Thursday, April 08, 2004

Apostles, Prophets and Personal Finance 

by Mathew
I think it is widely known among Mormons that, depending on which data set you look at, Utah has led the nation in bankruptcies for a few years. Even before Utah assumed the number one spot, our leaders talks about personal finance seemed to get more pointed–moving from general words about thrift and frugality to extended sermons and bits of specific advice. Some of that advice is contrary to what a financial planner would likely recommend–a fact not lost on the speakers themselves. In his October ‘98 address during the priesthood session President Hinckley had the following to say in a story referring to President Faust:

“He had a mortgage on his home drawing 4 percent interest. Many people would have told him he was foolish to pay off that mortgage when it carried so low a rate of interest. But the first opportunity he had to acquire some means, he and his wife determined they would pay off their mortgage. He has been free of debt since that day. That's why he wears a smile on his face, and that's why he whistles while he works.
I urge you, brethren, to look to the condition of your finances. I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible. Pay off debt as quickly as you can, and free yourselves from bondage.”

No doubt this advice is being taken literally by many of the faithful. I have family members who have taken money out of retirement accounts in order to make lump sum payments on their home. This is almost certainly a bad decision from a financial standpoint–yet I can’t imagine a clearer example of following the prophet

In his talk, Elder Wirthlin admiringly told the story of a man who vowed to pay off his debts instead of declaring bankruptcy. It was a great story and it reminded me again of some family members who did something similar. It took those family members well over the 10 years that a bankruptcy can legally remain on a credit report to pay back the money, but they considered it something close to a sacred obligation to honor their debts. Again, this was almost certainly a bad decision from a financial standpoint (although not as clearly as bad a decision as raiding the retirement accounts to pay down the mortgage).
think I’ve been pretty clear that I think some of the advice being given across the pulpit is not very good from a financial standpoint. At the macro level it seems even worse. To the extent they agree on anything, economists are pretty united in the belief that bankruptcies are useful tools governments can apply to encourage appropriate amounts of the type of risk taking necessary for wealth-creating entrepreneurial activity to thrive. If everyone treated their debts as an obligation to be honored at almost any cost, the nation and the world would be poorer (I understand that you could probably argue the converse–but I think it is a stupid argument and this post is already too long). Since only Mormons will give credence to Elder Wirthlin’s talk, we may end up poorer as a people if we follow his advice while the rest of the nation continues to engage in healthy entrepreneurial activity.

Looked at from a spiritual wellness perspective, however, I firmly believe that both President Hinckley and, to a lesser extent Elder Wirthlin, have taught true principles. I expect that the couple who raided their 401(k)s to make a lump sum payment on their home will be blessed for it, at the very least in the same way that President Faust was blessed–with the peace of mind knowing you are free of debt.

I personally take a net worth approach to my finances. I invest money every month, but I don’t pay down my student debt as fast as I otherwise could. Most of my loans are locked at a rate that is lower than historical rates of inflation and all of them are well under the 4% President Faust’s mortgage was at. In my rational mind, as long as my total net worth increases, it doesn’t matter to what account the money is applied. Using this approach it is likely that my net worth will actually be zero sooner than if I otherwise payed directly on my loans due to the fact that my fairly conservative investments will almost certainly have a greater rate of return than the interest payments I pay on my loans. Yet...there is a pebble in my shoe. Knowing that I owe a financial institution money–and that I will be making payments to that entity for the next 29 years and 7 months (my rational self says that I should extend the debt to the maximum amount of time possible) bothers me.

Likewise, I believe that in many, perhaps most, cases there is more satisfaction and honor in paying back one’s debts than seeking the protection of the courts. At the end of the day, material wealth is a poor substitute for lasting happiness.

I guess my conclusion is that the prophets and apostles aren’t in the financial advice business–they are in the spiritual guidance (what lifestyle managers might call “well being”) business and their advice ought to be seen and interpreted first and foremost in that light--and not as a guide to increasing your material wealth. Let’s hear it folks–what's your take on this new-found interest among our leaders in personal finance?
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