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Avoiding Common Financial Mistakes

by Ron Blue

A MINISTRY OF THE NAVIGATORS P.O. BOX 35001, COLORADO SPRINGS, COLORADO 80935

The Navigators is an international Christian organization. Jesus Christ gave His followers the Great Commission to go and make disciples (Matthew 28:19). The aim of The Navigators is to help fulfill that commission by multiplying laborers for Christ in every nation. NavPress is the publishing ministry of The Navigators. NavPress publications are tools to help Christians grow. Although publications alone cannot make disciples or change lives, they can help believers learn biblical discipleship, and apply what they learn to their lives and ministries. 1990 by Ronald Blue All rights reserved. No part of this publication may be reproduced in any form without written permission from NavPress, P.O. Box 35001, Colorado Springs, CO 80935. ISBN 08910-93125 Third printing, 1991 Unless otherwise noted, all Scripture quotations in this publication are from the Holy Bible: New International Version (niv). Copyright 1973, 1978, 1984, International Bible Society. Used by permission of Zondervan Bible Publishers. Another version used is the New American Standard Bible (nasb), The Lockman Foundation 1960, 1962, 1963, 1968, 1971, 1972, 1973, 1975, 1977. Printed in the United States of America

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Avoiding Common Financial Mistakes

A young businessman observed that his retiring boss had been very successful in operating his business. So he asked, as though at the feet of an old sage, Sir, can you tell me how you became successful? The old businessman thought a moment and replied, Two words: Good decisions. "That is profound, said the young man. You mean if I can make good decisions I will be a successful businessman? The older man answered, Thats correct. Excited, the young businessman asked, Can you tell me, then, how is it that you make good decisions? One word: Experience. The young man said, Thats fantastic! If I get the experience, and make good decisions, then I will be successful! But tell me, how is it that you get experience? The old businessman responded, That's simple. Two words: Bad decisions!

We typically learn more from our mistakes than from our successes. The successes (we assume) are
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just the natural result of our brilliance; our mistakes take a lot more effort! Although we do learn from our mistakes, this booklet is designed to help you avoid the most common financial mistakes. If you find you are committing some of them, take corrective steps. Otherwise, you can learn from the experience of many other people and never make these mistakes in the first place! Avoiding these common errors can make a real difference in your financial success. A financial mistake of $20 a week$80 a month or $ 1,000 a yearwould cost you $ 1,000,000 over forty years, because thats how much you could have made if you had invested that money at 12 1/2%! So if you are able to avoid financial mistakes, of course you will come out ahead.

Mistakes Involving Goals


Having no goals
In my business, we probably spend more time helping people determine what they want to do than anything else. You would think that a person who had great resources would have no problem setting
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Avoiding Common Financial Mistakes goals. But it has been my experience that the more resources you have, the more difficult goal-setting usually becomes. I once spent a day with a man who had a $32 million business. We spent five hours talking, yet he could not tell me what he really wanted to do with his money. He didnt know where he was going. He had no goals. Not knowing where you are headed financially can lead you to serious problems. If you dont know where youre going, youll never know when you have arrived, nor will you know how to get there. One benefit of goals is that they can help you have a better self-image, because when you reach them you have a sense of achievement. How do you set goals? You need to ask yourself, Where am I going in the short term and the long term? What do I want to accomplish in the short term regarding lifestyle, giving, taxes, saving, and debt payoff? Longterm, what are my goals regarding financial independence, college education for my children, debt payoff, giving, lifestyle, and owning my own business? (For more information on setting goals, see An Overview of the Financial Planning Process, a booklet available from Ronald Blue and Co.)
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Goal incongruity
Suppose a husband says, Our goal is to build a new home with two bedrooms and a study, while his wife says, Oh no, its going to have five bedrooms and a sewing room. They agree that they want to build a new home, but the specifics on how to accomplish the goal vary widely. This is a sure sign of incongruous goals. Unfortunately, few husbands and wives communicate specifically about their goals. If you start a marriage perfectly united with the attitude, Whatever she wants she can have, or Whatever he wants he can have, thats honorable. But how long can that attitude last? Few people keep it through the honeymoon! Suppose a husband and wife started out together at age twenty-two with their goals just one degree off from each other. Fifty years down the road, how far has that one degree led them apart? The gap between their goals looks like a huge valley in their relationship. One of the most difficult things in the world is getting a husband and wife to agree on major goals. I believe when they start out they should have perfect agreementespecially about finances. The only way
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Avoiding Common Financial Mistakes to be sure there is agreement is to commit goals to paper. Then both partners clearly understand them. Ask yourself, What is it that God would have us accomplish together as a couple? Commit your goals to paper to avoid incongruity.

Unquantified goals
An unquantified goal is fuzzy. At best it is a purpose statement. Suppose somebody asks you, Would you like to take a ride Sunday afternoon? and you answer, Sure. Before long you realize he has in mind driving to the next major city, but you assumed you would stay in town. You had agreed to the same thing, but you did not specifically state where you would go. A financial goal is not truly a goal until you can write it down in terms of dollar amount and time period. If you cannot state it that way, it is at best a broad statement of intention. If a goal is not quantified, you will never know whether you have accomplished it.

Fear instead of faith


The fourth mistake involves goals established on the basis of fear rather than faith. So often we set our goals by listening to others rather than to God. If
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God has entrusted certain resources to you, do you think He is concerned about how they are allocated? Of course He is. That is why He has given us the Bible and the Holy Spirit, as well as wise counsel from mature believers, to guide us. A faith goal comes from God. I can literally say, This is what God would have me do with His resources. Knowing that can remove all fear. Now that we have looked at the four common mistakes made in the broad area of goals, lets consider specific mistakes in each area of short-term goals: lifestyle, giving, taxes, investments, and debt.

Mistakes Involving Lifestyle


A consumptive lifestyle
The primary lifestyle mistake is living beyond what a person or family can really afford. A consumptive lifestyle has as its highest priority the material comforts of life. One who pursues this lifestyle says, I will not sacrifice anything that brings me satisfaction. Ill spend my money on myself first, and if theres anything left over, then Ill give it. This is probably the biggest mistake in the United States today.
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Avoiding Common Financial Mistakes Not long ago I stopped in a jewelry store to have a ring sized. I was standing at the counter when I noticed a well-dressed young man purchasing a Rolex watch. A Rolex watch has becomealong with the Mercedes or BMW cara symbol of success. This man was purchasing a relatively inexpensive $2,000 Rolex (many sell for over $10,000). Yet, when the sales contract was written, I noticed that it was for approximately $4,000. I thought there must have been some mistake. It turned out that the price of the watch was $2,000, and the finance charge was an additional $2,000. This man had purchased the watch with $285 down and a monthly payment of $235. When he walked out of the store with that watch on, he was giving the impression that he could afford a Rolex. Yet, could he really? He was making the mistake of having a consumptive lifestyle.

Having no budget
A second lifestyle mistake is to spend as needs come up, rather than according to a plan. If you are sincere about controlling your lifestyle, you must set a budget. Nobody likes to talk about budgeting. Its a nasty word to many. Perhaps you tried a budgetand failed.
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Or maybe youre one of the hardy few who kept at it and made it work. If so, I would guess that you were committed to the process for at least two years. If you are not committed to living on a budget for two years, then dont even start because youll only get frustrated. The first step in setting a budget is to ask yourself what you are currently spending or what you have spent in the past. Second, what would you like to spend? Whats your plan for the next month or the next twelve months? Third, how are you doing in relation to what you would like to spend? Then fourth, set a budget. It takes approximately two years to reach step four. It may take six months to identify what you have been spending, another six months to figure out what you would like to spend, and then a year to see how you are doing regarding what you would like to spend. Then you are ready to set a budget. The budgeting process will decrease your living expenseswithout questionbecause you will begin to understand the implications of overspending and having to allocate resources among various categories. However, I do not believe a budget should ever become anything more than a guide.
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Avoiding Common Financial Mistakes Treating a budget like the law is one reason many people failespecially if one marriage partner likes to live on a budget and the other doesnt. One will club the other over the head with the budget. Then its easy to abandon it just to avoid the conflict. If you really are serious about limiting your lifestyle, you will need a budget, and a budget requires self-discipline. After you have followed a budget for about four years, you will have established such habit patterns that you can probably forget formal budgets for the rest of your life. Thats what happened with my wife and me. Once the habit patterns were set, budgeting happened naturally. Are you willing to pay the shortterm price in time and commitment for the long-term benefits?

Cars
Do you know what is the least expensive car you can drive? The answer is very, very simple. When I was thirty, and not yet a Christian, I bought a new Oldsmobile 98even though I was dying for a Cadillac. Since I felt owning a Cadillac at age thirty was a bit pretentious, I decided Id wait a couple of years. But two years later I became a Christian and my value system began to change, so a car became
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less important to me. Before long I was in full-time ministry in Atlanta. By that time the Oldsmobile was five years old with about 110,000 miles on it. When it reached 150,000 miles, the seats were worn out, it was rusted, and I hated that car. It just didnt fit my image of myself! I lusted after new cars. So as an accountant, I said to myself, Ill just do a little research, because its time to buy a new car. I began to look for the cheapest car one could buy. I compared all of them. And I found the cheapest car that I could ever drive, ever, was the car I already had! Usually when the repair bills go up, we think its time to sell the car because its costing so much to maintain it. But thats not true. I was spending a lot of money on repair bills for that Olds, and it got only eight miles to the gallon. But it was paid for, so I had no interest cost, no depreciationit was depreciated to the bottomand very little insurance cost (who cared about collision insurance). My license fees were low, too. I paid more in repair bills and gas, but when I offset that with the other great savings, there was no comparison. The cheapest car I could drive was the car I had. The higher the price of the car, the more costly it is to drive, even if it doesnt depreciate much in
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Avoiding Common Financial Mistakes value. People tell me all the time about their great new investmenta $45,000 Mercedes. I always ask, Why is that a good investment? How much is that new Mercedes going to appreciate in value? I have yet to find a Mercedes that appreciated in value. At best, it may hold its own. You see, a car is ultimately an ego decision. Logic does not mix well with buying a car. Most people buy cars with their heart instead of their head. And when anothers ego is entered into the formula, the results can be far from satisfactory. There may be other factors involved in buying a car, such as safety or the need for a bigger car for a growing family. But almost always you are better off buying one thats slightly usedeven with the possibility of repair billsbecause new cars depreciate so much. If people persist in wanting to buy an expensive car, I tell them I have just one piece of advice: Pay cash, dont borrow to buy a car. You know what the response is? I cant afford that! Thats rightthey got the point! They cant afford it. You see, people dont buy cars today based on how much they cost they buy them on the basis of the finance cost and the monthly payment. The bottom line is that the cheapest car youll ever own is the car you presently
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have.

Mistakes Involving Giving


People make several mistakes in the area of giving, but the biggest is the lack of tithing. I am not speaking here legalistically of tithing 10%; what I mean is giving to God first from your income in recognition of His ownershipwhether its 8%, 10%, 12%, or 20%. The key is that it comes off the top in recognition that God is the source and owner of all you have. Its not that 10% is Gods part and the rest is your part. Its all His. Some people ask, Should I tithe off the gross or the net? I answer, Do you want God to bless the gross or the net? Not that He will necessarily bless in a material way, but He certainly will spiritually not because we gave a certain amount, but because we were obedient. Many peoplepro athletes for example hesitate to tithe because theyre making so much money. After all, 10% of half a million dollars is $50,000! They say theyll tithe later when their income decreases. But where did that money come from in the first place? It belongs to God, and giving 10%, or even more when you can, brings the joy of
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Mistakes Involving Tax Planning


Making tax reduction a priority
Have you heard the story about the man who hated to pay taxes so desperately that he cheated on them? He did it for years. But when he became a Christian, God convicted him of the sin of cheating on his taxes. He wrestled with that one, because reducing his taxes was one of his highest priorities. Well, his conscience got the better of him, so he wrote an anonymous letter to the IRS: Dear sir, I have been cheating on my income taxes for years. Now I have committed my life to Jesus Christ and cant sleep at night because of this cheating. So, enclosed is $1,000. Then he added a P.S.: If I cant sleep tonight, Ill send the rest. Many people will do anything to reduce their taxes. When I used to do tax returns, people would ask, How can I cut my taxes? I would say, Simple: Cut your income. Itll work every time. Go to your boss and say, Will you please reduce my salary by $10,000 so that I can pay $2,000 less in income tax? How many people would choose that?
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Very few. We must realize that there is no such thing as a free tax reduction. There is only one sure way to reduce your taxes, and that is to reduce your taxable income. How do you do that? You reduce your income or you increase your expenses. When you hear of schemes designed to reduce your taxes, remember: There is no such thing as a free lunch when it comes to tax reduction. Many people think paying interest is a good thing because it will reduce their taxes. But consider this: Ill give you the same thing as an interest deduction. All you have to do is loan me $1,000 and I will promise not to repay you. You can write it off on your income taxes as a bad debt, and Ill report it as income and pay the taxes on it, so we are both ahead. Youve reduced your taxes and I have increased my cash. But that makes no sense, and neither does paying interest. Here is the principle: The higher your taxes, the higher your income must be, and the lower your outof-pocket expenses must be. So tax reduction is not necessarily a good thing, because the only way to accomplish it is by reducing income or increasing expenseswhether through interest, taxes, charitable contributions, losses, and so on. If you can
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Avoiding Common Financial Mistakes remember that, you will save yourself a lot of grief.

Having a short-term perspective


This mistake is having an attitude that whatever it takes this year, I will reduce my taxes. Ill worry about next year, next year, and Ill worry about future years in those future years. This short-term perspective seriously affects the future. You might have a tax investment in which you get a deduction this year without spending cash, but that means in some future year you must spend that cash.

Mistakes Involving Investments


Investing for tax purposes alone
If an investment gives you a tax deduction, it has a cost associated with it that allows you to take those tax deductions. That means it is not necessarily a good investment. I consider an IRA to be a good investment with tax shelter characteristics. Its an excellent way to invest and get a tax benefit. Pension plans, savings plans, stock purchase plansall are excellent ways to make investments and get a tax benefit at the same time. I would counsel you to take advantage of those if you work for an employer who
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offers them. Im less comfortable with other tax shelters.

Falling into a binary trap


The binary trap says that when faced with a decision to invest, I have only two alternatives: Should I invest in thisyes or no? But thats the wrong question. The right question is, What is the best use of the money? There may be many alternatives. Typically we are offered a good deal that cant miss. Well, I see five of those each day. There is always a good deal coming down the road, so dont ever fall into the binary trap of evaluating an investment only in light of its own characteristics. Evaluate that investment in light of everything you want to accomplish financially.

Investing without understanding the objective


Are you accumulating, or are you preserving? Almost everybody in America is accumulating. We enter the preservation stage typically when we reach the end of our working life. There is a difference. If I am investing to accumulate, then I am merely setting aside current income and storing it up for the future. If I am investing for preservation, it means I have
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Avoiding Common Financial Mistakes already accumulated, so I need to diversify my investments. I believe there is a sequential strategy everyone should follow in investing. Your first investment should be to get out of debt. That is as good as investing money. It improves your net worth and it decreases your interest cost. Second, put savings in an emergency fund. I recommend having from one to six months living expenses set aside in an emergency fund in the bank, a money market fund, or something like that. Third, save for major purchasescars, appliances, a down payment on a home, etc. This keeps you from going into debt when you have to make a major purchase. Only after you get out of debt, set up an emergency fund, and save for major purchases, should you really get into the investments areanot before. Then you can begin investing for your childrens education or for your financial independence. In other words, you invest for longterm goals. Money set aside for emergencies and major purchases is all savings. That means very few people have come to the stage when they should be
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investing. The way to accumulate wealth is not through investments; it is to spend less than you earn over a long time period.

Mistakes Involving Debt


I think there are two kinds of debt problems: (1) How do I get out of debt when I am already severely in debt? and (2) How can I avoid using debt? First let me say that debt is never the problem; it is always symptomatic of something elseusually of greed, ignorance, or self-indulgence. Debt is overextending yourself in order to satisfy some shortterm desire. When you make a commitment to stay out of debt, you are committing to having less than what the world says you are entitled to. There are five types of borrowing: credit cards, consumer loans (automobiles, major appliances, etc.), mortgages, investment borrowing, and business borrowing. Using credit cards to borrow (i.e., not paying the full balance at the end of each month) never makes economic sense. The same advice holds for consumer loans, because you are paying interest on or funding an item that is depreciating in value. That is poor stewardship.
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Avoiding Common Financial Mistakes Mortgage borrowing is acceptable when two conditions apply: (1) You borrow money at a fixed rate to buy something that appreciates in value, and (2) you have a sure way to pay back the amount borrowed. If you cannot meet those two conditions, then you should not be taking on that kind of obligation. So if you are buying a home that is depreciating in valuewhich some homes have doneor if your loan is not at a fixed rate, or if you are unsure of your income or ability to repay, then assuming this debt does not make sense. That doesnt mean you should get rid of an existing mortgage debt. Because if you have a low rate and your home is growing in value, or you have a large equity in it, I believe the debt is acceptable. Regarding investment and business borrowing, if you have a fixed rate of interest, a guaranteed way of paying back, and an appreciating asset, then I believe the debt is permissible. But be careful that you are not motivated by greed or pride. If you dont already have the money to make the investment or enter into the business, it may be that you should not do it. With this in mind, here are the three main mistakes involving debt.

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Borrowing to fund a consumptive lifestyle


Credit card companies have determined that if you use a credit cardeven if you pay it off every monthyou will spend 34% more to live than if you used cash. Now I didnt believe that until I tried it. I got rid of my credit cards and spent cash only, and my living expenses decreased by 33%. The mere fact that you have credit cards makes it more convenient to purchase. Try this: Do without your credit cards for six months. After that, if you want to, use them for convenience, because then you will have established new habit patterns. But dont delude yourself and think that by using credit strictly for convenience you are spending the same amount you would spend if you used only cash. You will spend more if you use credit cards.

Debt usually denies God an opportunity to work


Think about this statement: God, I need a new car, and well, I assume You supplied the banker to be the resource. Why not have this attitude: God, I am trusting You to supernaturally provide the car that I need in Your way and in Your timing? He
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Debt always presumes on the future


When you borrow money, you are agreeing to pay it back. Therefore, you are presuming on the future. If you were not, you would have no commitment to pay it back. But that would be wrong. The Bible says, The wicked borrows and does not pay back (Psalm 37:21, NASB). So as a Christian you do not have the option of not paying the money back. (For more about debt, see The Debt Squeeze by Ronald Blue, Focus on the Family.)

Summary
Few people realize they are committing financial mistakes until they learn how their actions are affecting their financial health. If you want to become a better steward of what God has entrusted to you, put these steps into practice: 1. Set quantified financial goals. Discuss them thoroughly with your partner and write them down so that you are certain you agree. 2. Base your goals on faith in God rather than on fear. Base them on what God is saying to you rather than on what people say.
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3. Spend less than you earn, and do it for a long time. 4. Make a budget over the next two years. 5. Resist buying a new car. Dont buy any car you cant buy with cash. 6. Tithe to God from your income first. 7. In planning your taxes, dont make tax reduction the highest priority. Dont have a short-term perspective. 8. Dont presume on the future by going into debt, especially for tax or investment purposes. 9. Instead of borrowing, give God a chance to work.

For Reflection and Action


1. Whichif anyof the financial mistakes mentioned are you making? Make a list. 2. How do you think your attitudes need to change with regard to finances? 3. What action do you need to take to stop or avoid these mistakes? (What might you need to discuss with your spouse? What steps can you take on your own?) 4. What are the top three financial goals God would
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For Meditation
Memorizing and meditating on Scripture is an excellent way to begin letting God change your attitudes about money. Below are passages to choose from. Copy one, or part of one, on a card and post it where you will see it often. Read it aloud to yourself several times each day for the next week, committing it to memory if possible. Think about what it means for your life.
Do not worry about your life, what you will eat; or about your body, what you will wear.... For the pagan world runs after all such things, and your Father knows that you need them. But seek his kingdom, and these things will be given to you as well. Luke 12:22,30-31 Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much. So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches? ... No servant can serve two masters. Either
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he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money. Luke 16:10-11,13 Godliness with contentment is great gain. For we brought nothing into the world, and we can take nothing out of it. But if we have food and clothing, we will be content with that. People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction. For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs. 1 Timothy 6:6-10

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The NavPress Booklet Series includes:


A Woman of Excellence by Cynthia Heald Avoiding Common Financial Mistakes by Ron Blue Building Your Childs Self-Esteem by Gary Smalley & John Trent Dealing with Desires You Cant Control by Mark R. McMinn God Cares About Your Work by Doug Sherman & William Hendricks Hope for the Hurting by Doug Sparks How to Deal with Anger by Dr. Larry Crabb How to Handle Stress by Don Warrick How to Have a Quiet Time by Warren & Ruth Myers How to Keep Your Head Up When Your Jobs Got You Down by Doug Sherman How to Know Gods Will by Charles Stanley How to Make Friends by Jerry & Mary White How to Overcome Loneliness by Elisabeth Elliot Prayer: Beholding Gods Glory When You Disagree: Resolving Marital Conflicts by Jack & Carole Mayhall You Can Trust God by Jerry Bridges Your Words Can Make a Difference by Carole Mayhall

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