Debt is the Real Grinch

November/December 2008 Issue | Posted by Melissa Hartog in Features

By Phil Lenahan

ipersonally have never felt the “holiday blues.” But I know many, many people who have celebrated a beautiful Christmas — only to get the bills blues in January.

I will always remember a young couple who once participated in my 7 Steps to Becoming Financially Free small group study.

They had been fortunate to purchase a home just before the housing boom and run-up in prices. They wanted their children to have all the things their families had been unable to afford when they were growing up. As the value of their home increased, they borrowed repeatedly against it in order to buy all types of “goodies” — new home furnishings, a travel trailer, jet skis, and an SUV to tow the trailer.

Christmas just kept coming for them.

You can imagine what happened next. It became difficult to pay their regular bills in addition to a higher mortgage payment. Then the housing bubble burst. The value of their home dropped, and they could no longer use it as an ATM.

As this couple began to learn more about their Catholic faith, their outlook changed. Christmas changed from a material event to a spiritual one. They focused on the Lord instead of material things. They continued to grow in their faith and took the difficult steps necessary to bring their finances back into balance.

The Battle for Temperance

Why is it so hard to live within our means? Why are so many of us willing to go into debt to finance a lifestyle that we really can’t afford?

“Our thirst for another’s goods is immense, infinite, never quenched,” as the Catechism puts it (No. 2536).

The remedy? Temperance. That’s what “moderates the attraction of pleasures and provides balance in the use of created goods.” Temperance “ensures the will’s mastery over instincts and keeps desires within the limits of what is honorable” (No. 1809).

Temperance is hard to come by. Especially for the young.

The findings of a recent survey by the Pew Research Center found that in “Generation Y” (ages 18 to 25):

• 81% of those surveyed said their most important goal in life was to be rich.

• 51% said they most aspired to be famous.

• Bringing up the rear at a whopping 10% was the goal of becoming more spiritual.

Young people are bombarded daily with messages that point to wealth and consumption as a means of achieving happiness — the same trap that caught that young couple.

But the kind of “happiness” we can buy is a false happiness, and when it’s built on a foundation of debt, it’s bound to come crashing down. Misuse of debt continues to plague many Americans.

• In 2001, only 1.5% of home loans were “interest only” loans. Just three short years later, 31% of home loan originations were such loans. In the San Diego area where I live, over 50% were “interest only” by 2005.

• Only 30% of credit card holders pay their balances in full every month.

• The average household carries $8,000 in credit card debt.

• 20% of credit card holders pay only the minimum required balance every month.

Productive Debt vs. Unproductive Debt

A good rule of thumb to use when deciding to borrow money is to determine whether you are using the debt to purchase an appreciating asset.

The most common examples of appreciating assets are homes or investment properties. When used prudently in this manner, debt is considered “productive.” It’s also possible that borrowing to obtain a higher education could be a productive use of debt — although extra prudence is needed here.

These are long-term investments where the borrower expects to own the asset for a long period of time in order to benefit from appreciation over the years.

What has happened over the last several years in the housing market is that many people used debt with the hope of making short-term profits. While some people succeed at timing the market in this way, most get burned.

When borrowing to buy a home or investment property, make sure you are making good decisions for the long run, and that you have adequate cash reserves to withstand slower times.

Auto Loans and Home Improvement

Let’s consider a few other common purchases we make with borrowed money: automobiles and home repairs or improvements.

Once again, when we consider taking on these kinds of debts, we must return to the basic principle of only borrowing to purchase an appreciating asset.

Do these purchases tend to increase in value after you acquire them? With cars, certainly not! A new car depreciates in value the minute you drive it out of the dealer lot. And with most home improvements, the answer is the same — many of these purchases drop in value over time.

Rather than borrowing and paying years’ worth of interest for these purchases, it’s much wiser to be patient. Begin a monthly savings program and plan to pay cash.

Everyday Expenses

What about using credit cards to make regular purchases? There is nothing inherently wrong with credit cards. It’s how we use them that counts. If you are using them to pay for budgeted items and paying the balance in full every month, then you are using them wisely. But if you are using credit cards to buy things that you can’t afford, or that aren’t part of your overall financial plan, then you are creating a credit problem — especially if you aren’t paying the balance in full every month.

Ask yourself this: When was the last time I bought something with my credit card that has increased in value over time? Borrowing with credit cards or through installment loans are some of the most unproductive types of debt in use today.

Emergency Fund

Perhaps you are reading this article too late. What can you do if you find yourself already saddled with a great deal of “unproductive” debt?

Your best bet is to develop a plan to eliminate it as soon as possible. But first and foremost, I would advise you to establish an emergency fund. Save bit by bit if you have to, but try to put aside at least $2,000 in an “emergency fund” before you start a debt repayment plan.

The reason for this is simple: We all know that Murphy’s Law is going to strike. You’ll begin a debt repayment program and right away something will go wrong with the car, or you’ll have a surprise medical bill that will throw your repayment strategy off track. With an emergency fund in place, you can begin a repayment program and keep moving forward, even if Murphy’s Law tries to trip you up.

Accelerator Repayment Plan

Once you’re ready to make the commitment to repayment of your unproductive debt, it’s time to get serious about an “accelerator repayment plan.”

The idea is to get aggressive about eliminating debt by carving out of your budget an amount that is well beyond your monthly minimum payments.

If you are paying the minimum balance on your debts, you’ll have them for a long time, and you’ll pay thousands in interest that you should be saving.

How long it will take to pay off your debts will depend on your own circumstances, but with some short-term sacrifice, you can be free of the bondage you feel when in debt. You can register for a free My Veritas Plan at my website to learn more about how an “accelerator repayment plan” works. The website is VeritasFinancialMinistries.com.

Make Compound Earnings Work for You

One of the keys to understanding how to grow financial resources for your future needs is the concept of “compound earnings.” When you save and invest, you put “compound earnings” to use for you by accumulating interest over time. But if you are buried in unproductive debt, the financial institutions are benefiting from “compound earnings” and you are paying them! It’s like trying to swim upstream against very strong rapids. Isn’t it time you turned that situation around and started benefiting yourself?

I encourage you to get on the road to true financial freedom today by eliminating your unproductive debt and becoming the steward of providence that the Lord is calling you to be. Whatever your current woes, seek out the support you need to take charge of your financial situation. You and your family have only true happiness and financial freedom to gain.E

Phil Lenahan is president of

Veritas Financial Ministries and

author of 7 Steps to Becoming Financially Free: A Catholic Small Group Study (Our Sunday Visitor).

Christmas Cash

I’m dreaming of a debt-free Christmas

Once you’ve made the commitment to remaining debt-free this Christmas season, you’ll need a plan.

Here’s help for making merry without breaking the bank.

Set a gift budget. Make a specific plan for how much you can afford to spend on gifts this year.

… but be realistic. Don’t decide you’ll make personalized soaps and craft handmade bird feeders for everyone on your gift list if you lack the skills or know you won’t have spare time for crafting. Otherwise, you’re setting yourself up for cheating at the last minute.

Be Creative. Great gifts don’t have to be expensive. Your parents or grandparents might appreciate a framed photo. Your godchildren might prefer a scheduled afternoon of cookie baking.

… and dare to draw. Many families opt for drawing names among extended relatives. Each individual or couple buys a gift for only one other individual or couple. Suggest it. Other relatives might be as relieved as you are to cut back spending.

Cut Back in Advent. To compensate for extra expenditures, forgo some of your usual discretionary spending during Advent. Check out neighborhood Christmas lights instead of going to the movies. Make simpler meals at home instead of eating out.

… and wait a while in Christmas. Recall that Christmas is a season and make a deal with your spouse or a close friend to exchange gifts sometime after Dec. 25. You’ll be able to take advantage of clearance sales and reduce the strain on your December budget.

— Danielle Bean

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