet, there are many things that we purchase that are “eligible” for a negotiated price, even when we don’t believe it is.  All we need to do is ask.  The problem is that we make so many purchases where the price isn’t negotiable, that we don’t learn which ones are. 

Houses, cars, furniture, and garage sale items all can have their prices negotiated.  There are services that we contract for around our homes that also fall into this category of flexible pricing.  And if we are bold enough to negotiate the price, we can end up with a lower price than what the pricing started at.

And so why do we not negotiate our prices?  Well, I suspect there are a couple of reasons why.  First, we just don’t ask because we don’t want to hear no.  Second, I would say it’s because we don’t have a negotiating strategy.  So, let me say more.

Why don’t we want to hear no? 

Clearly, there are lots of reasons but I guess I hear my parents saying no and not the salesperson.  It sounds like we are being told no to the item and not the price.  If we want the item, then we want to make it easy to purchase.  We don’t want to fight for the thing we can’t live without. We also become emotionally attached and therefore we convince ourselves that we have to have it.  And so why would we want to negotiate when this is work?

Why don’t we have a negotiation strategy? 

This one is simple; we are typically not trained to negotiate – not in high school, not in college for most degrees.  But we often negotiated with our parents and this was usually hit & miss.  Most of the time our parents weren’t interested in negotiating, the answer was no.  And so it’s no wonder most of us don’t negotiate for our purchases.

Now to negotiate is a general term that means to reach an agreement with another party.  It doesn’t imply pricing only.  We all negotiate every day, from where we will eat diner, to what movie we will see at the theater, and to where we will go for the family vacation. If we need to reach an agreement with another individual, we are probably negotiating with others. 

But when it comes to reaching an agreement on price, we find that we are not as bold as we could be.  And so let me suggest some negotiating techniques.

First, have a strategy.  Most negotiating strategies would suggest that you need to have four prices in mind before you begin to negotiation.  These are:

·         Target Price – the price you would like to pay for the item. E.g. $900

·         Walk-Away Price – This is the price you will walk away from the purchase. Yes, walk away from the purchase!  This is typically established by what you have budgeted for or saved for.  If you only have $1000 for a new sofa, then that’s all you have and this will be your walk-away price.

·         Starting Offer – the opening price that starts the negotiation discussion. E.g. $750

·         Target Price of the Seller – you should have some idea of what the other party’s target price is. E.g. $950

Note these example prices are based on a buyer’s perspective.  If you were selling an item, e.g. a used car, then your prices would be more like: Target Price: $1500, Walk-Away Price: $1000; Starting Offer: $2000; Buyer’s Target Price: $1300 (what he found thru Kelly’s Blue Book)

With these prices in mind, you can approach a negotiation with a much better idea of how to get to your target price.  The toughest thing you will have to do is walk away from the sale.  But I will tell you that the most powerful negotiation technique is to walk!  I have been brought back to the negotiation table more than once after I have walked away from the sale.  But this wouldn’t have happened if I didn’t have the walk-away price in mind. 

Another thought I would like to share with you is having a concession strategy.  This is how quickly you approach (concede toward) your target price.  You can either concede large amounts with each subsequent offers being smaller and smaller concessions.  For example: Starting offer: $10,000 with target price of $5000; next offer $7,000 ($-3000); next offer $5500 ($-1500); last offer $5500 ($-500).  Conceding in this manner creates the impression that there won’t be much left to concede and so leads the seller to want to settle on the deal. 

And I would say when you concede, always get something in return.  When I was negotiating for my last home purchase, I was firm on the price.  The seller wanted me to concede on the price but I was firm and so I walked.  The seller came back with the price I wanted if he could take the hot tub.  Since I didn’t care much for the hot tub, I agree because the purchase price was most important.  But the seller didn’t concede without getting something in return. 

Is there more to negotiation strategies than this? Most definitely yes and while I would love to teach you the art of negotiations in this article, I just can’t.  But if you would plan your negotiation and just be a little bit bolder and ask, you just might discover you can negotiate effectively for the things you want at a lower price.

Start by trying your skill in garage sales, where prices are all subject to negotiation and work your way up to the bigger sales. After all, you work hard for money and why not make it go as far as you can!?

Yes, You Can Borrow – at times

Scriptures: Jer 32:7-14; Matt 13:44-46; 1 Cor 7:23

Going into debt by borrowing money is typically frowned upon; the borrower becomes a slave to the lender.  But are there valid reasons for borrowing money?  Aren’t there times when it’s appropriate? Read more at Beyond the Ten Percent.

Some would say that to borrow money to make a purchase is an indication that the person is impatient, unwilling to wait out the time to save, and therefore unnecessarily goes into debt to satisfy a desire.  Others would say that it is necessary and therefore required to go into debt in order to reap a profit.  Are there purchase where each of these statements are true?  Well, it all depends on the item that requires the money.

In accounting there is a term for an item over a certain dollar amount and that is an asset. The dollar amount is a guideline that acts as a trigger for capitalization.  And capitalization usually triggers a depreciation process that can take years to complete.  All this said I want to also suggest that there are two kinds of assets, appreciating and depreciating.

Depreciating assets are those kinds of assets that lose all or most of their value over time through use.  For example, a new car loses value the minute you drive it off the car lot.  Furniture is designed to be used and therefore is a depreciating asset.  And most would agree that these assets lose value over time but they do retain some residual value, even if it’s just scrap value.

Appreciating assets on the other hand increase in value over time, even though they may be used.  The prime example here is land (real estate), improved or unimproved.  The value of land has proven to be an asset that increases in value, though recently it has demonstrated some extreme volatility associated with unhealthy lending practices. 

Larry Burkett (1939-2003) in his financial radio programs would say (in essence): always pay cash for depreciation assets and borrow cautiously for appreciating assets.  And this continues proves true.

If you were to buy a car or furniture today, paying cash is still the best way to pay for it. Why? The interest you will pay for the loan increases the effective price you are paying for that asset. Specifically, total purchase price equals the price of item at time of purchase plus financing costs.  For example, for a $5000 loan at 5%, you would pay ~$400 over 3 years for that piece of furniture or $5400. And for a depreciating asset, this simply does not make sense to pay more money for something that will decrease in value over time. 

Yet, if you purchase a home, it is typically expected that the home would appreciate in value with appropriate upkeep.  At the very least, you can expect it to keep pace with the rate of inflation. 

But here too, there are lots of variables that determine the value of the home and these can change over time.  For example, in the news recently it was reported that oil wells are being installed in adjacent lots causing many to protest that their property values are going to decline – and they probably will.  The point here being that the oil well wasn’t there when the home was built and not that it is there, the property value has fallen. 

Overall, most will agree that there are no guarantees in life, yet some choices are better than others. Be an informed buyer at all times.

Now you may be asking: Are there other kinds of appreciating assets that I might borrow money for?  Yes. 

Here are some examples of both:

Appreciating Assets – Land, improved and unimproved (without any buildings on it); College education. Yes, the list is short.

Depreciating Assets – Cars, trucks, boats, snow mobiles, furniture, appliances, vacations (when paid for by credit cards), and electronics. Yes, this list almost seems endless.

Now there are some exceptions in the depreciating asset class that are worth noting.  For example, antique furniture can be an appreciating asset or even a classic car.  But be careful, there are many who are fooled into believing something is of value only to learn later that the item was a reproduction.  And so I recommend you step into this space very cautiously and use this course only as a means of generating a greater return on your money over the current form that it is in. 

But are there other assets that could appreciate?  Yes, but it is usually in the class that includes lots of speculation.  For example, precious metals as used in jewelry and the gems that encrust them have their intrinsic value associated with them (e.g. gold melt value = intrinsic value but the piece value can be much higher due to artistic design).  And we know that the precious metals markets rise and fall with time.  The bottom line here is jewelry is a luxury item and in my opinion one should always pay cash for these kinds of items.

Lastly, let me suggest that businesses also borrow money to maintain a level of cash flow or for investment into the business and to do this borrowing money is often necessary.  But the focus in my blog is personal finance and therefore I will leave this topic for others to comment on. 

At the end of the day, you have to ask yourself the following questions:

·         Is this an asset that will appreciate or depreciate in value?

·         Are you willing to pay that much more for the asset due to financing costs?

·         Do you really need the item?

·         Is there a way to save as much as you can to reduce financing costs?

·         What will the cost of ownership (repairs, insurance, etc.) be for the item? Do you have this in your budget in addition to the financing costs?

·         Lastly, have you prayed about the purchase?  Does God have an alternative for you to consider, especially when you don’t have the cash for it?

Minimizing the Impact of Mayhem

Scriptures: Prov 22:3; Phil 4:19; Ps 113:7-8

How do you mitigate financial risk? Have put an emergency fund aside for when mayhem rears its ugly head?  Are there good and bad ways of preparing for that time when you will need more money that you make in one month?  Read more at Beyond the Ten Percent.

You never really know what life is going to throw at you; the unexpected visit to the emergency room, the water pump that failed on your car, an IRS audit that discovered you owe additional taxes from last year, or the large tree limb that damaged your home’s roof.  And while most of us carry insurances that cover the lion’s share of these unexpected expenses, we all have deductibles that must come from our budget/savings.

There are some amusing, yet sobering, Allstate Insurance commercials airing now on TV suggesting that Mayhem is everywhere, that it is just around the corner waiting for you.  These commercials remind me of the Scripture in 1 Peter 5:8 where our enemy is like a lion, prowling around for someone to devour.  But this passage also states that we should be alert and prepared, which is why it is wise to carry insurances.  (See more about insurance in my blog article: Provisions – Your Role and His)

On the Crown Money Map™, the first milestone is having an emergency fund set aside.  Their recommendation of $1000 is to cover many of the things that are unplanned or unexpected.  While this is a nice round number and an achievable starting point for most, it should be representative of the number aligned with your insurance policy deductibles.  Today, there are high deductible health plans that allow you to start a Health Savings Account (HSA) and the deductibles associated with these plans can be as high as $6000. Therefore, please examine your emergency fund in light of your insurance policy deductibles and plan to have the higher amount set aside for an emergency.

But what if you don’t have your emergency fund established yet?  What then?

I will first say that the last resort should be to use your credit card, especially if you are deep into debt.  The high rates of interest charged by most credit card companies is simply too cost prohibitive.  But what are the alternatives?

Here are a few to consider when you are in need of money for those unexpected expenses. (Yes, a large mouthful of humble pie may be necessary but this should never be a barrier to seeking these paths.)

Relatives:  Reaching out to your brothers, sisters, parents, aunts or uncles may be a much better choice over the credit card sharks. Working out a repayment plan with a relative is much easier than with a credit card company.  And you can even throw in an interest payment as well that makes it a win-win for all parties involved. 

Churches: Many churches have benevolence programs to assist financially in times like these.  Most will have a simple application process but these funds are gifts to you as an individual in need.  If your need is large, then sometimes your church may solicit a special offering from the congregation – definitely work with your pastor on this approach as there are many ways to accomplish this in a church. 

Service Provider: Don’t forget that many of the companies that you are receiving a service from would be happy to work out a payment plan with you.  Yes, they may charge an interest rate but these will often be less than what you would pay with a credit card company. 

But the best line of defense for the unplanned expense is a cash emergency fund. If you don’t have one today, start building it as soon as possible. Don’t wait; Mayhem is waiting for you and you don’t want to be caught unprepared!

Six of One, Half a Dozen of Another (encore)

Scriptures:  Romans 13:6-7; Matthew 22:16-22

If you itemize your federal taxes, did you know that the IRS allows you to deduct $5,000 when you give it to your bank for your mortgage interest or to your church; these both legally lower your tax burden.  Not having a mortgage does not necessarily mean you will pay more taxes.

As we turn the page of the calendar to February, our postman begins delivering to our homes all of the necessary tax documents we need to complete our yearly tax filing obligation.  For most, this is a necessary and unpleasant task.  But I would like to suggest that it’s a time to examine how we spend our money in light of tax saving benefit AND to the benefit of the God’s Kingdom. 

I suspect that most of us haven’t connected the dots between receiving a tax benefit and giving to support the growth of God’s Kingdom, but we should.  God has inspired such tax law and we should all be creating budgets that can support such objectives. 

And so, in an encore performance sort of way, I encourage you to blend the thoughts presented in these past blogs and allow the Holy Spirit to inspire you to transform. Use the themes of these articles like ingredients of a recipe; one standing alone is okay but when it is blended with others, it becomes an enjoyable, satisfying meal. 

Six of One, Half a Dozen of Another – having all of the ingredients

Benchmarking Your Budget – right proportions for all of the ingredients

Mine, Ours, or His?  – where all of the ingredients come from

Kingdom Investments – a God-honoring goal of our financial blessing

To Give or Not to Give – Tax is the Question! – the personal benefit of our giving

When you let these ideas steep in your spirit, I suspect you will be transformed as I have been.