As Iron Sharpens Iron…

“As iron sharpens iron, so one person sharpens another.”
– Proverbs 27:17

Iron Sharpens Iron

Many pastors work in isolation… especially when it comes to our struggles and weaknesses.

That’s why I’ve created Clergy Financial Coaching–to destigmatize clergy financial struggles and help pastors find financial wholeness.

And I’m excited about our brand new online community, Solomon’s Court, where we can gather and sharpen each other–motivating, inspiring, and learning from each other as we seek God’s wisdom and find financial freedom.

Register to post, share your journey, ask questions, give answers, encourage others…

Solomon’s Court is completely free! And it’s a great way to help us all learn from each other…
As iron sharpens iron.

 

Could you come up with $400 in an emergency?

in an emergency
Rich Legg/iStockphoto.com NPR

“If a financial emergency struck — say, a health problem or a car that needed repair — would you be able to come up with $400? According to the Federal Reserve Board, 47 percent of Americans would have trouble doing so — they would have to sell something, borrow money or simply couldn’t pay.”

$400 in an emergency? Of course!
Without borrowing it? Sure, just put it on my credit card! (um…)

Yesterday on Weekend Edition, NPR reported the startling findings that almost HALF of US Citizens couldn’t come up with an emergency $400 without borrowing it or selling something to get it.

And think of what “in an emergency” means:

  • $400 is a simple car repair.
  • $400 is an airline ticket to your Aunt Ruth’s funeral.
  • $400 is Fido’s vet appointment.
  • $400 is a chipped tooth.
  • $400 is Jr’s emergency room visit.

Before we got control of our finances, a $400 emergency would have caused us to go into a panic! And then we would have sucked it up and charged it on our already-maxed-out credit cards.

This is why we have a $1,000 starter emergency fund before we do anything else. Click To Tweet

Before you can save for college, before you can budget, before you can start aggressively paying off debt, before you can invest, before you can vacation, before you can be truly generous, you must have a baby emergency fund. If you don’t, every little $400 emergency will set your whole plan back by a year!

These 47% of Americans aren’t all poor people. These are the American middle class. And they’re living paycheck-to-paycheck.

Here’s another quote from the interview:

“We have been taught that a middle-class existence is … maybe a $250,000 house, and a vacation every year, and a car for each adult, and education for the children. And, indeed, those are the very metrics that the commerce department has used in defining what a middle-class life is. But as I point out in the article… the price tag for that middle-class life is $130,000. Only 1 in 8 Americans makes $130,000. So the middle-class life that we’ve all been taught is ours — if only we work for it — is out of the reach of all but a very small number of us.”

So some of this is about contentment:

Would you be content living a lifestyle you can actually afford? Click To Tweet

And some of this is about processes:

Are you doing the right things in the right order to win with money? Click To Tweet

If you find that you wouldn’t have $400 in an emergency, you may need help with contentment or help organizing your finances. Who do you know that could help you with that?

Early Withdrawal Penalties (might not be so bad)

early withdrawal penaltiesEarly withdrawal penalties may have scared people off from investing in the right place! If you’re investing in a non-retirement account and your retirement accounts aren’t completely maxed out, you’re probably throwing away thousands of dollars!

All we need is 403(b)!

If you’re a minister, you can invest in a retirement account through a 403(b). A 403(b) is a tax-sheltered annuity, which means you put money in before it gets taxed and it’s sheltered from taxes while it grows. Clergy members also have a benefit of being able to withdraw from a 403(b) tax-free for housing expenses after retirement!

A 403(b) does an amazing job of lowering your taxable income (therefore lowering your taxes) and helping you save for retirement. In 2015 and 2016, you can put up to $18,000/yr into your 403(b). Pastors over 50 may also contribute an extra $6,000/yr as a catch-up contribution!

How much should I put away for retirement?

Retirement and finance gurus like Dave Ramsey tell us to invest 15% for retirement.

If you’re a pastor, it’s likely 15% of your income won’t come anywhere close to maxing out your 403(b). And don’t forget, you can also use an IRA to reduce your taxable income and save up to $5,500/yr per spouse.

Let’s pretend you’re under 50, married, and make $100,000/yr as a pastor (Hah!). If you put away 15% ($15,000) toward retirement, you still have $14,000 in potential 403(b) and IRA limits that you could be sheltering.

After I’ve funded my retirement, where do I invest?

After you’re done putting 15% of your income into retirement accounts, where should you invest?

Most people will open up a non-retirement investment account at Charles Schwab, Vanguard, T. Rowe Price, or Fidelity (BTW, these are the ONLY four places I would consider).

But why? Why would you invest in a non-retirement investment account when there’s plenty more room to invest in your retirement accounts? Three little words: Early Withdrawal Penalties.

Everyone will tell you that you need to invest in non-retirement investment accounts because:

  • Non-retirement account withdrawals are taxed at only 15% (capital gains taxes)!
  • Retirement account withdrawals are taxed at your marginal tax rate (25% for most pastors)!
  • Retirement accounts are additionally subject to 10% early withdrawal penalties!

So it seems like it would make sense. If you want to grow your investments, withdraw them, and not have them subject to higher taxes and penalties, you should invest in a non-retirement investment account. Right? Wrong.

When I did the math, it blew my mind!

It turns out that the benefit of being able to put more money into a retirement account (remember, it’s pre-tax) completely outweighs the benefits of investing in a non-retirement account.

NOTE: I AM NOT suggesting that you pillage your retirement account! I’m simply saying that if you have more room in your retirement account, it can make you thousands of extra dollars over investing in non-retirement accounts. AND it can lower your taxes!

early withdrawal penalties might not be so badLook at the comparison chart I put together. This chart assumes a one-time investment and marginal tax rate of 25%. It also assumes a 10% return on investment each year for math convenience.

The same money will buy you $10,000 of investments in a 403(b) OR $7,500 in a non-retirement account. This is because you have to pay $2,500 in taxes on the $10,000 before you invest in a non-sheltered account.

Being able to invest a higher dollar figure into your 403(b) makes the higher tax and early withdrawal penalties completely irrelevant. Even if you take an early withdrawal again and again and again, it still makes more sense to start with the higher initial investment that can be made pre-tax.

What I’m saying is this: If you have not maxed out your 403(b) AND your IRA limits, you’re throwing money away by investing in a non-retirement account.

Why we stopped our debt snowball

debt snowballThe debt snowball is a powerful way to pay off your debts fast! It’s motivating to pay off your smallest debt and then roll that payment into paying off your next smallest debt. As debt after debt gets paid off, the debt snowball gets larger and picks up more speed to pay off your big debts.

Click here to use our debt snowball calculator

Over the last 30 months, we’ve been able to pay off over $40,000 of debts, including medical debts, credit cards, a car loan, and a student loan! We only have about $12,000 left until we are finally debt free! (applause)

But we’ve stopped our debt snowball. We’re no longer paying off our debts fast. And we stopped on purpose.

Why? Is it because we love our debt and want to keep it around and keep feeding it?

No. We stopped our debt snowball for two reasons:

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