The Bible never describes taking on debt as a sin. However, Proverbs 22:7 warns that debt can enslave us: “The rich rule over the poor and the borrower is servant to the lender.”
Becoming enslaved to debt is contrary to how Jesus desires for us to live. “The thief comes only to steal and kill and destroy; I have come that they may have life, and have it to the full” (John 10:10).
The Apostle Paul reminds us of the sacrifice Jesus made so we could experience such a life: “You were bought at a price; do not become slaves of human beings” (1 Corinthians 7:23).
Financially, a crucial aspect of experiencing life “to the full” is living free from the bondage of debt. With the above biblical framework in mind, let’s consider some practical applications related to debt.
Types of debt
Credit Cards
If you’re carrying a balance on a credit card from month to month, we urge you to pay off that debt before beginning to invest.
Here’s how. First, build a small emergency fund — enough to cover one month’s worth of essential living expenses.
Why focus on emergency savings first? Because if you’re trying to pay off debt and don’t have any savings to cover unexpected expenses, chances are an expense will crop up that’ll drive you further into debt. So, build at least a small base of savings.
Once that’s done, redirect the amount you had been putting into savings and use it for accelerated debt payments.
If you have balances on multiple credit cards, a common question is: Which should you pay off first — the highest interest-rate debt or the lowest-balance debt? (You can compare the results of each approach by using a free online calculator.)
Generally, you’ll pay off your overall debt a little faster — and pay a little less interest — if you target your highest-rate debt first. However, by targeting your lowest-balance debt first, you’ll probably pay off one of your debts quickly. The psychological boost that comes from putting a debt behind you is important. It adds momentum to your journey toward becoming debt-free. That’s why we believe most people are better served by targeting their lowest-balance debt first.
Once you’ve paid off all your credit card debt, redirect the money you had been using for debt repayment toward building a larger emergency fund. A good goal is to accumulate an amount equal to three to six months’ worth of essential living expenses. Once that savings reserve is in place, begin investing.
For detailed instructions on how to pay down credit card debt, read The Essential Steps for Getting Out of Debt.Vehicle Loans
If you’re making payments on a car or truck loan, commit to making this your last financed vehicle. Also commit to keeping your current vehicle as long as possible — at least a total of 10 years, preferably 15.
Once your vehicle is paid for, continue making payments, but send them to a savings account instead of to your financing company. That way, when you need another car, you’ll be able to pay for it with cash.
For more on this topic, read Putting the Brakes on Car-Buying Costs.Student Loans
The default payoff period is 10 years, but you can put a student loan on a faster payoff schedule. Use a calculator to see how much quicker your loan(s) will be paid off if you add extra money to the required monthly payment. That may motivate you to find the money to pay more than the minimum.
For more information, read Should You Consolidate Your Student Loans?A Mortgage
For most people, buying a house with cash isn’t realistic. So if you’re going to borrow, here are two guidelines we recommend. First, make sure your monthly payments (including the mortgage, taxes, and insurance) add up to no more than 25% of your monthly gross income, preferably no more than 20%. That’s typically the threshold that will enable you to live generously, save and invest adequately, and enjoy some surplus — assuming you have no other debt.
Second, make sure your mortgage is paid off by the time you plan to retire. (Of course, it’s fine to pay it off even sooner!) When you transition from living off your work income to living off your investment portfolio, Social Security, and other sources of income (such as a traditional pension or annuity), having no mortgage debt will provide tremendous freedom.
Some people argue that with mortgage rates so low, it doesn’t make sense to put extra money toward paying off that debt early. But the peace of mind and security that come from owning a home free and clear are invaluable.
For more on this topic, read Making Sure Your House Doesn’t Own You.
Uncommon success
Living with debt is so prevalent in our culture, it can feel normal — even unavoidable. But it isn’t the standard to which God’s word encourages us to aspire.
Becoming free from the bondage of debt is an essential aspect of living “life to the full.” Having no debt frees us from stress that can hinder our most valued relationships, and it enables us to more clearly hear and respond to God’s call on our lives.
