7 Questions to Ask Yourself Before Borrowing Money
I'd love nothing more than a world where people didn't have to use debt. I dream of it. Could you only imagine?
I personally envision what a debt-free life will look like. It’s exciting and exhilarating.
For most of us, completely avoiding the use of debt throughout our lives isn't very realistic. There are just situations where we have to borrow.
Like I’ve said before, using debt isn't sinful (although it can reveal spiritual deficiencies). Regardless, we should have and maintain a biblical perspective of debt.
However, if we must borrow then we should ask ourselves, and reflect on, the 7 question below.
Does It Make Sense Economically?
Borrowing must make sense economically. This means that the return, or what we get, must be GREATER than the cost, what we give up. If not, you're playing a losing game.
This is how many individuals and families fail to make progress and ever create long-term wealth. They often borrow for things that don't retain value and do this repetitively. Talk about a vicious cycle.
Practically, a poor economic borrowing decision would be borrowing money for electronics, which are mostly depreciating assets (an asset that loses value over time).
Another poor borrowing decision would be borrowing for anything consumptive in nature (clothes, dining out, travel/experiences, entertainment, etc.).
These are perhaps the biggest borrowing traps that most people, that struggle with debt, fall into.
There are some scenarios where borrowing may make economic sense but we should also be very cautious going about it. For example, student loan debt may make economic sense for those specializing in a field or occupation BUT keep in mind that it still mortgages the future. However, student loan debt for a more generic degree makes less sense due to it’s unlikely ability to be applied.
When it comes to investments, very rarely do I see that borrowing money for an "investment opportunity" make sense, even if it "makes sense economically" on paper. For example, many investors utilize debt to "lever" their investment returns.
If you think back to middle school science a lever is a powerful, simple machine that can amplify your work output. In the investment world you can use "leverage", which is debt, to amplify investment returns. However, leverage also amplifies investment losses as well. This part gets skimmed over all the time.
One area where it could make sense to borrow, when it comes to investments, is a securities backed loan. Basically this is taking out a loan against your investment portfolio instead of selling the investments. Many will use this as a means to not sell their investments and trigger capital gains. Because the loan is backed by investments means that typically you get a more favorable interest rate. When it comes down to it, you still need a justifiable reason to borrow in the first place.
Is There a Guaranteed Way to Repay What I Borrow?
Borrowing money without a guaranteed way to repay it puts you in a vulnerable position and exposes you to the dangers of debt.
You MUST have a guaranteed method of repaying the borrowed funds. It's too dangerous not to.
"Well, I have a job where I can pay back what I borrowed." This is most likely the most considered and cited response. Many individuals and families thought the same thing before defaulting on their mortgages during the Great Recession, and many businesses thought the same thing before defaulting on their loans due to COVID-19.
When citing your job as a "guaranteed" way to repay your debt, consider your ability to weather various circumstances (layoffs, market disruptions, mergers & acquisitions, where the market is moving, etc.). Remember, the longer that debt has a presence in your life the riskier it will be "guaranteed" that you can repay it.
If you own your own business then business debt is always presumptive. This is because the repayment of that debt always assumes the continuity of your business and revenue.
The recent COVID-19 pandemic has been a perfect example of how many businesses leveraged debt but solely relied on their business revenue to repay that debt. Consequently, we've seen how a pandemic, or rather an unforeseen event, can strike a huge blow to commerce that transcends countries and affects millions of businesses.
If you do get presented with an business borrowing opportunity, that involves taking on debt, be sure to talk with the counselors in your life (financial advisor, CPA, attorney, etc.). Also, a lender will always want to know how and if you can repay your debt. So if you get a “no” from a lender then that’s a sign that you aren’t ready to proceed with borrowing.
“Be not one of those who give pledges,
who put up security for debts.
If you have nothing with which to pay,
why should your bed be taken from under you?”
Are Me and My Spouse in Agreement?
God created marriage for a variety of reasons, many of which are still unknown to me. But, in this context, I am certain that one of those reasons is checks and balances, as well as unity.
We must consider whether there is unity in this borrowing decision. Both spouses MUST agree. If not, it's a simple no. Don't ignore the Holy Spirit, and don't let your pride get the best of you on this one.
Far too often, one spouse will act emotionally while the other will act logically. One may be inquisitive, while the other is compulsive.
Don't get me wrong: there's nothing wrong with being emotional, but research shows that the more emotional we are, the less rational we are in the moment. They have an inverse relationship. Emotions will always be present, but I'm referring to the emotional extremes.
When making a borrowing decision, husband and wife must be in agreement.
In order to proceed, both spouses must fully understand AND be able to thoroughly explain the borrowing decision at hand. Far too many people get themselves into trouble by doing things they don't understand.
Are There Any Other Alternatives?
Borrowing should be considered only when all other options have been exhausted. It should only be used as a last resort.
The truth is that all borrowing has the potential to deprive God of an opportunity to work in your life. That's correct. We frequently take a shortcut to what we want or need when we immediately resort to borrowing.
Consider this "strong arming" the situation to make it bend to our will. We choose to avoid allowing space for God to reveal something to us or for Him to work within us.
Borrowing before considering alternatives can even be harmful to ourselves because it provides us with all-too-easy access to what we want.
Have you prayed consistently about any borrowing decisions at hand? Are you looking for alternatives to borrowing? Will you consider the alternatives humbly?
It also wouldn't hurt to involve some people you trust in this situation. We all have blind spots, and perhaps others can help us see all of our options.
"Not that I am speaking of being in need, for I have learned in whatever situation I am to be content. I know how to be brought low, and I know how to abound. In any and every circumstance, I have learned the secret of facing plenty and hunger, abundance and need. I can do all things through him who strengthens me."
Do I Have Peace of Mind When I Envision Making This Borrowing Decision?
If our emotions are evidence of what's truly going on inside of us then we should be creating time and space to reflect on the decision at hand.
As a fruit of the Spirit, peace should be ever present including a moment such as this. If it's not then I suggest ceasing the process, I know I personally would (and have).
Remember, err on the side of taking your time to evaluate a decision. This period of reflection allows us to remove the extremes (whether it be emotion or logic) from the decision making process.
If a decision has a hard pressed timeline that's quickly approaching then this should be a red flag. If it seems to good to be true then it likely is.
Very rarely are good decisions made hastily. Don't fall into the trap of acting on compulsion either. As you can see, self-control is another fruit of the Spirit that comes into play here.
Are you walking in step with the Spirit? Doing this helps protect us against the desires of our flesh. I'm reminded of Paul when he was writing to the Galatians:
“For the desires of the flesh are against the Spirit, and the desires of the Spirit are against the flesh, for these are opposed to each other, to keep you from doing the things you want to do. But I say, walk by the Spirit, and you will not gratify the desires of the flesh.”
It also wouldn't hurt to filter this decision through the best and worst case scenarios that could result from borrowing. Are you at peace with those outcomes?
And finally, consider bringing outside counsel into the situation with you. We all have blind spots and biases. It often helps to have different perspectives, insights, and wisdom on these important decisions.
"But the fruit of the Spirit is love, joy, peace, patience, kindness, goodness, faithfulness, gentleness, and self-control; against such things there is no law."
Do I Have Peace of Mind When I Pray Through This Borrowing Decision?
Pray, pray, pray. We should be eagerly praying about ALL financial decisions. When we're stewarding what God has entrusted to us all financial decisions are spiritual decisions.
When we pray, what is the Holy Spirit revealing in us? We need to let the Holy Spirit lead us through its counsel.
It should be a tell tale sign if peace isn't present when inviting the Holy Spirit.
Remember, prayer helps calibrate our heart and mind to God. He is the epitome of our peace. Pray for a softened heart. Pray for humility. Pray to release all control to God. Pray for wisdom. Pray for guidance.
“Many are the plans in the mind of a man, but it is the purpose of the Lord that will stand.”
What Personal Goals and Values Am I Meeting That Can Be Met in No Other Way?
Finally, we should ask ourselves how this borrowing decision will get us closer to our goals or how it will reaffirm our values. If we don't have a solid answer then we need to dismiss the idea of taking on debt.
When looking at financial planning:
Our goals are "What" we hope to accomplish.
Our values explain "Why" those goals are important in the first place (i.e. our values are used to craft our goals).
All the action items & tasks, including borrowing, are the "How". The action items help fulfill the goals which in turn reflect our values.
With all that in mind, borrowing should only be considered IF we're to accomplish our goals and reaffirm our values because there's no other way that they can be met.
Be sure you're extremely clear on your "Why" because if you aren’t then borrowing can be a costly mistake.
“If you aim at nothing, you’ll hit it every time.”
Zig Ziglar
Again, it isn’t realistic to go through life having not borrowed at all. However, moving forward we can avoid the use of debt, where possible, or at least be very stringent and smart when a borrowing decision arises.
This starts with asking the right questions and being completely honest about those answers.
I love how Jesus was always so inquisitive, despite knowing everything, with the people he came across. He always asked questions.
There's a lot of power in asking questions because it causes us to be still and REFLECT, something that's been lost in today's fast paced society.
So don't forget to ask these important questions before borrowing money.
