Are you trying to pay off credit card debt, student loan debt, car loans and a home mortgage while at the same time trying to save for retirement?
If you’ve been trying to figure out which to tackle first, you’ve probably found all sorts of information about the interest rate on your loans versus the interest rate your investment may be able to earn.
The more research you do, the more complicated the answers can get and the confusion prevents you from determining the best way to proceed.
In order to define the path forward, let’s review some basic Compass Catholic concepts. The most important one is that God owns everything. Whatever you have, whether it’s a little or a lot, it’s a blessing that God has granted you. Psalm 24:1 tells us “The earth is the LORD’s and all it holds, the world and those who dwell in it.” If God owns everything and what we have is a blessing from him, then our role is to be a steward.
The role of a steward is to manage someone else’s property. As a steward you are managing the money and possessions God has given you. In the Garden of Eden, God gave man dominion over the earth, not ownership of all things on the earth. That thinking may require a complete mental adjustment, and it’s not always the easiest thing to wrap your brain around, but once you understand that concept and live as a steward, finances become a lot easier to manage.
Here are some tangible steps you can take right now to become a good steward and balance the debt payoff with saving for the future.
Step one is to track every penny you spend. If you don’t know where you are spending your money, how are you going to determine if you are spending wisely? If you are like most people, looking at ALL your spending will result in a few surprises about how much money is being wasted on things that aren’t important.
Step two is to create an emergency fund. If you are the typical American, you don’t have $400 to cover an unexpected expense, so emergencies go on the credit card, and the balance on the cards keeps growing and growing.
Start by saving a minimum of $1,000 in a savings account. As you are able to do so, increase your emergency fund to one month’s income, then three month’s income, and eventually to six month’s income. Saving $1,000 may seem impossible, but you will never get there if you never start.
Step three is to create a spending plan. Once you have tracked your spending for 30-60 days you have a good basis for developing a spending plan (AKA budget) based on actual data about what you spend each month. It also helps to research your spending for the past 12 months for those quarterly, semi-annual, and annual payments that you need to consider as part of your monthly budget.
Categorize all of your spending, and add it up, then subtract the spending from the income you bring home each month. Hopefully you still have a little money left over and you are spending less than you earn. If you are spending more than you earn, review each of your categories and eliminate things that are not absolute needs.
Be sure that one of your categories is focused on paying off your credit card debt and that you are setting money aside each month for the quarterly, semi-annual and annual bills.
Once you get a spending plan in place, Step four is to create a debt snowball to pay off your credit card debt. This debt repayment needs to be included in the monthly spending plan.
Make a list of all of your credit cards along with total amount owed, minimum payment amount, interest rate and payoff date. All of this information is available on your latest statement. Prioritize your list from smallest balance to largest.
Do everything possible to pay off the smallest balance asap. Once the first card is paid off, apply what you were spending on the first card to the card with the next smallest balance
To help you stay motivated, meditate on this verse as it relates to your debt: Proverbs 22:7 reads “The rich rule over the poor, and the borrower is the slave of the lender.” If you don’t believe this verse is so true—even today—stop paying your credit card bills and see what happens! Those lenders—the credit card companies—will definitely begin to rule your life!
Step five, once you are actively using a budget and getting the debt under control, is to maximize your investing opportunities at the lowest possible cost to you. Begin by investing in your employer’s qualified plan, especially if the company offers matching contributions. Invest enough to reach the maximum your employer contributes—it’s free money for something you need to do.
Step six after you have all the consumer debt paid off is to really focus on investing. Even though you might still have a mortgage or student loans, the interest rate on these two items is typically pretty low—much less than the return you should be able to earn on your investments
Now is the time to build up your savings and investments. Determine your goals. When do you want to retire? How much do you need to save before you can retire? What do you want to accomplish when you retire? Create a monthly plan of savings and investment that will allow you to reach your goals.
At some point in your journey of paying off debt and saving for the future you are going to ask yourself, “Why am I doing all of this?”
At the beginning, we talked about being a good steward of God’s blessings. This is the reason for the hard work and discipline!
If you can do all that we outlined here, then someday, you might hear these words from Matthew 25:21, “Well done, my good and faithful servant. Since you were faithful in small matters, I will give you great responsibilities. Come, share your master’s joy.”
Checkout the Manage Your Money God’s Way podcast for more.