With all the challenges of debt in personal finances, the banking industry continues to be one of the most profitable businesses in the economy, indicating high appetite for borrowing. Many young adults are introduced to debt long before they earn an income through students loans to enable them pursue higher education. As soon as they join the labour market, many are encouraged to join a SACCO and to borrow. Many breadwinners attribute their success in educating their children and providing a home for their families to debt. Has that been your story?
Essentially, debt is not bad in itself and neither is it a sin. Debt is a tool that can be beneficial in specific circumstances. The danger with debt is the borrower presumes they will have sufficient cash flow in future to repay it. Based on the three economic principles, the future is unpredictable and repayment cannot be fully guaranteed.
Developing a decision-making framework long before you need to make a decision can be helpful in maintaining objectivity and result in better outcomes. Ron Blue the author of the book ‘Master Your Money’ has shared the following four guidelines that I have adopted in my debt decisions. From my experience, when applied together they provide clarity, confidence and better communication among spouses, family members and business partners.
- The economic return must be greater than the economic cost: Objectively do a cost benefit analysis bearing in mind that repayments are always after tax and tithe (for some) income. While student loans may make economic sense in spite of mortgaging the future, borrowing to buy depreciating assets or for consumption purposes does not.
- Always have a guaranteed way of repaying the debt: We tend to be very optimistic of investment opportunities while the real motive for borrowing might actually be greed. Ron recommends that you test this guideline by talking to your bankers first, if they do not agree to loan you the money, you certainly should not borrow from other sources.
- Only borrow if in agreement with your spouse: For those without a spouse, for instance widows, widowers and single parents consider your children especially where your financial decisions directly impact their wellbeing. This is particularly important in regards to investment opportunities. Ron states, “If you cannot explain it well enough to your spouse then you do not understand it. If you explain it clearly to your spouse and they do not agree, do not do it.” Your relationship is far more important than the investment outcomes.
- Only borrow if there is no other way of taking care of the need: Critically evaluate the main reason why you are borrowing and do not rob God an opportunity to provide.
The above guidelines have a biblical basis as per a sample of scriptures below:
- James 4:13-16 (NLT) Look here, you who say, “Today or tomorrow we are going to a certain town and will stay there a year. We will do business there and make a profit.” 14 How do you know what your life will be like tomorrow? Your life is like the morning fog—it’s here a little while, then it’s gone. What you ought to say is, “If the Lord wants us to, we will live and do this or that.” Otherwise you are boasting about your own pretentious plans, and all such boasting is evil.
- Ephesians 5 (ESV)
Verses 15-17,21. Look carefully then how you walk, not as unwise but as wise, making the best use of the time, because the days are evil. Therefore, do not be foolish, but understand what the will of the Lord is. Submitting to one another out of reverence for Christ.
- Psalms 37:21 (ESV) The wicked borrows but does not pay back, but the righteous is generous and gives;
- James 1:5 (NLT) If you need wisdom, ask our generous God, and he will give it to you. He will not rebuke you for asking
- Philippians 4:19 (NIV) And my God will meet all your needs according to the riches of his glory in Christ Jesus
Quoting Ron Blue again, “you can never borrow your way to prosperity but you can borrow to look prosperous”. Join me in our next article, as I share my views on prosperity.