Publication: One-to-One, Summer 2008
Whether looking for specific investment recommendations, or biblically-based financial teaching and perspective, every month, thousands of Christians rely on the counsel of Sound Mind Investing (SMI). The SMI primary investing strategy has beaten the U.S. market the past nine years in a row. Its founder, Austin Pryor, was a regular guest on Larry Burkett’s radio program. Other key Christian financial leaders like Ron Blue and Dave Ramsey have had kind things to say about SMI over the years as well.
Recently we were fortunate to catch up with Mark Biller, Executive Editor of SMl’s financial newsletter (which has been publishing since 1990) to discuss investing and current events impacting our economy.
121: Recently we’ve seen multiple billion dollar bailouts within the credit market; most notably with America’s largest bank, Citibank, and largest lender, Countrywide. What is driving this and what will it mean to the individual?
MB: The key to understanding the recent credit crunch is realizing that the credit markets have their own cyclical pattern. The last big credit crunch was in the early 1990s, following the Savings and Loan crisis. For several years following that, lenders were fairly reluctant to lend, as they’d recently been burned by bad loans. So they demanded strict terms and would only lend to those that had very good credit. Over time, the higher profit potential of making loans at higher interest rates, to those less well-qualified, persuaded lenders to start lending more money to those further down the credit scale. After that went on for a while without any new crisis developing, the lenders kept going further and further down the credit ladder, until eventually it seemed like anyone with a pulse could get a loan. At that point, we’d reached the opposite end of the credit cycle.
That’s where we’ve been the past few years. All the exotic loan types that have been in the press in recent years-the interest only loans, the “2/28” adjustable rate mortgages, and so on-these were largely created to allow people to borrow money who really weren’t very good credit risks. Lenders made these loans because of the high profits these loans earn, assuming the payments are actually made. This time around, lenders also felt safer making the loans because the latest crop of financial wizards had supposedly come up with a way to eliminate much of the risk from this sub prime mortgage group. Turns out that wasn’t really the case, and they’ve since rediscovered the principle that lending money to people who are not likely to repay is still risky after all.
While the credit cycle often takes years to loosen, it can snap back and tighten in a hurry. That’s what we’ve experienced over the past year. Unfortunately, when that occurs, it makes it more difficult for everyone to get loans of any type, as the lenders all get very nervous very quickly. This sudden tightening of the credit markets makes it harder for businesses as well as individuals to get financing, so there’s a ripple effect throughout the whole economy.
On the individual consumer level, there’s a large group of people with loans that aren’t conventional fixed-rate mortgages. These mortgages are largely adjustable-rate, and are resetting at higher interest rates now that the initial “teaser” rate periods are ending. Many of these borrowers never expected to make payments at these higher rates; they expected to refinance into another low-rate loan when the time came for their teaser rate to reset. But now they’ve found the credit market has completely changed, and the same lenders that were happy to give them their mortgage 2-3 years ago won’t touch them now.
With housing prices having peaked and in some cases fallen, these borrowers are between a rock and hard place: they can’t afford their new higher mortgage payments, but they can’t sell their homes for enough to cover the amount they owe on the mortgage. As a result, foreclosures have been rising rapidly in certain parts of the country, which just further exacerbates the problem as it adds more housing inventory to what is typically already a flooded marketplace.
With the economy slowing and lending still tight, the government is trying to push on both levers at its disposal to help. On the one hand, the Federal Reserve has cut interest rates by 1.25% since the beginning of the year, trying to stimulate lending and borrowing activity. On the other, the government is pushing through an economic stimulus plan to try to help get the economy rolling again.
121: Under the proposed “economic stimulus plan,” over 100 million American families receive a rebate check of $300 per family member. Will this help? And what is the best use of this money for an individual?
MB: Unfortunately, the track record of these one-time “rebates” is quite poor in terms of their ability to stimulate the economy. Taking money from those who pay the most taxes and giving it as a “rebate” to those who pay less, or in some cases, no taxes at all, isn’t a proven way to increase production and economic growth.
Thankfully, as individuals we can take actions to help insulate ourselves from these types of economic ups and downs. At SMI, we teach readers to set financial priorities according to a “4 Levels” process. These 4 levels are based on biblical principles and help readers understand what they should do with that “next available dollar.”
LEVEL 1 – IS GETTING DEBT·FREE (Proverbs 22:7). The journey toward financial peace of mind begins by making it a priority to pay off those credit cards, car loans, student loans, and other short-term debts. Accelerating the payments on your mortgage should also be a goal albeit a longer-term one.
LEVEL 2 – IS SAVING FOR FUTURE NEEDS (Proverbs 21:20). Even if you’ve not paid off all your consumer debt yet, it’s a good idea to set aside some money for emergencies. That means establishing a contingency fund. We suggest trying to save $1,000 as a short-term goal while you’re working on Level 1. Eventually, an emergency fund of $10,000 or so is probably suitable for most family situations. We know that sounds like a lot, and it’s your call. But most financial planners agree it’s prudent to have at least three to six months living expenses in reserve.
LEVEL 3 – IS INVESTING YOUR SURPLUS (Matthew 25:21). When you venture into the stock and bond markets, you take the risk of losing part of your money. That’s why you shouldn’t apply your discretionary money at Level 3 until you’ve paid all your consumer debts and established a decent Level 2 emergency fund. Every dollar applied to Levels 1 and 2 is guaranteed to improve your financial situation. That’s not always the case at Levels 3 and 4.
LEVEL 4 – IS DIVERSIFYING FOR SAFETY (Ecclesiastes 11:2). Once your Level 3 investments reach a certain size (SMI uses $25,000 as a rough rule of thumb), it’s time to transition to Level Four for further diversification. By adding holdings that “march to different drummers,” we create a more efficient, less volatile portfolio.
So, when evaluating what to do with any potential tax rebate money, you can see that our 4 Levels framework offers some pretty clear guidelines. It’s not that these priorities are so unique or clever. It’s that they’re biblical, and they work. If you eliminate debt and build an emergency fund, you have a lot less to fear from periodic economic disturbances. That helps you obey other biblical commands about not worrying, being generous on every occasion, and so on.
121: Your Company states that one of its goals is to help individuals not only have more, but give more. What would you say to someone in generation “X” or “V” who might believe they don’t currently earn enough to invest, let alone give?
MB: Giving is a funny thing. It’s easy to look at people who earn more than we do and think, “If I made as much money as they do, it’d be easy to tithe and give generously.” And it’s also easy to look at people who earn less than we do and think, “Well, if I only made that much, it wouldn’t be a big deal to give 10% of it away.” But it’s always hard to look at the exact amount of money we’ve been entrusted with today and give generously from that amount.
The irony is that Christians have so many reasons to give generously! First of all, God tells us to do so. But beyond that, Scripture reveals that our giving makes God happy, that God has built a law of reciprocity into our world that we store up treasures in heaven when we give on earth, and so on. If those positive reasons aren’t motivation enough, there are warnings like Luke 12:21 to motivate us that things won’t end well for the one “who store up things for himself but is not rich towards God.”
I’m 35 years old, and I know from relatively recent experience what it’s like to support a wife and children on a single, modest income. At the end of the day, I think giving is a trust issue. Do you really believe that God will take care of your needs if you’re faithful to give what He’s asked of you? Our money often acts as a mirror, reflecting what is most valuable to us. If you look at someone’s checkbook and credit card statement, it won’t take long to figure out what their true priorities are.
That said, I’m also sympathetic to the financial strains many people face. My advice to the person who honestly wants to give more, but doesn’t feel that they are able is simply this: test God. That’s not boldness on my part, it’s Malachi 3:10, where God challenges Israel to bring its tithe to the Lord and see if He isn’t faithful to meet their needs. Start giving beyond your comfort level and see if God doesn’t meet you there and start providing for your needs. And as He does, you be faithful in return and continue to stretch your giving higher.
Here’s one final thought on giving at a level beyond what you think is possible. I encourage every reader who sees this to take some time to prayerfully consider a future giving schedule. This is an idea I saw in a great little book called The Eternity Portfolio. If your family income is currently $50,000 and you’re giving 10%, then your giving schedule might call for you to give 10% of all your income up to $60,000, then 15% of any income between $60,000-$80,000, 20% of your income between $80,000-$100,000, and so on. (Note that I’m not trying to suggest any particular percentages or income levels with this example, that’s between you and God.) Don’t be bashful! Continue that schedule out to income levels that you don’t really expect to ever hit.
A couple things happen when you create a future giving schedule like that. One, it firmly establishes your intention to be generous and takes you out of a default giving posture. By establishing future levels of generosity that are in excess of your current level, it enlarges your vision about giving. Second, it commits you to giving increasing portions of any future increase to the Lord. As you reach those future income levels (which often occurs quicker than people expect as the Lord blesses their efforts to give more generously at their current level), your giving increase is already predetermined, so it gets taken care of first, before you adjust all your other spending to the higher income.
Instead of adjusting all your other spending first and continuing to simply give the same percentage of your new, higher income, the future giving schedule allows you to painlessly bump your giving up significantly over time, to levels that many Christians never even dream of. It’s a fantastic tool, and I’ve heard some amazing stories of what God has done from people who have used it.
Note that the future giving schedule doesn’t let you off the hook on your current giving though. The key to starting down the path to generous future giving is to begin to stretch a little bit with your current giving. Then watch as the Lord accelerates your ability to be generous in the future. Our giving doesn’t obligate God to bless us financially. We’re not manipulating Him to give us more. We’re simply saying “God, I desire to give more generously than I am now. Help me to be able to be generous on every occasion. Help me to be faithful to increase my giving and to hold everything you entrust to me with an open hand.” I think that’s an irresistible prayer to God when it comes from a sincere heart.
SMI is a non-denominational financial newsletter that has been in continuous monthly publication since 1990. SM/ exists to help individuals understand and apply Biblically-based principles for making spending and investing decisions in order that: (1) their future financial security would be strengthened, and (2) their giving to worldwide missionary efforts for the cause of Christ would accelerate. In other words, they want to help people have more so they can give more. For more information please visit www.soundmindinvesting.com.
Scripture Reference: Proverbs 22:7; Proverbs 21:20; Matthew 25:21; Ecclesiastes 11:2; Malachi 3:10