Four Major Financial Decisions
that Affect Eternity
We are constantly bombarded with an unending assortment of things we are made to feel we can't live without. We want to live like Mom and Dad when we are only a few years into our marriages, and we also want to "keep up with the Joneses." Of course, these desires do not apply just to young couples starting out.
Indeed, some of our clients moved into their dream houses after their children were 8-to-12 years old, only to find that the additional debt they incurred added a significant degree of financial stress.
We have defined lifestyle by how we look, where we live, and what we drive. The problem is then compounded in that we typically use debt to fund our lifestyles.
The remedy, of course, is to reduce one's lifestyle, but this can be incredibly difficult to do. Each of us faces important financial decisions involving our housing, cars, lifestyle, and investments. As we analyze the impact of these decisions on our ability to balance family and work, some action steps become apparent.
1. THE BIGGER-HOUSE DECISION
The house decision is the most critical financial decision most of us will make. Not only does the price of the house dictate our largest debt obligation, but the bigger and more costly the house, the greater the other expenses—utilities, property taxes, insurance, furnishings, repairs, and maintenance.
There is tremendous pressure to buy too much house for one's budget at two critical stages in our lives.
The first occurs when we are just beginning our careers and families. We are tempted to buy more house than we can afford because we think we will be able to "earn" our way into it. In some cases, couples can do this without both spouses working.
However, the risk of not being able to do so is too great, even if one's income might increase rapidly enough to support the stretch. Any marginal time a couple may have to spend with their children when they are young is consumed by working to make money to pay for the house. By the time they have worked their income up to a high enough level to create some breathing room in their budget the kids are already ten—and past the age when parents have the most influence on them.
We recommend that young couples do several things.
First and most important, never buy your first home on both of your incomes! Make sure you buy a home that will work into your budget on the income of the husband only.
Then if the wife gets pregnant, there won't be the pressure of having to go back to work after the baby is born. It is much easier to move up slowly in size and price than to move back. It is okay to start with a "starter home"! Yet young couples today want to skip the starter home and get to the dream-house stage.
Second, since many couples today are well educated and will be in the workplace early in their marriages, we recommend that the wife's net income (after taxes) be saved. Simply act as if it is not there and save it. This will allow you to buy more house using only the husband's income or to buy the same-sized house with a greater down payment, reducing the subsequent payments.
If the husband's income will support payments on a $100,000 mortgage and you save $30,000, you will have two options. First, you could buy a bigger house and keep the $100,000 mortgage by applying the $30,000 to the down payment. Second, you could borrow only $70,000 by putting down $30,000 more on the same house. The lower borrowing will reduce the monthly payments, giving you more discretionary income and, as a consequence, more discretionary time.
Third, don't buy the lie that renting is always bad. Many times you are better off to rent longer so you can save a greater down payment and thereby reduce your mortgage payment which, in turn, maximizes your flexibility. For more on buying versus renting, see Housing Decisions: Should You Buy or Rent?. 
The second time there is great temptation to buy more house is about eight to fifteen years into a couple's work and marriage. Several things converge during this time frame to create what often seems like an acute need for a different (and usually larger) house.
First, all the children have usually been born by this time. Not only are all the children on the scene, but they are growing and needing more room.
At the same time, the peer pressure to buy something nicer to ("keep up with the Joneses") is greatest on Mom and Dad. They have gotten their family and work off the ground and most of their friends have nicer places, so they begin to feel they deserve a new place too.
The husband is typically approaching middle age, and the big, new house is the man's attempt to assuage his own ego in many cases. He feels he deserves his dream house after working so hard for all these years.
It is interesting to note that just when the family budget is usually beginning to get some breathing room (as a result of Dad's increasing salary over the years and living in the older, less-expensive house) a couple decides to get right back under the pile. They buy the big house and stretch their finances all over again; then they spend the rest of their children's formative years (the next eight to fifteen years) under financial pressure again.
One of the best things a couple can do to balance work and family during the formative years of their children's lives is to live in the older, smaller house a few years longer. Instead of having such a great percentage of their earnings earmarked for the house, more discretionary funds can be invested in family activities such as vacations, ball games, and the like. Also, it may be that Dad could opt for smaller salary increases and more vacation time.
I also recommend that you avoid succumbing to the "mirage" principle. Most of the big houses that "the Joneses" are living in are not paid for. As a matter of fact, there is probably less equity in their homes than you have in your older, smaller home. If they have any glitch in their income (such as the husband losing his job or having to take a pay cut or the wife becoming unable to work) then the whole thing disappears. They lose it all.
Many couples I know are house poor; they work themselves to a frazzle to make the monthly payments and keep the place up, and there is no money and time left to do anything else. And the travesty is that children do not care where they live! They just want Mom and Dad to be around and have some emotional energy to give them.
This is not to say one should never buy a bigger house. However, consideration should be given to purchasing a new house only when adequate savings have been accrued so the family's monthly outgo will not be changed.
For example, let's assume I live in a $150,000 house with a $120,000 mortgage and I can handle the payments easily on my current income. If, over an eight- to fifteen-year period, I am able to save $50,000, then I could choose to buy a $200,000 house. I could put my additional $50,000 into a new house and effectively keep my payments the same.
Obviously, a more expensive house will have some additional costs, but the biggest outlay is the mortgage. It follows, then, that if you can pay cash for the house, the size is irrelevant. What is relevant is maximizing your flexibility and options.
The second part of my recommendation would be to change houses only if it will enhance the environment you want for your family (rather than detract from it). Will the new house truly be a home, or will it be just a house because you're never there?
2. THE NEW CAR DECISION
Buying a home and buying a car (the second critical financial decision) are not problems in themselves. When these two items require the use of debt, however, they can create problems because the more debt a couple takes on, the less flexibility they have.
It is my observation that parents preoccupied with debt problems will not invest adequate time and spiritual resources in their children, which assures that they will not have the spiritual capability to manage the financial resources that may be left to them.
Here are two common mistakes couples make in their car decisions. First, they don't pay cash; instead they take out a five-year note. This enables them to handle the payments, but ensures that they will probably owe more than the car is worth in a couple of years.
This problem will be accentuated because of the second mistake they make. They buy a car that will be dysfunctional for a growing family in another year or two and, as a consequence, will necessitate buying another car. As a result, they will need to sell their first car and probably will lose money on it. Buying new cars frequently is a good way to keep one's finances on the edge by keeping cash flow tight.
What I recommend is very simple: 1) Pay cash for your cars if at all possible, 2) buy used instead of new cars, and 3) plan to drive your cars at least ten years.
Fifty percent of all cars ten years old and older are still on the road. The older the car gets, the less the taxes and insurance. Maintenance costs increase, but they are usually significantly less than the annual interest cost on a new-car loan. Used cars allow you to take advantage of the immediate depreciation that occurs in the first year or two of a car's "life."
Julie and I bought a $20,000 car that was two years old for $10,000, and we're now in the eighth year with that car.
If you cannot pay cash immediately but will drive your current car ten years or longer, you will be able to pay cash for your next car. How? If your current car payment is $300 per month and your car is paid off in five years, keep setting aside the $300 per month in a savings account for the next five years. You will have accumulated $18,000 plus interest, and this should allow you to pay cash for the next car.
The key to reversing the debt cycle is driving the older car longer. I do not know anyone, myself included, who does not think it would be nice to have a new car. But driving the older car longer really does work to enhance freedom and options.
If you can pay cash for your car, it really does not matter what you drive as long as you are not neglecting your charitable giving to the Lord. If you can afford a BMW or Lexus, it is okay if you decide, as a couple, that you want to spend your money this way.
3. LIFESTYLE DECISIONS
Another mistake people make is to develop expensive habits and hobbies. Although these can seem affordable early in a marriage when there are two incomes, they can become tremendous drains on the budget later on.
For instance, eating out and frequently taking vacations cost a lot of money. Sometimes couples will continue these habits and pay for them with a credit card. Instead, their attitude toward their lifestyle must change. They should tell themselves, "If we cannot pay cash, we will not do it."
Furnishing and decorating a home is also a lifestyle issue. Are you willing to wait to furnish the house until you have the cash, or will you go into debt to get it fixed up as fast as you can?
One final lifestyle choice is the issue of education. Many people are concerned about their children's education—and rightfully so. This concern, however, many times leads to the pressure to send the children to private elementary and high schools as well as to the finest colleges.
On the surface this seems like good thinking. However, I have seen many mothers go back into the work force to pay the child's private-school tuition or many dads work a second job for the same reason. I often wonder if their emotional energy might not be better spent on training their children; maybe saving the money and using their time to home-school the children rather than work would be a more effective way to educate them.
We must remember that even though we want our children to be knowledgeable, wisdom is more important. We, as parents, impart wisdom to our children, and that takes time! Just as children don't care where they live, they don't care where they are educated as long as you are around and involved with their training.
I would rather have smaller raises now and more vacations when my children are young than have it the other way around. I will have a lot of time to work when they are in college and when they have careers of their own.
Also, because I understand the principle of long-time horizons (which means not being in a hurry to retire), I am not under pressure to generate more income now so I can set aside a lot each year for retirement. I tend to invest some of my "retirement money" in my children now, using some of these funds for family memory builders, for trips to the ballpark, and for paying off debt.
4. INVESTMENT DECISIONS
Most people think investments are glamorous. They think if they could make a big yield on their investments, they would have it made; they would not have to work so hard, and all their financial problems would go away.
The truth is that people accumulate financial wealth by spending less than they make over a long period of time and preserving capital with their investments. They do not accumulate financial wealth through investments only.
Financial wealth is a by-product for those who do not seek it. It is a by-product of working hard and spending less than they make (cash-flow control) and then investing conservatively so they do not lose the capital they have accumulated.
A critical action step is to implement a sound investment strategy that will promote—and not detract from—the development of a godly posterity. I recommend the following sequential investment strategy:
- Step 1: Eliminate all short-term, high-interest debt such as credit cards and consumer debts on such items as furniture, cars, and appliances.
- Step 2: Set aside three to six months' living expenses in a savings account or a money-market fund for emergencies. Although this type of investment will only earn the prevailing money-market rates of interest, by having the emergency fund you will avoid having to pay for emergencies on a credit card and as a result you will avoid paying the high interest rates charged for credit-card debt.
- Step 3: In an interest-bearing savings account or a money-market fund, save money for planned purchases of major items such as a down payment for a house, or for automobiles, furniture, and the like. Again, you will only earn the prevailing money-market rates of interest, but you will avoid the heavy charges that occur if you need to finance a car or furniture.
- Step 4: Accumulate funds to meet long-term goals. When you reach this step you are ready to invest, in the traditional sense of the word. At this point you should seek expert advice to develop a diversified investment plan in keeping with your goals, temperament, income, tax bracket, and age.
I have seen many cases where couples attempting to "make it big" took inordinate risks with their investments only to lose their money. Many times the motivation for the risk was good: to make a lot of money so they would have time and flexibility to spend with family.
If such investments work out, great. But what if the investment turns sour? I believe the risk is too great. Very rarely do people make large enough returns on their investments that they become financially independent. I've found that financial independence occurs by spending less than one makes over a long period of time, not from gaining big returns on investments.
I discourage taking undue risk with your investment dollars until your children are at least eighteen. Instead, I encourage you to invest very conservatively to ensure that you do not lose your investments. You can take all the risks you want when the children are older and no longer require as much of your time. Besides, you will surely be wiser by then!
A PERSONAL EXAMPLE
Julie and I decided many years ago that our motivation for managing our finances was not to have more money so we could retire or just to have more money. Instead, we agreed that our motivation would be to manage our finances correctly and wisely to increase our options and flexibility, to buy time, and to reduce our pace.
We have been in our home eleven years, and many times we have been tempted to take on debt and get a place we would really like (our "dream spot"). After all, we rationalize, the kids could enjoy it; if we wait until we can easily afford to buy it, the children will likely be grown.
But then I consider how nice it is not to have the debt pressures a new home would bring. I think about the fact that we have discretionary income that enables us to go on family vacations and create special memories. I am grateful that we can go out to eat or that I can buy some special things for Julie without using a credit card. We are glad that Julie can be a full-time mother and pour her emotional energy into our boys during these very formative years.
We think about these things, and we stay put. If God blesses us financially and we could move without losing any of these benefits, we might do it, but not before those conditions are met.
Our cars are six and eight years old; the paint is starting to look bad on one and the other has a dent, but that is okay. We could use a van because the children are getting bigger, but we will not buy one until we can pay cash. We are on the ten-year plan, so we may be crowded for another four years.
I do not think the children will be any worse off for being a little crowded. As a matter of fact, we were crowded in our little Volkswagen before we traded it, and the kids still miss it!
Finally, Julie and I are motivated to make good decisions financially because we realize that what we are buying is a rare commodity: time. We can either use our money to buy things that will not last (a bigger house, more toys, more stuff), or we can invest in our posterity, which will last. 
- The Myth of the Working Mother
- Book Review: Living Well on One Income in a Two Income World
- Ten Motivating Reasons to Get Debt-Free
- How to Have Great (and Affordable) Family Vacations
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