Mormon Finance: Dealing with Debt

Are Mormons richer, poorer, or statistically the same as everyone else? I have no idea. If you do, I?d love to hear it. (Update: A reader just pointed out a great graph from the New York Times that answered this question for the USA). What I do know is exactly how being Mormon is impacting my personal finances, so I’ve decided to write an entire series on the topic.  We’ll cover topics ranging from the donations we are expected to make, to surviving as a single income family, to maintaining a year’s worth of food in our basements (yes we actually do that). I hope you enjoy.

Debt

Thought I’d kick the series off with the subject that has been top of mind for me recently.  Next week, I graduate from business school and along with my wonderfully framed diploma, I will also begin receiving a monthly bill asking me to start paying off my sizable student loans. Ahhh debt, how we love thee.

For the past several hundred years, Mormons have been taught to stay out of debt. It’s drilled into us. Our prophets and leaders talk about it all of the time. The only exceptions for our debt aversion are to finance a modest home, an education, and maybe a first car. All other debt should be strictly avoided.  And the debt we do have, we are counseled to pay off as quickly as possible.

This doesn’t mean all Mormons follow that counsel. I know plenty of fellow Latter-day Saints who have fallen into the debt trap.  Bankruptcy rates in Utah are among the highest in the US. It’s just so hard to say no to things we want sometimes, that we convince ourselves that we can afford things we really cannot.

However, there are a lot of Mormons who do try to follow this counsel. My parents are some of them.  They made some serious financial sacrifices in order to pay off our house as soon as possible.  They’ll tell you it was the best thing they’ve ever done, but they worked very hard and went without a lot of other luxuries in order to achieve it.

My wife and I have decided to try and follow their example. As we go off into the real world and start earning income again, we’re basing our goals around getting out of debt as fast as we can.  You are all invited to the party when we make the last payment in a few years. Just don’t judge us if we are hosting that party in a cramped apartment with outdated furniture. Paying off debt doesn’t always come cheap. 🙂

…..Don’t forget to leave comments sharing your thoughts on debt.  I’d be happy to get into discussion on interest rates, the value of debt, the difference between good and bad debt, or whatever else floats your boat. Just drop a line.

8 thoughts on “Mormon Finance: Dealing with Debt

  1. Derek

    I read an interesting article about the correlation between religion and income in the New York Times this week – http://www.nytimes.com/2011/05/15/magazine/is-your-religion-your-financial-destiny.html. It found that Mormons make slightly more than the national average.

    My first reaction was surprise, because there are a lot of successful Mormons out there. Then I started reading the comments and the answer popped up right away – double incomes. Most LDS mothers don’t work. The survey was about family income, not individual income.

    It’s an interesting read, and there’s also a link to the original study and a very helpful graph.

    Reply
    1. Jacob Post author

      Thanks for the link, Derek. I decided to include a link to the graph in my post.

      I think the point about double incomes is important, but it doesn’t look like it is the whole story here. This graph seems to say that Mormons are only slightly more educated (college degrees) than the average. It’d be interesting to learn why, as education is also strongly encouraged in my faith. Maybe both of these numbers are due to the fact that first generation Mormons tend to come from a lower income group and the education and earnings don’t kick in ’till later? I’m also guessing that this survey doesn’t distinguish between practicing Mormons and the non-practicing, which would be interesting to look at.

      Reply
  2. Andrew baxter

    Jacob,

    From your business school perspective, does it make financial sense to pay off low interest debt at an accelerated rate (student loans, mortgage, etc)? That’s my contribution to your blog discussion…now how are you doing? Give me a call one of these days when you have a minute.

    Reply
    1. Jacob Post author

      Andrew-

      I think you are bringing up an argument that goes something like this: “My loans are only costing me 5%, while if I invest that money in the market I could make around 10%. Doesn’t it make sense to invest this money, rather than pay down the lower interest debt?”

      The straight financial answer is yes. If you can get a guaranteed 10% from the market than it would make you more money. However, there are a few points I’d consider when making this decision. The first is that interest is guaranteed, while the market is NOT. I think the markets of past few years have shown that. Even though over the long term the market should outperform your interest rates, we do not pay our grocery bills and electricity over the long term. What I’m saying is that there are significant benefits to being out of debt, even if you make less money that way. You are more resilient to shocks in the economy, you have more freedom (think switching to a lower paying job), and there is a huge psychological benefit of not having the weight of debt on your shoulders.

      This isn’t to say you should spend every penny on paying down debt immediately. It’s prudent to have a savings account with some emergency cash. I also think it would be stupid not to take advantage of company 401K matching programs. But if the reason you are holding on to debt is so you can put some extra cash in stocks and try to “juice” the market, you may want to check to see if you’ve moved from prudence to greed.

      As in all things, this is a personal decision and it might vary a little bit. I do want to say that this decision doesn’t necessarily have to come down to the numbers for Mormons. We believe in following our prophet and if he tells us to get out of debt, we believe that there will be blessings in doing so.

      One of our apostles tells a story of being blessed to be able to pay off his home loan in this article. http://lds.org/general-conference/2010/10/trust-in-god-then-go-and-do?lang=eng&query=eyring+debt. I thought it was relevant.

      Reply
  3. Liz

    Thank you, Jacob, for talking about debt. Although I grew up in the Mormon church, I have never been good with money. A few years ago I finally got myself out of credit card debt but I’m still struggling with my finances. I currently have student loans and a loan on my car.

    For the past year, I’ve wanted to move out of my parents house and become “independent.” As I am on my late 20’s and finished with school, this makes sense, especially since my younger friends have already done this. My question for you is this: do you think it would be better for me to keep living with my parents (without the independence) and try to pay off my loans or get out on my own (using my money to pay rent)?

    Reply
    1. Jacob

      Liz- that’s a great question and congratulations for getting out of credit card debt!

      First of all, let’s just clarify that the decision is totally between you and God, and I could see the answer going either way. But your question highlights some important principles, so I’ll tell you how I’d approach it and you can take my advice for what it’s worth.

      I think your situation contrasts two interesting principles we are taught in the Church of Jesus Christ of Latter-day Saints. On one hand, you want to be independent (the church calls it self-reliant), and I think that is totally in-line with what God want’s for us. He wants us to learn and grow, and taking care of ourselves and our families both financially and physically is a great way for us to do that. On the other hand, you want to be free of debt. Both are great things.

      In my mind, this decision would come down to how much income you have relative to your debt. If you feel like you can make your regular payments, while still paying rent, than moving out might be the right thing for you. If paying rent means you won’t have enough money to pay off your loans, maybe it is not the right time just yet. It doesn’t do anyone any good if you move out only to default on your loans and set yourself further back. Also, make sure to budget in money for unexpected needs, because you don’t want to be in trouble the first time you have to go to the dentist or your car breaks down.

      That being said, I personally would look for some way to get the car paid off as fast as possible. If it is an expensive car, you may think about selling it and buying something more conservative. If it is already conservative, you may think about staying with your folks for a few more months, and throw all of your extra cash that would have been spent on rent to finish paying it off. Then you can move out and only have one loan to worry about.

      I wouldn’t necessarily wait to move out until the student loans are done, as that is probably a longer term commitment. Student loans are not bad (as long as they aren’t excessive), and I don’t think they typically warrant putting life on hold to pay them off. The trick is to just pick a lifestyle you can afford while still paying off your loans, and doing so as fast as you can.

      When choosing what lifestyle you can afford, let me recommend not stretching your student loans out for 30 years. The longer you stretch out the loans, the more money you will be wasting on interest (and the longer you will have to suffer with knowing you are in debt). For example, if I were to stretch my student loan (10 years, 7.5% interest) out to 20 years, I would end up paying $93 dollars of interest for every $100 of loan. With a 10 year loan, this will only be $42 and if I can pay it off in 5 years it is only $20. The point is, each time you stretch out your loan payment period, you dramatically increase the amount of money you are wasting on interest and paying a loan off early will save a lot of money in the long term.

      Hopefully this was helpful. If there is any other part to this question that you think I missed or that we should ask the other readers about, let me know.

      Thanks.

      Reply
  4. Pingback: Mormon Finance: Living on less than ½ an income | Next Door Mormon

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