54–Lever #5:Interest Paid (Part One: Understanding Debt)
Debt can sometimes be a useful tool, but it's often a trap
Debt is the last lever in our financial life equation. But unlike Income (I) and Interest Earned (IE), it’s a negative to the equation, but not in the same way that spending, giving, and taxes are. Debt is a “negative-negative.” It’s a lever you pull by basically not pulling it (although you might pull it by paying your debt off). So, in some ways, it’s a non-lever lever (to confuse things even more).
What do I mean by “debt is a negative-negative”? Well, first of all, it’s a mathematical negative. As you know, based on the FLE, your future wealth equals what you have now, plus what you earn, minus what you spend, plus what your investments earn, minus what you pay in interest. I’ve been expressing it this way:
Wt+n = Wt + ∑It+n –∑Tt+n–∑Gt+n–∑Et+n+ ∑IEt+n–∑IPt+n
Where:
W = Wealth
I = Income
T = Taxes
G = Giving
E = Expenses
IE = Interest Earned (investment returns)
IP = Interest Paid (debt costs)
t = current time
n = number of future years
In the FLE, debt reduces wealth by adding Interest Paid (IP) every month, while investing adds Interest Earned (IE). Paying down debt reduces IP over time — freeing up more of your income to save and invest, boosting IE in the future. The lower your IP and the higher your IE, the faster your wealth grows in the FLE.
Second, it’s a negative risk. Paying interest means you’ve gone into debt, and going into debt (or cosigning for the debt of others) may be foolish and can be financially ruinous (Proverbs. 6:1–5; 17:18; 22:7). Debt can be attractive because it can temporarily enable you to enjoy a standard of living far beyond your income. Excessive debt (especially the wrong kinds of debt) greatly increases the risk of financial disaster for families, corporations, and governments. Sooner or later, the bills must be paid.
There’s a third reason debt is a ‘negative-negative’ in the FLE. Not only do you have to spend the interest now, but you’ve also committed to spending it for some time into the future–you’ve ‘mortgaged your future.’ Furthermore, the only way to prevent it is to pay it off, which would require an even larger expenditure in the present, using money that could be allocated to another purpose, such as giving or saving. (Remember our ‘opportunity cost’ discussion?)
To illustrate, let’s say you earn $60,000/year and carry:
$10,000 in credit card debt at 20% APR = (.20 x $10,000) = $2,000/year
$25,000 in auto loans at 6% APR = (.06 x $25,000) = $1,500/year
$200,000 in mortgage debt at 5.5% APR = (.055 x $20,000) = $11,000/year
Your total annual interest paid in a year (∑IPt+1) would be $14,500 (=$2,000 + $1,500 + $11,000). That’s $14,500 per year that you’re not saving, investing, or giving. Over time, it’s a massive opportunity cost, even without the mortgage interest.
But let’s take it a step further and suppose that you carry that $14,500/year interest cost for 10 years instead of paying off your debts. If you had invested that money at 7% annually instead, it could have grown to over $200,000!
So, generally speaking, debt should be avoided. As a general principle, we want to avoid and eliminate debt because it presumes on future income and unknowable future events to pay for a current expense. Please don’t laugh, but some years ago, I was curious and started listening to Suze Orman on PBS one night (due to insomnia, I think). I can’t commend her or all of her teaching to you, but she said something that made a lot of sense: “Debt makes today’s wants tomorrow’s need.”
The Bible is pretty straightforward about this. Proverbs 6:1-5 and 22:7 say that debt “enslaves” us; it obligates us in a way that makes us a slave (actually, more like an indentured servant who has to “work the debt off”). We say “my house” or “my car,” but in reality, it’s the bank’s house or the bank’s car. The creditor “owns a slice of you”—not only the payments, typically due for years into the future, but the time you must work to earn the money to make those payments. Depressing? Of course, indentured servitude always is!
Debt costs more than you may think. Regarding those payments (interest), they cost more than you may think. If you borrow $20,000 for a new car costing $30,000 ($10,000 down payment) at 6 percent interest for 60 months, you’ll pay a total of almost $40,000 for the car. (Plus, at the end of 5 years, it will be worth 20% or less of the original purchase price.) Wait, there’s more…
You have to pay it back with AFTER-TAX dollars. Think back to our taxes discussion. If you’re paying 15% in taxes, you have to earn $46,000 before taxes to pay for it. Your $30,000 car has cost you 50% more than the cost of the car! Additionally, over 5 years, it could lose 80% of its value, resulting in a total cost of $46,000 for 5 years of use. With a residual value of approximately $6,000, the net cost is $40,000.
Debt causes the “miracle” of compound interest to work against you instead of for you. A $10,000 credit card at 16% interest would require that you pay back as much as 3 or 4 times what you originally borrowed if you only make the minimum payment (you’re paying interest on the unpaid balance plus interest on that interest if you don’t pay it all every month).
Finally, there is the “emotional and spiritual cost of debt”—it can weigh heavily on us, cause us stress, and can cause relational (especially marital) problems.
With all this talk about the negative aspects of debt, you may be wondering if borrowing is a sin. Surely the Bible prohibits all debt, and maybe even suggests that borrowing is a sin, right? Well, not really…
There can be no doubt that debt is discouraged in Scripture, probably because of the amount of your time and resources it consumes that can’t be used for Kingdom work. Still, the Bible never says that it is a sin (in fact, the ability to lend is actually commended, provided we don’t charge interest (among family and Christians–see Deuteronemy 23:19-20, Proverbs, 19:17, and Matthew 5:42). It’s better to give a gift than to lend, in my opinion; however, I don’t see where lending without interest and without demanding repayment is prohibited.
I’m also not suggesting that those who live with debt can’t honor God, but they do so with a “handicap”—money that could go toward saving or kingdom work is obligated to creditors. What about Rom. 13:8 (says “owe no man anything”)? This verse does not prohibit all borrowing, so long as the debt is repaid at the time it is promised…we must pay what we owe, when we owe it (i.e., make mortgage payments on time).
For reflection: Debt can (sometimes) be a helpful tool, but more often than not it quietly drains our peace, freedom, and future wealth if left unchecked As you think about borrowing, lending, or paying off what you owe, consider this: Does your use of debt show contentment and trust in God’s provision, or a desire to live beyond your means today at the cost of tomorrow? True financial freedom often begins with learning to live within your means and choosing wisdom over impulsive spending fueled by debt. Our verse below reminds us afresh of the timeless truth that debt can bind us in ways that limit our freedom to give, save, and serve others generously.
Verse: “The borrower is the slave of the lender” (Proverbs 22:7, ESV).