This weeks question put to the personal finance bloggers brain trust at GetOutOfDebt.org was:
When people are working with a credit counselor or working up their own budget they often hear or believe that they should not make religious contributions and should not put any money in savings while they are making debt repayments. Instead, some believe that every dollar should be used towards debt reduction. What is your opinion?
Elizabeth Warren – A national expert in consumer debt and bankruptcy. She has authored a number of books and is often see on news shows and talk shows providing expert consumer debt advice. More Information | Blog
Paying down debt is a form of savings. Because credit card companies charge 16% (or more) and savings accounts pay 4% (or less), it usually makes sense to pour every penny into debt repayment.
Getting rid of debt is life transformative, and it is worth pushing hard toward that goal.
I see religious contributions as a very different issue. For some, tithing is a regular part of religious observance. For such people, contributions are an expense, much like food or medical care. The costs should be kept to the lowest sustainable level, in the same way that it makes sense to pass up steak when the budget is tight, but nourishing the soul is as important as nourishing the body. Getting out of debt is about building a better and more complete life.
WC – A 27-year-old writer living in Chicago and writing about personal finance through The Writer’s Coin.
I think this all comes down to priorities. Religion is a very personal decision and I don’t think anyone should tell anyone else how to handle their religious beliefs. Debt can be a crushing thing, though, and I personally believe that you can’t really take care of other people until you can take care of yourself first. I would make religious contributions something you can take care of once you’ve settled your debt. Pay it off first and you’ll be in a better position to give down the line.
Dawn – Iowa Hippie Chick blogs about money love and marriage and offers so very insightful posts on personal finance that involve emotional insight and awareness. Vist her blog.
To me, the reason we usually get into debt in the first place is a lack of financial balance.
The process of debt reduction can be a terrific time for us to learn that balance.
Even if our primary goal is reducing debt – allocating a percentage of our incoming dollars to an emergency fund, savings, or retirement account, is a start to living in financial balance!
And if we are committed to tithing or donating to a charitable organization – it can definitely continue during debt reduction. Maybe just scaling back on the actual dollar amount if necessary, until the debt is reduced.
It’s really not about the debt reduction period – it’s about learning good financial skills for life! (If we don’t learn how to balance our finances during our debt reduction, we will probably just end up back in the same place – DEBT).
Patrick Bryan – Living in Northern Ireland, Patrick helps people in a very different environment and economy but yet, mush is universal and much is the same. Visit Patrick’s Northern Ireland blog on debt.
Thought provoking question, glad to have the opportunity to rumble it around my brain!
I think the practical outcome to your question will depend on the level of debt people find themselves in, and how much agreement they have to obtain from their creditors in terms of their budget, although fundamentally I would always defend a person’s right to make religious contributions and have savings.
If a client is going into a debt management plan or IVA then as you know there are ‘allowable expenses’ up to a certain level, and also ‘other’ expenses which the creditors may or may not permit. I had a case recently for example where the creditors agreed a £30pm gym membership because the clients had made reasonable claims in other sections of the income & expenditure form. I argued that staying healthy was important for these people and would help them continue to work hard to repay the money they owed.
I certainly support an individual’s right to make religious/charitable contributions whilst in debt themselves, as for many people they feel a strong personal obligation to give, and when struggling with personal debts they also need to boost their feelings of self-worth wherever possible. The desire to make that religious/charitable donation may just give that person enough determination to grit their teeth and work harder to resolve their debt problems.
In terms of making savings there are two aspects to this – from a purely financial perspective if you are paying 29% APR on a credit card and earning 6% on a deposit balance then it makes good sense to repay the credit card BUT in many cases credit card companies will cut a client’s spending limit if they reduce the balance on their account, or have perhaps defaulted them which means that they can’t spend at all. If that is the case then they have no emergency fund accumulated even though they are reducing their borrowings. For this reason I would recommend clients still have some savings tucked away for a rainy day as they are less likely to be able to rely on using their credit card as a buffer zone. Also, learning to save is a fundamental way of keeping out of debt in future, so it is good to get people in to that habit early, even if it is just a small amount whist they are reducing their debts.
Steve Rhode – A personal finance blogger and founder of the Myvesta Foundation, a global scoial enterprise that helps people find solutions for money troubles. You can ask Steve your debt related question through GetOutOfDebt.org and he’ll help you for free.
Many debt advisers and credit counselors approach the budget as a purely technical exercise and do not realize that to be truly representative of the person it should include expenses that are critical to the person even if we do not agree.
Giving to a religious organization at a time of debt reduction is one such area. If tithing is fundamentally important to the person in debt, they are aware that money used to donate is not available to reduce debt and they want to give it, then I support that decision.
It would be wrong for an adviser to suggest that they stop something like tithing or religious contributions and giving that is a core belief. If giving is slashed by the adviser it can have ramifications with the debtors self-worth and self-esteem when they are unable to give as they feel is necessary. And continuing to feel a valuable part of their religious community can give comfort and emotional support during an otherwise difficult time in their lives.
However, I do have the conversation with people that they can give in other ways that are valuable, other than money. They can donate time and work around their religious organization to still feel like an important contributor even though the money donated may be less that their previous donation amounts.
It is my opinion that savings should be part of a debt reduction budget. If the person is not putting emergency cash aside then far too often unexpected expenses wind up right back on the credit cards if they are still open. If the cards are not open they often find themselves in a very difficult position and it is not unheard of a client to then go get a silent payday loan to cross that financial bridge. Savings should be based on the individual persons circumstances but I usually suggest no less than $50 per month. If a large reserve is built up then a lump sum payment could be used to accelerate debt reduction latter.
What are your thoughts about this? Leave your comment below.