Six Lessons for Financial Literacy

We'll be right back. April is Financial Literacy Month. This event began some two decades ago to raise awareness about the critical need for financial literacy.

I'll talk about it first today, and then it's on to your calls at 800-525-7000. Well, I know it's not quite April yet, but we want to give you a head start on gaining financial literacy. It's important because if you don't know how to set up a budget, handle credit cards responsibly, or figure out how much car or house you can afford, well, you'll run into all sorts of trouble.

And guess what? Financial literacy is just another way of knowing and following God's financial principles for earning and saving money. Now, a recent article in the Wall Street Journal laid out six practical things you need to know to be financially literate, so why don't we go over each of them one by one? The first is knowing the power of compound interest and how it works, and that it can work for you or against you. When you save, your interest is compounded.

That means at some point it's added to your principle, making it larger. Then you're paid more interest on your larger balance, and so on. The earlier you start saving, the more time your balance has to grow at an ever-accelerating rate.

Here's an example. Let's say you're 20 and you invest $5,000 a year for 10 years and then stop. Over the next 30 years, at an annual return of 7%, your balance will be $600,000. But if you wait until age 30 to start and invest the same $5,000 a year for the next 30 years, do you think you'll have more?

Nope. Your balance will only be $540,000, so the earlier you start, clearly the better off you'll be. By the way, I said compound interest can work against you, too.

If you use a credit card and don't pay it off each month, the interest is added to your balance, meaning you'll owe even more. That leads us to the next lesson for financial literacy, so-called good debt. This is debt you take on with a reasonable expectation that the return you'll get will be more than what you have to pay in principal and interest. Some examples would be borrowing to start a business if you expect that your revenues for the business will be enough to cover the loan and give you enough to live on. Buying a house would fall into the category of good debt because in most years, homes appreciate in value. A student loan also because if you finish with a degree that gives you marketable skills, you can reasonably expect to earn more than the loan will cost you, but be careful to borrow as little as possible for education. Far better to save for it ahead of time, again, using compound interest in your favor, like with a 529 education savings plan.

Buying the outside edge of good debt could be a car loan if you need it for transportation to get a job, but make as big a down payment as possible and continue to save when the loan is paid off so you can eventually buy a car with all cash. Okay, our next financial literacy lesson is about your credit utilization rate. That's how much credit you have versus what you owe, as spelled out in your credit report, which affects your credit score.

You should never owe more than 30% of your available credit because it will lower your score, resulting in having to pay a higher interest rate if you need another loan. The next lesson is called pay yourself first. This simply means that you should put something into savings each pay period before you spend any money. The next is diversification, another of God's financial principles.

Ecclesiastes 11.2 says, give a portion to seven or even to eight, for you know not what disaster may happen on the earth. It simply means to divide your investments among different stocks, mutual funds, bonds, and other securities. Don't put all your eggs in one basket. You can also diversify your assets for tax purposes.

For example, contribute to your employer's 401k or 403b with pre-tax money, but also open a Roth IRA and invest after-tax money in it. It's great to have something in each bucket if you can do it. Okay, our last financial literacy lesson is something called liquidity. And all that means is that you can get to your money when you need it. If that sounds like an emergency fund, you're exactly right. Your retirement accounts and even CDs and money markets are not the place to keep funds that you may need at a moment's notice.

Keep three to six months living expenses and a savings account and an online bank to get the best interest rate possible. So those are your six lessons. We hope you'll use April, financial literacy month, to start putting them into practice. I'm Rob West and your calls are next.

800-525-7000. We'll be right back. Grow in wisdom and knowledge by connecting with a community of thousands of Christians striving to be good and faithful stewards at faithfi.com or by downloading the FaithFi app. As 2023 comes to a close, we are thankful for the generous and faithful supporters of FaithFi who believe in the message of financial faithfulness found in God's word.

This season, we want to get back to you for your support. We'll send you the book Leverage Using Temporal Wealth for Eternal Gain. For just a few more days, you can request your copy with your gift of any amount at faithfi.com. Start the new year by aligning God's purposes with your finances. That's faithfi.com. You're listening to Faith and Finance, where we talk about how we handle God's resources.

How are you using God's resources? We're talking about it and the lines are open to take your calls and questions. 800-525-7000 is the number to call. Let's head to Indiana.

Hey, Elsie, thanks for calling. Go ahead. I was talking about a celebrated banking as a way to pay off a mortgage quicker. I have a 15-year mortgage. They take a pay off in three and a half years or less than that, but I have to give them a lump sum. And then I want to compare it to reverse mortgage.

Do you recommend either one? That's my question. A lot of folks mean different things when they say accelerated mortgage. Are you talking about this strategy?

We haven't heard a lot about it lately, and there's a good reason for that. I'll tell you in a second. But it involves taking out a home equity line of credit and using that to float your monthly bills and trying to apply your income to your mortgage and kind of going back and forth between the two. Is that the strategy that you're describing?

That's exactly what he was talking about, exactly, to a c. Yeah, I'd stay away from that, Elsie. It's complicated. It involves a lot of moving back and forth, often involving computer software to kind of help you calculate everything. Usually there's, in some cases, thousands of dollars in upfront fees. It's going to use a home equity line of credit, which is going to have a variable interest rate, which is not a good idea right now with interest rates as high as they are right now. It requires a lot of cash flow in order to make the strategy work.

So usually folks have higher incomes that are doing this. It takes a lot of discipline as well just because of the risk that you run by taking out this additional debt and trying to jump back and forth between the two. So this is something that I would stay far away from. They're going to pass it off as a way to pay off your mortgage faster, but it's going to end up potentially being a real problem area for you.

It's going to cost you a lot in the way of upfront fees, which means that perhaps the only one that wins is the one who's selling you the software and the quote-unquote program. So I wouldn't touch that. A reverse mortgage is the opposite. If you're trying to get out of debt, a reverse mortgage is going to tap into your equity to create an income stream.

I'm not a big fan of those because they're complicated and expensive. There's an interest rate inside that reverse mortgage that's probably not the most attractive either. The only case that it makes some sense would be as if you've got somebody who has depleted most of their assets. They're sitting on a large asset with the family home. Maybe there's a gap in what they need between the income they have and the expenses they have.

They don't want to move. They're over the age of 65, and they would like to just systematically pull the equity out of the house and use that to cover the gap in their expenses to fund their lifestyle. But just keep in mind, if you wanted to pass the house off as an inheritance, they're going to have to satisfy that debt if they want to keep it. You've got to still pay the mortgage and the taxes.

If you need to go into long-term care, you're going to have to sell it and satisfy the loan. So that's not my favorite approach either except in a few limited circumstances. So what would I do?

Well, I'd keep it really simple. Take the mortgage you got, which is probably a pretty attractive interest rate. I love that you've got a 15-year mortgage and not a 30. And I just try to send an extra payment a year if you can. If you can do more, great, but let's try to get that paid off so that as quickly as possible you take that largest expense in your financial life off the table, which makes it easier to cover your obligations every month. And once you're debt-free, now you've got complete flexibility and peace of mind. You're no longer in a position of being slave to the lender, and you can enjoy whatever God has for you next. That's my approach.

It's not fancy, doesn't involve slick calculations and a lot of software, but I think it's the biblical model in my view. That makes a lot of sense. I appreciate that. All right, Elsie, God bless you. Yes, ma'am, thank you for calling today. 800-525-7000. Looks like all of our lines are full. Let's continue to move through these questions as quickly as we can to Chicago. Hi, Finney. Thanks for calling.

Go ahead. I have a townhouse who already paid off, and that's our old house, and another townhouse that have combined have 500,000 in there. And I was thinking to live debt-free.

That's only 15 years. But we have a handicapped child who needs 8,000 a month to be put in the facility in seven years, and some friend advised that we should sell the boat townhouse and get a building, a $2 million building, so that we can generate more rental income, so that way we can make the payment for pay for his facility. Yeah. Well, I realize that the challenge here, I guess the only concern is that that sounds great, and could it work?

Possibly. But it's not without risk. I mean, especially when you're talking about commercial real estate right now, the commercial real estate market is changing quite a bit. And so as we're looking at the changes post-pandemic, a lot more people are working from home. That means a lot of empty office buildings.

I mean, there's quite a bit of transition going on. And so for you all, even if you're going into this with 25% equity, you'd be taking on a massive note to buy a building hoping that you could keep it occupied and throw off enough income to service the debt and all the expenses. And this is a completely different situation than being the landlord of a townhouse, a multi-tenant commercial building. That's a whole different ballgame, and it could actually create a lot of financial risk for you all if for some reason you couldn't keep it rented, and you got behind on these debt payments or something like that. So as much as I love the idea of you all trying to solve for how are we going to cover this $8,000 a month, which I realize is a massive bill, and you want to care for your son and provide everything he needs, I want you to do it in a way where you're not taking unnecessary risk in this situation. And I think getting into commercial real estate without a lot of expertise, especially if you're doing this on your own and this is a new venture for you, would be something I'd be very concerned about. Does that make sense?

Yes. So I think the question is kind of where is that money going to come from? How much of that $8,000 a month would you be able to cover just based on your current situation with whatever rental income you're collecting from the townhouses plus any discretionary income after your bills are paid? $2,000, so we need $6,000 more.

So you need another $6,000, yeah. So obviously that's going to be challenging, so let's just make this a matter of prayer, look at other options out there where you could perhaps care for him. And I don't know anything about what his medical condition is, what his needs are, so I wouldn't even begin to venture to try to help you explore what options you have.

I'm sure you've done a lot of research and a lot of studying. I think the thing that I want you to do is, number one, we want to trust the Lord. He knows this situation, so let's make this a matter of prayer. Let's ask the Lord to provide miraculously, but let's also not take unnecessary risk.

Let's not jump to something that is potentially speculative and beyond what you have the ability to do financially and based on your own expertise to try to solve for this in a way that could create a lot more financial strain and strain on your marriage and your family beyond the strain that's already there caring for this child of yours. So let's pray about this. I would seek out a certified kingdom advisor as well in your area at faithfi.com. Just click Find to CKA and see if you can get some wise counsel from an advisor who can help you navigate this because there's a lot of moving parts there. Again, faithfi.com, click Find to CKA. Vinnie, God bless you.

We'll be right back. Do you feel like your hands are tied with debt preventing you from serving God? If you have credit card debt, Christian Credit Counselors can help. Through our debt management program, we can get you out of credit card debt about 80% faster while honoring your debt in full. For more information on how Christian Credit Counselors can help, visit christiancreditcounselors.org. That's christiancreditcounselors.org, or call 800-557-1985, 800-557-1985.

Welcome back. This is Faith and Finance. I'm Rob West. We're taking your calls today, 800-525-7000. That's 800-525-7000. By the way, you don't have to call, just send an email, askrobatfaithfi.com.

That's askrobatfaith, the letters F-I dot com. All right, back to the phones we go, the Cleveland area, WCRF. Hi, Kathy. I understand you have a testimony. I do. I am just testifying to the faithfulness of God how little money I have made all my life, and He has always been faithful. I give generously to charity. I give without thinking, usually. If I hear of a need, I give what I can at that moment.

Not a percentage. I'm sure I give more than 10% of my income, and I make a moderate income, but God is so faithful. I needed a car. He provided the money. I live debt-free, and I have been taught that way from a little, little girl. My mother barely had two nickels to rub together, but she always paid her bills, and she lived debt-free, and I do too. I just wanted people to know how faithful God is to provide what you need when you need it, because He always has for me. And truly, I make very little money.

I'm single, I'm all alone, and I really have no family. Well, I appreciate that testimony. It sounds like there's really been two keys. Number one, you recognized your role as a steward, that God owned it all. You were generous throughout the entire process of managing God's money, even though, as you said, you didn't have a whole lot. And you lived frugally.

I mean, would those have been some of the keys, do you think, Kathy? Always. Always. I've always just worked. I've always worked. He's provided me jobs with moderate income, and I've always given.

I just always have. I've never counted, really, what I give. I always just give.

I've always belonged to a church. And I give to other ministries as I hear of them. If I hear of a need, I say, well, I should give to this. But the one thing I always do, I heard it said once, lots of people give to lots of charities, but only Christians give to Christian charities.

So those are the only charities that I give to. That's well said, and a great reminder for all of us today. Kathy, thank you for calling and sharing your story today. We appreciate that. May God bless you.

800-525-7000 is the number to call with your questions or perhaps another testimony to Ohio. Hi, Marsha. Thanks for calling. Go ahead.

Hey, Rob. I had a question on stepping out of my job here. I'm a 61-year-old widow who collects my husband's Social Security, and I always will, because his will always be larger. However, I'm a school bus driver and I put in to step away from my job at the end of this month with the thought pattern of I would be falling under GPO if I were to collect my pension at 62. And therefore, it's my understanding two thirds of what I'd be collecting would be dropping or coming out of my Social Security anyhow. My thought here is, and I don't know if it's the right one, but my thought is to step out at the end of this month.

I've already given them the word and do a cash out. Would there be a big issue with that? Does that sound like something that's going to bite me in the butt down the road or? Yeah, not necessarily. So, you know, as you know, if you receive a pension from a job where you didn't pay Social Security taxes, then they reduce your benefit. Is that what's going on here in your situation? Did you pay Social Security taxes? I didn't do that yet. I'm in the process of stepping away from the job before I turned 62 because in order to be eligible for the pension, I would have to be 62 with 10 years on the job.

Is that? What would they give you for the lump sum? I can't tell you the exact amount, but when I figured it out, I would be 78 before I would have spent it. Okay. And what is the alternative as it's been laid out to you? It hasn't all been laid out to me. I've been investigating and looking into things and comparing the lump sum to, I guess, let's say I'm eligible for a 300-month pension if I continue on. Two-thirds of that, technically, two-thirds of that is going to go away because it's going to drop out of my Social Security. Am I understanding that right? That's right, yeah, through the government pension offset.

That's right. So, it can reduce it by up to two-thirds of your pension. Okay, so then I'm understanding that out of that 300, I'd technically only be gaining 100 and, of course, that's before taxes. So, my thought pattern was if I got out before I was eligible for the pension and took the lump cash and called the cash out. Sure, yeah. And then you'd still be able to collect the full Social Security benefit. Is that what you're thinking? Yeah, that is my thought pattern.

Am I doing this all right? Yeah, no, you could be, absolutely. I think the next step is for you to sit with the Social Security administration and just kind of look at your own work record and look at what your options are.

Because the last thing you'd want to do is to make an election here without understanding the full implications. And it's not always cut and dry, especially when we get into these GPOs, the government pension offset and the windfall elimination provision. These are ways where your Social Security is reduced as a result of you participating in a pension plan where Social Security taxes were not collected. The question would be, is the lump sum payout kind of an end around on this where you can essentially get the benefit of the cash out and still collect the Social Security? I would hate to weigh in on that. I don't know enough about the details of what you have here to be able to say one way or the other.

So if it were me, I'd probably get with the Social Security administration, show them what you have, and then let them tell you whether or not you can accomplish what you're trying to accomplish here through this approach. It sounds good to me at face value. I just want to make sure we're not missing anything. Okay, I appreciate that. What are you most looking forward to, Marsha, in this next season once you're retired? Spending time with my parents because I'm at a time in life where I just feel like I don't want to look back and say I could have and I should have.

It's a hard thing to walk away from children with school bus driving, but I'm ready for more time with my parents. Yeah, I can imagine you are. Well, that's exciting. Here's what I want you to check. We're going back to the question for a second. Many times when the pension is paid in a lump sum, the reduction is calculated as if it's paid monthly.

And so my concern would be that this may not work the way you're intending and you could have the same impact as if you had got the pension the way it's normally paid out. So I just want you to investigate this a little bit further before you make that final determination. But listen, all the best to you, Marsha, in this next season of life. And thanks for calling in today. God bless you. That does it for us today. I'm Rob West. And again, I want to wish you a Merry Christmas from all of us here at Faith and Finance. Faith and Finance is provided by Faith Buy and listeners like you.