Perfect Storm for Debt

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A joke going around the internet actually isn't that funny. It goes like this, if anyone is Christmas shopping for me, I take a size large in student loans. I am Rob West. A perfect storm may be coming that could make this Christmas shopping season not funny at all for folks with student loan debt. Neely Simon joins us today with the details. Then it's on to your calls at 800-525-7000.

That's 800-525-7000. This is faith and finance, biblical wisdom for your financial decisions. Well, our guest Neely Simon is a certified credit counselor with Christian Credit Counselors, an underwriter of this program. Neely has been following events that affect consumer debt and she's here today with another report. Neely, great to have you back.

Thanks for having me on the show, Rob. Now, we set this up by saying there's a perfect storm brewing for debt, Neely. So why is that the case?

So there's a few reasons that I'd like to touch base on. One is that student loan payments resumed in October after being on forbearance for three years. The federal student loan debt is estimated to be 1.7 trillion, which affects 40 million Americans. So as a result, a monthly seven to eight billion dollars will have to go towards student loan debt. And then the average monthly payment now is about 503 due to inflation.

Wow. As we all know, inflation is not going away, although it is slowing from last year's 8.5 percent. The Consumer Index states that it is still running at a 3.4 percent annually, where food inflation is at 3.7 and gas prices are up over 3 percent annually, but spiked over 10 percent in August alone. Despite all these reasons, consumer spending remains high at 4.9 percent above last year.

Well, if that's the case, Neely, how is it that spending actually increased in the last year? The hard reality is that people are still living outside their means, spending more than they make and relying on credit cards to make ends meet or to keep up with their lifestyle. Bank rate stats show that 46 percent of credit card holders are carrying a balance, which is up 39 percent from last year. The average credit card interest rate is now 20.24. And for people seeking credit counseling, we see the interest rates to be closer to 22, up to 26 percent. And then lastly, the average balance per account is around 5500 and climbing.

Wow. Well, then the last part of the perfect storm is that we're coming into the Christmas shopping season when folks really feel pressure to spend money that perhaps they don't have. So what advice do you have for them, Neely? I would say don't fall victim to retailers offering you a discount or promotional rate by opening up a new account. And then prepare your Christmas budget. Know how much you can afford and don't go over it. One way to do this is the good old envelope system where you use all cash. This will ensure you don't go over. Then you can make a list of all your presents with spending limits. Another option is you can give cards or make inexpensive gifts and then allow for some budget in regards to decorating, food, holiday baking and other things. But don't be excessive. Remember, he is the reason for the season, not all the stuff. That's exactly right.

Now, sometimes things just get away from people, though, Neely. So if someone is struggling with credit card debt, how can Christian credit counselors help? So we offer a debt management program which lowers your payments and interest rates, getting you out of debt about 80 percent faster. Our program helps you do it the right way by paying off your debt in full with interest ranging between one and 12 percent APR. We also offer a free consultation that provides you with a comparison estimate which will outline all the benefits and the fees. Keep in mind, there's no commitment. We really just want to educate you on your options. Proverbs 3.27 states, Do not withhold good from those to whom it is due, when it is in your power to do it.

Christian credit counselors is here to help you get on the road to financial freedom, and we look forward to speaking with you. Absolutely. And you've been great partners for a long, long time, Neely. We're so thankful that you stopped by today with some great information. Thanks for being here. Thanks so much. All right. Folks, if you have credit card debt, my preferred way for you to get out of debt is debt management, and that means Christian credit counselors.

So check it out today. Christiancreditcounselors.org. Get those interest rates down and pay that debt off up to 80 percent faster. That was Neely Simon with Christian Credit Counselors. Your calls are next on Anything Financial. 800-525-7000.

That's 800-525-7000. This is Faith and Finance. Stick around. If you enjoy this radio program, you're going to love all of the many different resources waiting for you at faithfi.com and the Faithfi app. You'll find powerful wisdom, free podcasts, articles, videos and more from leading voices such as Randy Alcorn, Howard Dayton, Ron Blue and our own Rob West. 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. God has entrusted his finances to you and we at Faithfi have designed our Faithfi app to help you live, give, owe and grow. With that perspective, our Faithfi app is the leading biblically based finance app. You can manage your money, get top biblical financial resources and interact with a community of like minded believers where you can ask questions, get answers and share what you're learning. Go to faithfi.com and click the word app to get started. 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 St. Louis.

Hi, Carlos. Go ahead, sir. So my question is, so I'm trying to pay off my house. I'm only 45 and I've been telling it to my wife and we want to stay in the house for forever. Okay.

So God take us home. So my question was, is it okay to take out a loan from my 401k to pay it off and just deal with it and then just continue adding more percentage to my 401k to continue growing my money there? Yeah, I wouldn't do that, and I'll tell you why in a second, but let me ask a couple of questions. What is the interest rate on that mortgage?

3.2, I think. Okay. All right.

And how long before you have it paid off just based on the current payment schedule you're on? I have like maybe 10 to 15 years left. Okay. And how far off is retirement just based on what you know today? Oh, I'm 45 right now. Okay. So 20 years, please. Yeah. Okay.

Yeah, I mean, you know, here's what I would say, Carlos. I love the idea of you paying off your house. I'd love for you to be debt-free as soon as possible. But unless you have just a real conviction from the Lord to be debt-free, you know, as soon as possible, I would balance the desire to be debt-free with the competing priorities of maintaining proper liquidity, meaning you have access to capital reserves or what I would call an emergency fund, and the ability to have compounded growth working for you in your retirement accounts between now and retirement. And we've got to balance all of these things because although it's a good thing to pay off the mortgage, if we have to deplete all of our liquid savings, well, that's not good because now when the unexpected comes and it will, now I've got to put it on the credit card. Or if we do it at the expense of our 401K, so the mortgage is paid off and we got rid of that 3.2% in interest, but we miss out on, you know, 20 years of compounded growth that, you know, let's just take the S&P 500 over the last 100 years, 9% a year on average.

You know, so I think we've just got to balance all these things. So my goal for you would be to make sure that that mortgage is paid off at the very least by the time you retire. The good news is if you just stay on your current track and maybe add an extra payment a year or something out of current cash flow, or even if you don't, you just continue like you are, you're going to have this paid off 5 to 10 years before you retire, which is great. And that means that you're going to enter retirement with that major expense of your mortgage gone. And that's the way it should be. And by doing that and not pulling from the 401K, you're leaving all that money in the 401K, which does two things.

One, it means it's still available to grow. And I realize we've been in a challenging market. So you might say, well, why would I want to leave it in the market and just watch it decline? Well, only if you're looking at the last couple of years is that true. If you would have looked at the last 10 years before that and the last 10 years before that, and if I were to keep going, you'd see that the market has done well. And we would expect it to do that again once we get past this recession. But if you borrow that money out, you're going to miss it.

You're not going to be there and have the ability for it to grow. So you've got a nest egg down the road. And if you were to separate from the company for any reason, all that becomes taxable.

And if you're under 59 and a half, now you're going to pay a 10% penalty on top of it. So where would I go from here? I love your idea of being debt free, but I wouldn't do it at the expense of savings or your retirement assets. So I would stay on your current track. If you get extra money along the way, a bonus or gift or an inheritance, by all means, accelerate your debt payoff.

But let's not try to do it through either depleting your savings or borrowing from your 401K. Does that make sense? Yes, that makes a lot of sense. I appreciate it. Okay.

Very good. Listen, Carlos, I love the way you're thinking, so I don't mean to squelch that in any way. I want you to be debt free. I just want you to balance that against these other competing priorities. So it seems like you're on the right track, my friend. All the best to you and your wife as you live out your desire to be a faithful steward of God's resources. To Woodstock.

Hi, Carl. Go ahead. My wife and I are looking, hopefully, Lord willing, to move out of state in about two years. When we sell our current home, we'll profit a little over $100,000. Also, sometime next year, I'll be receiving a car accident settlement of also around $100,000, a little over.

And when we move out of state, we're wondering whether or not we should use the money to pay cash for a home or just the money from the sale of the home towards a home and take a small mortgage and invest the money from the settlement. Yeah, yeah. Would you consider yourself on track for retirement, Carl, apart from this $200,000? Unfortunately, not at all.

I was disabled about six years ago, so all of my savings is gone. And how far out is retirement, just based on what you know today? For my wife, about 13, 14 years. Okay. All right. And does she have a retirement plan available to her? She does. She's investing in a 401k with her current place of employment. Okay. And how much is she putting into that percentage-wise, do you know?

Ten percent. Okay. All right.

That's great. Yeah, I mean, here's what I would do. I think right now, with interest rates where they are, it probably makes sense for you all to go ahead and buy this house for cash, if you could, and not pay seven percent interest. If it was lower, I would say you could look at investing it or perhaps just maximize, have her fully max out what she can put into the 401k. And then you guys each fund two Roth IRAs every year. And if that meant that that pulled your income down a little bit too low, then you could replace that out of the $100,000 that you're going to receive from the settlement. So you'd essentially be shifting that money systematically into your 401k and your two Roths over time.

So I think that could be an option for you. But at these interest rates, I think if we're still in the sevens or even the high sixes, I'd probably just go and pay off that house, keep your expenses as low as possible. And then just out of current cash flow with what you would have been sending to the mortgage just over the next 15 years, just fund as much of those long-term retirement savings as you can by maxing out her 401k and funding some Roths. And that will allow you to, you know, between your social security disability, you know, your tax, your debt free on that, including your house, the amount you're putting in over the next 15 years into her 401k and these two Roths. I think that will allow you to get to retirement in between social security, which will eventually switch to and her social security plus your nest egg. And the fact that you're debt free, hopefully that'll, you know, work itself out.

I would also encourage you to connect with an advisor just to do some planning around this as well before you made that final decision. And you can connect with the CKA at our website at faithfi.com. God bless you, Carl. Thanks for calling today. Lupe, real quick, you're wondering about adding your daughter to your credit card. Is that right? Yes, to my visa or to go to a bank and she would like a debit. She just started working. Are you trying to build credit or are you just trying to teach her how to manage money or both? Both. Yeah.

Okay. I like the idea of you helping her. I don't want her to get into debt though. So I like the debit card and helping her get a spending plan together. I think that makes sense. If you wanted to add her as an authorized user and not give her the card, that will pass your credit to her and help her build credit. But keep in mind, if you have a late payment or any negative credit history, that will go as well. So just be careful there.

But I like the debit card idea and helping her put a spending plan together. We'll talk to you soon. We'll be right back. As the leading advocate for the Christian financial industry, Kingdom Advisors serves the public by promoting the integration of a biblical worldview across every aspect of the financial services industry. And we serve a growing network of thousands of Christian financial professionals, equipping and empowering them to carry biblical financial wisdom to their clients, peers and community. For more information, visit kingdomadvisors.com. That's kingdomadvisors.com. Welcome back to Faith and Finance. I'm your host, Rob West. The number to call is 800-525-7000. I'm looking forward to hearing from you as we take your calls and questions from across the country. In fact, let's go to Tennessee.

Hi, Patty. Go right ahead. I am recently divorced of 44 years and I have no debt. I have two hundred thousand dollars in an IRA and a divorce settlement. I have a five hundred thousand with another maybe five hundred thousand coming after we sell the house. I'm wondering when I get my money now, should I buy a home? Should I pay rent?

What should I do? Well, let me ask you a couple of questions. I appreciate that background. So you're going to have about one point two million in assets between the IRA, the half million and then the additional half million that's coming. What income sources will you have at that point? The only thing I have is my Social Security and that's twelve hundred a month.

OK. I was thinking about starting to work part time. OK. Well, before we factor that in, what are your expenses currently and where are you living? Living with friends and family. I've looked into apartments and paying rental because I know if I buy a house, there's always something that's going to come up with a house. But then rent is so expensive right now. You know, when you start adding up rent, you're spending so much.

Yes. OK. No, that's helpful. I mean, I think at the end of the day, what you need to do is look at, you know, what is your budget going to look like? So I think the first step would be to say, OK, if I were to rent, what would my budget look like? And go ahead and build it out fully. You know, what would it look like for you to maintain your current expenses? Just the cost of you, you know, food and, you know, all of the things you're going to get a bill for, plus your utilities and so forth and build that out. You've got a base of income from your Social Security.

That's great. If you had the full one point two million available to you, I'd say, well, you know, you should be able to invest that with a certified kingdom adviser. And, you know, the typical rule of thumb here is you could pull four percent a year and you should be able to maintain that that principal balance of one point two million, you know, over a long period of time. It may be you may actually see some it dip below that in any one year or quarter.

But over the long term, you know, every 10 year period, you should be able to maintain that. Well, that would allow you to pull out forty eight thousand a year, you know, or an additional four thousand a month at one point two million. So, you know, that would say, well, I'd have fifty two hundred dollars a month between your Social Security and if you were to pull four percent a year from your one point two million. Well, that's certainly if you're living on that amount now, that would cover rent and any other expenses. So then we could say, OK, well, what if I took two hundred and fifty thousand or let's keep around numbers. What if I took two hundred thousand out of it and bought something, you know, then you'd have a million left.

And that would throw off forty thousand a year. And, you know, that would give you about thirty three hundred dollars a month. So now you own a small place free and clear, whether that's a condo or a townhouse or a small single family home. You've got a million dollars left. You don't have any debt because you paid for it with cash and you're pulling thirty three hundred a month from your investments and you add the twelve hundred a month from Social Security and you're at forty five hundred a month. And you don't have a mortgage. And, you know, you've got probably at that point you wouldn't even need four hundred forty five hundred a month.

I'm guessing even when you add in utilities and setting aside a little bit, you know, every month for for maintenance on the house, that kind of thing. Does that make sense? Yes, it does.

Yes, it does. The other thing I'd like to do is I'd like to send you a book that I think will be really helpful to you. It's by Miriam Neff and Valerie Neff Hogan, and it's called Wise Women Managing Money.

And it's for someone in your season of life that is now going to be responsible for managing a significant amount and just will be an encouragement to you and give you some helpful ideas on what that could look like. And so I want to send you that as our gift. OK. Thank you. Thank you so much.

You're welcome. And, Maddie, stay on the line. We'll get your information and we'll get that right out to you. And if I can help further along the way, don't hesitate to reach out to Ohio.

Ronaldo, thank you for calling. Go right ahead. Yeah.

How are you doing? Yeah. So I have a daughter. She's 19 years old, second year in college. She doesn't have any credit. And I've heard that if I just add her to one of my credit cards or something as an authorized user, that that would help begin establishing her credit.

But I've also heard that if I myself have any negative items or things like that, that that could also hurt her. Yeah. I don't know. That's exactly right.

Yeah. So all of the information will pass to her credit report. So a lot of folks will use this to build credit for those that don't have credit, and that would certainly apply to college students. And so what they do is they add them as an authorized user. They don't give them the card or any charging privileges. But then all that credit history starts flowing through to their credit report.

But you're exactly right. The good credit history will. So if you're an on-time payer keeping a low balance, that's going to give her some really positive credit. If you had a late payment, that late payment will show up on her credit report, too.

And guess what? You might have a lot of history and a lot of other accounts to kind of offset that. She will have very little credit in that late payment that passes through to her credit file will be significant negatively for her because she has such little credit that one black mark is going to really be compounded at that point. So you have to be very careful if you're going to add her as an authorized user to make sure that you're keeping your balances low below 30 percent, that you're always an on-time payer.

Otherwise, that could backfire. The other approach is you could get her first of all, she's probably already getting credit card solicitations as a student. I know my son just went off to college and he's already getting solicitations.

We're not going to get them. We've been establishing credit other ways, but you could get a credit card in her name just as long as she understands how to use it. Again, maybe she maybe just wants to put a recurring charge for five or ten dollars, a budgeted expense she was already planning for. And then she pays it off.

And now she's starting to establish herself some credit history. Another way to do it, which is a little safer, is what's called a secured credit card. That's where you put or she puts a three or five hundred dollars on deposit. They issue a credit card against it with a limit of what the amount is on deposit. So they're not taking any risk. Anything she charges, if she doesn't pay it back, they can take the money from the account. So that means they don't have to worry about whether or not she has any credit history, but it will be reported to the bureau and that's going to allow her to start to build some credit.

So either of those strategies can work. Just make sure you understand what you're getting yourself into. If you want to find a secure credit card, go to Nerd Wallet. That'd be a great place to look for the best one today. Thanks for your call, Ronaldo. Well, we're almost out of time. If you like today's program, why not share it with a friend? And while you're at it, share the Faithfi app with them as well. Help us get the word out. Thanks for listening and sharing. And I hope you'll come back and join us again next time for another edition of Faith and Finance. Faith and Finance is provided by Faithfi and listeners like you.