Financial stewardship in your 20s and 30s
By Scott Vander Linde
One of the more difficult times in life to practice financial stewardship is early in your work life. But it is also a very important time, because what you do at this stage of life generally defines your lifetime pattern.
One of the most important practices at any age is to begin each day thanking God for another opportunity to be a caretaker of the resources he has given you to manage and to be content with what he has given you. Though this sounds easy, it is in fact quite difficult and even countercultural. Living in this way runs contrary to most of the signals coming to you about how a college graduate, rising professional or typical North American should be living—signals like: Buy a new car at graduation, finance the largest house you can “afford,” purchase the latest and greatest electronics, and on and on. So what to do?
Begin by disciplining yourself to give from each paycheck as a thank offering, applying the concepts of tithing from your “first fruits,” as described in Deuteronomy 26. Give locally, nationally and internationally. By doing so, while tangibly thanking God, you will also put into context your own needs versus the needs of those most needy in your community and around the world. Contentment is much more attainable when you make such comparisons. And make such giving a community affair, prayerfully discussing and deciding what and where to give with a friend or your spouse and, if you have them, children, from a very early age.
Next, contribute to a long-range savings plan—yes, even with your first paycheck after high school or college. Saving for the future also helps give you a clear sense of managing God’s gifts to you by putting your current and future needs in perspective; saving has the side benefit of giving you the ability, because of your current stewardship, to be generous later in life. Simple knowledge of the time value of money indicates that a dollar put away in your early work life will result in the need to save less later in life to attain a given long-term saving goal.1 When you save for a longer period of time, interest compounds longer for you. Utilize opportunities your employer or the IRS has for you to defer taxation on retirement savings.
In addition to these savings, over the first four or five years of employment, build a “rainy-day account” equivalent to six months of your after-tax income. This can be a very helpful hedge against an unfortunate episode of short-term unemployment—a far too-frequent reality of the modern economy.
Finally, in the context you create for your finances by doing the above, a pretty simple principle can guide your use of the rest: Don’t spend what you cannot afford! This does not mean that you should never use debt; it does mean, however, that you use debt carefully and responsibly. Some examples: Use credit cards for day-to-day purchases only if you will be able to pay off the entire balance on the card each month. Buy bigger ticket items like cars, furniture, appliances, etc., by saving the entire amount, or, in the case of cars, at least 50 percent of the entire amount before making the purchase. Then, even if you do find a very favorable financing rate to use for the purchase, you have the ability to quickly pay a loan off should rates increase quickly with changes in the economy. These items are not investments, but assets that do decline in value over time—often very quickly. Also avoid taking out service contracts on purchased items, as these are very expensive forms of insurance.
And for home purchases, despite what current market psychology and mortgage providers might encourage or allow, follow a tried and true model of home purchasing: Do not buy until you have saved (in addition to long-term savings) 5 to 20 percent of the purchase value of the home. The latter allows you to minimize the cost of mortgage insurance and gives you a buffer against home market fluctuations. And do not spend more than 25 percent of your after-tax income on a mortgage payment. Remember, there are many costs to owning a home in addition to the purchase price, including property taxes and annual and long-term maintenance requirements like electrical and plumbing repairs; sidewalk repair; re-painting, re-roofing and remodeling expenses; furnace replacement, etc.
Make it a practice in your church or with friends to discuss how to make financial decisions, including how to make relatively safe long-range investments, and how to be content with what you have. And remember, by making economic stewardship a habit early in your life, you have more time to enjoy an open-handed, gratifying economic life, and you can likely avoid some of the financial hardships so many face during economic declines.
Questions for reflection:
- Is a 10 percent tithe too much or too little, given the needs of the world?
- What proportion of my income should I give to other causes, use now and save for retirement? As my income rises, how should these proportions change?
- What individual, family or families can I share discussions of personal financial stewardship with?
- What types of insurance should I take out, and what types should I avoid?
—Scott Vander Linde, Class of 1980, Professor of Economics, Calvin College
1 For example, if you begin saving $1,000 per year at age 20, with a 5 percent annual interest rate, you will have an account worth $159,700 at age 65. That is, you have actually put away $45,000, but it has accrued to the larger amount. If you start saving at age 35, you will need to save $2,405 per year for the next 30 years—a total of $72,150—to accrue the $159,700.