Archives For Retirement

       On Wednesday, I had the pleasure of interviewing Chuck Bentley, the CEO of Crown Financial Ministries, about his upcoming book The Root of Riches: What If Everything You Think about Money Is Wrong?. The book will be released in the next week or so, but if you’d like to get a 20% discount you can go to http://www.crown.org/rootofriches and sign up to pre-order the book and get a free sample chapter.

       I had the chance to read the book before the interview and I highly recommend it to all of you. Chuck does a good job of getting to the heart of our issues with money by highlighting how being rooted in Christ is the only way to receive true riches. The interview below will give you a good overview of the central ideas in the book and help you determine if it’s something you’d want to read.

       I’ve included the audio here which you can listen to on the website or download for later. I’ve also transcribed the interview for those of you who prefer to read. I’d be interested in your feedback on how well you liked this because it’s the first time I’ve tried doing an interview/podcast. (I was quite pleased with how my intro and outro music turned out!) Feel free to leave your thoughts in the comments at the bottom of the page, and if you have any questions I’ll do my best to answer them.

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Download the audio by right-clicking here and choosing “Save as…”.
Credits: intro and outro music for the audio is from “Bucolique Utopique” by David on Jamendo

Note: I was not paid anything to post this interview. I only agreed to it after reading the book because I believed Chuck’s message in The Root of Riches is excellent and needs to become more prominent in Christian personal finance.

Continue Reading…

Uncle Sam says,        With tax time fast approaching, I thought it might be a good idea to share a tax tip with you all that I’ve found useful for my clients. By combining a Traditional IRA deduction with the Retirement Savings Contribution Credit (sometimes called the Retirement Saver’s Credit), you can reduce your taxes by quite a bit after the tax year has ended because you don’t have to make IRA contributions until April 15. You may be able to reduce your taxes (and increase your refund) by up to $2,000 with this tip.

This tip works because the size of the credit increases as you reduce your adjusted gross income (AGI). Making a deductible Traditional IRA contribution lowers your AGI. Depending on your income, you can make yourself eligible for the Retirement Savings Contribution Credit or increase the amount of your credit. Here’s what you need to know.

The Drawbacks

This tip won’t work if you’re under 18, a full-time student, or can be claimed as a dependent on someone else’s tax return. Those are basic requirements for the Retirement Savings Contribution Credit. If any one of those apply to you, this won’t work.

Additionally, this tip only works at lower incomes (and it works best at very low incomes). The problem here is that people with low incomes often have a more difficult time contributing to retirement accounts. Here are the adjusted gross income limits for 2010 before counting the IRA deduction:

  • Single or Qualifying Widow(er) – $32,750 ($33,750 if you’re 50 or older)
  • Head of Household – $46,625 ($47,625 if you’re 50 or older)
  • Married Filing Jointly – $65,500 (up to $67,500 if you’re both 50 or older, $66,500 if only one of you is 50 or older)

This tax move doesn’t work if your filing status is married filing separately because the phaseout range for a deductible IRA contribution is so small.

Finally, the Retirement Savings Contribution Credit is not a refundable tax credit. This means it will only reduce your tax liability to $0 – beyond that it won’t get you any extra money. That doesn’t mean it’s useless though. If you have other refundable tax credits, this tax tip could increase the refund you get back from those credits because it reduces your tax first.

How to Do It

Assuming you meet the requirements, your income isn’t too high, and you have some tax due, the next thing you’d want to figure out is how much you should contribute to an IRA to get the most benefit from the Retirement Savings Contribution Credit. You’re going to need to do a little math to figure this out, including considering ira rates. Alternatively, you can just do your tax return several times using different IRA contributions to see how things work out.

If you’re going to figure it out manually, you’ll need to first look at your tax due to figure out how big of a credit you need. On Form 1040, you’ll find your tax due on line 60. As I said before, the Retirement Savings Contribution Credit isn’t refundable, so you only need a credit as large as your tax due. Any more than that is useless.

Once you know the maximum amount you’d need from your credit, you’ll want to figure out how much of a credit you can get. There are two things you need to keep in mind. First, the Retirement Savings Contribution Credit is calculated as a percentage of your retirement contributions. But the credit is only calculated on up to $2,000 in contributions (or $4,000 if you’re married filing jointly – $2,000 for each of you). Second, the percentage depends on your adjusted gross income (after your IRA deduction) according to the table below. You can also find this information on Form 8880 – Retirement Savings Contribution Credit.

Filing Status 50% Credit 20% Credit 10% Credit
Single or Qualifying Widow(er) up to $16,750 $16,751 to $18,000 $18,001 to $27,750
Head of Household up to $25,125 $25,126 to $27,000 $27,001 to $41,625
Married Filing Jointly up to $33,500 $33,501 to $36,000 $36,001 to $55,500

So let’s say you’re single and your AGI is $30,000. You wouldn’t qualify for the Retirement Savings Contribution Credit unless you make a deductible IRA contribution of at least $2,250 to bring your AGI down to $27,750. That would get you down to the 10% credit range. Your credit would then be $200 (10% of $2,000). It doesn’t matter that you contributed $2,250. The credit is only calculated on the first $2,000 of your retirement contributions. But you might have to contribute more than $2,000 to make yourself eligible.

Want to see a more exciting example? Let’s say you’re married filing a joint return and your AGI is $37,500. As you stand now, you’d be eligible for the 10% credit on any retirement contributions you’ve made (this credit includes 401(k) plan contributions and similar accounts). But by making two deductible IRA contributions – $2,000 for you and $2,000 for your spouse – you can bring your AGI down to $33,500. This makes you eligible for the 50% credit and would lower your taxes by $2,000 ($4,000 * 50%). You just made a $4,000 contribution to your retirement accounts at a net cost of $2,000! I’d say that’s a good deal.

I like this tax tip because I’ve seen it work for myself and many others quite well. There are a few other aspects of this tip that I didn’t cover here, but I’ve given you enough info to get started on it. It’s a great way to boost your retirement savings while reducing your taxes – sometimes by quite a bit!

Want More Tax Tips?

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Using Rules of Thumb for Retirement Planning?  FAIL       In my post on why the save 10% of your income for retirement rule is stupid I mentioned that expecting you’ll need 80% (or 90% or any other %…) of your pre-retirement income in retirement is stupid as well. How much income you’ll need in retirement is one of the major variables in calculating what you should save for retirement, so it’s important to use the most accurate estimate you can. Relying on a percentage rule of thumb is likely to steer you in the wrong direction for several reasons. Here are a few.

Housing

       Do you plan on downsizing in retirement? Or maybe you’re thinking about upgrading. Planning to move? That’s going to change more than just your housing costs. If you’re going to be renting or still paying a mortgage in retirement, you’ll need to figure that in as well.

       Consider maintenance costs as well. If you’re a handyman now and do most of your own repairs, how long will you be able to keep that up in retirement? Eventually, your physical abilities are likely to become limited and then you’ll need to hire others to do those repairs.

       You can’t plan for every possible variable in your housing costs, but these are the kinds of things you need to consider when figuring out how much income you’ll need in retirement. Housing is the highest cost for most people, so it’s even more important you get this one as accurate as you can.

Transportation/Travel

       Have you thought about how your transportation and travel costs might change in retirement? I’m guessing they’re probably not going to mirror your pre-retirement spending. The lack of a commute and the desire to travel more may offset each other for some people but not for most. This one might be difficult to figure out all at once, but if you take each aspect at a time you can come up with a reasonable estimate.

Food

       Will you be more likely to eat out in retirement, or do you want to improve your culinary skills and cook more at home? You’ll have an excellent opportunity to lower your food costs in retirement by cooking more from scratch, but many retirees look to eating out as a way to engage in social life and get out of the house. Depending on your preferences, skills, and plans, this could be another area that you’ll need to consider carefully.

Health

       During retirement, you’re going to be shouldering more of your health insurance expenses. Your health will also be at a higher risk of declining as you age, so you’ll have to expect more health costs overall. This is one area where many retirees experience a large increase in spending – especially as retirement goes on.

Income Taxes

       Depending on your personal situation and how you decided to save for retirement, your taxes in retirement could look quite different than before retirement. This is especially true if the income you’ll need in retirement is very different from your pre-retirement income. There are a number of variables that affect income taxes and they change from person to person. Assuming you can count on an average to help you might the right decision for your retirement is foolish.

Savings

       This is at least one area where the percentage rules directly account for some changes in retirement. But there’s still a problem. Maybe you waited until 10 years before retirement and had to save 30%, 40%, or 50% of your income to catch up. That’s going to drastically change once you enter retirement, so you need to look at your unique circumstances. Or maybe you hit a windfall sometime in your life and haven’t been saving anything for retirement. Following one of these rules of thumb won’t work for your situation either.

       It doesn’t matter if you don’t fit into one of the examples I shared above. The point is that your situation is different and unique to you, and you need to plan accordingly.

So How Should You Figure Out How Much Income You’ll Need in Retirement?

       I think it should be clear by now that the only prudent way to figure out your retirement income needs is to carefully consider your own situation by looking at your circumstances and expenses alongside your goals. When I was creating my free retirement calculator, I wrote an article specifically designed to help you start thinking about how much income you’ll need in retirement based on your situation. It doesn’t cover every possibility, but it will help you get started.

       My goal in pointing out how stupid these rules of thumb are is not to make things difficult for you or to make fun of others who give this kind of advice. I want you to see that your financial decisions involve factors that are unique to you. You shouldn’t risk making a wrong decision because you followed an easy rule of thumb. Take the time to really think about your situation, learn what you need to know so you can make a smart choice, and use that knowledge to manage your money well.

photo credit: (Hans Gerwitz on Flickr)

This article was included in the Best of Money Carnival.

This article was included in the Carnival of Financial Planning.

Cracked Nest Egg Because of Stupid Retirement Rules       The “save 10% for retirement” rule is absolutely stupid. And so is “save 15% for retirement” (sorry, Dave Ramsey) or “save 20% for retirement” and any other “save #% for retirement” rule you’ll come across. Now I don’t doubt that the people giving this advice meant no harm. They probably just want to get you to start saving for retirement, and offering a simple % of your income solution is a quick, easy answer for a difficult question.

       But they’re all absurd, useless rules for one simple reason: they completely ignore your situation. For most people, a simple rule like “save 10% of your income for retirement” is likely to be wrong (and blindly following dumb advice like that can have nasty results). The right answer depends on seven major factors that are specific to you and your situation. Specifically, they are:

  1. Your Current Age
  2. Your Retirement Age
  3. Your Life Expectancy
  4. Your Current Savings
  5. Your Investments
  6. How Much Income You Need for Retirement
  7. Your Current Income



       All of these factors work together to determine how much you should be saving for retirement each year. Let’s break them down.

Your Current Age & Retirement Age

       The difference between your retirement age and current age determines how long you have to save and invest. If you’re 25 now and don’t plan on retiring until you’re 70, then you’ve got 45 years until retirement. But if you’re 50 and want to retire at 65, well then you’ve only got 15 years. That’s a huge difference!

       The longer you have until retirement, the less you’re going to have to save. But these simplistic rules ignore this completely. If you’re young and just starting out, these rules might be OK for you. But if you’re older and haven’t done so well with saving for retirement, you’re not going to be happy when you realize you can’t retire because you didn’t save enough.

Your Life Expectancy

       Trying to guess your life expectancy can be a shot in the dark. You don’t really know when you’re going to die. But your health, your habits, and your family history do affect how long you can expect to live. Obviously, the longer you’re likely to live, the more you should save for retirement. But these dumbed-down % rules don’t account for this at all.

Your Current Savings

       If you’ve been wise and have already been saving a lot for retirement, you may not need to save 10% of your income. But if you’re 50 years old and haven’t saved a dime, then even 15% or 20% are unlikely to cut it unless you’re willing to make some major changes to your life and retirement plans. How much you already have saved can drastically affect how much you should save for retirement, but once again these % of your income rules won’t help.

Your Investments

       Are you so afraid of risk that you’ve vowed only to use CDs to save for retirement? Well, I can tell you that you’re going to need to save a whole lot more than 10% of your income even if you’re starting at 18 and don’t plan to retire until you’re 75. Your investment returns (which are connected to the risk you’re willing to take) will drastically affect how much you need to save. Based on what I can figure, the % rules assume you’re going to invest in a moderately aggressive mix of stocks and bonds that you tone down as you get closer to retirement. So if your risk tolerance is higher or lower, these rules won’t work for you.

How Much Income You Need for Retirement

       How much income you need for retirement is also a huge factor in figuring out how much you should be saving. Are you going to get a pension? Well, you’ll need less income from your own savings (lucky you). Do you plan to downsize and cut way back on some major expenses? Then you probably won’t need to save as much. Want to travel the world extensively? You might have to plan on saving more if your retirement expenses are going to drastically exceed your current income.

       You see, these % rules assume you’re going to need about 80% or so of your income in retirement. (That’s a stupid assumption for some other reasons, but I’m saving that for a different post.) So if you’re going to be different, these rules just won’t work for you.

Your Current Income

       Finally, and this should be obvious, your current income will affect the % you should be saving. Once you consider all these other factors I mentioned above, you can figure out exactly how many dollars you should save for retirement this year. But depending on what you make now, that could be 5% or 25% of your current income. (Or even more!)

The Solution

       So how, exactly, should you calculate how much you need to save for retirement? Well, I’d like to say that my handy little retirement calculator is the perfect answer, but it’s not. (It’s free by the way!)

       My calculator assumes you’re going to invest using a diversified portfolio of low-cost index funds (also a free calculator) with a moderate-slightly aggressive stock/bond mix. It also simplifies the taxes and doesn’t allow for “lumpy expenses” or significant changes in your retirement spending. Finally, it’s based on some other assumptions that I just can’t know will be absolutely correct. I did my best, but I know it’s not perfect.

       My free retirement calculator is certainly an improvement over these stupid % of income rules, but it’s still no replacement for sitting down with a good fee-only financial planner and working it out. So definitely try it out, but do yourself a favor and find a qualified professional to help you as well. And you need to do this more than once. Every few years you should revisit this plan with your advisor and update it as needed.

       I know that’s not an easy answer, but at least you’ll have a better chance of actually meeting your goals! Plus, I tried to make my calculator as simple as possible without making it too simple. And trust me, it’s better than most of the other free retirement calculators you’ll find out there because I used hundreds of thousands of Monte Carlo simulations to develop it. So it’s based on assumptions that mimic real market returns (which vary from year to year) instead of assuming a straight % return every single year (like 8%, 8%, 8%, …).

       Try it out, let me know what you think, and feel free to share your results here! What % of your income should you actually be saving to reach your retirement goals?


(photo credit: Nina Matthews)

The Secret to a Successful Budget eBook
 
       Welcome to the Carnival of Personal Finance #271 – The Secret to a Successful Budget eBook Edition! My friend Craig Ford at Money Help for Christians is launching a new eBook today. It’s designed to help you discover the secrets to successful budgeting.

       I think it’s a great resource for anyone who’s ever struggled with budgeting, so I’ve included some quotes from his eBook throughout this carnival. You can get the book for 30% off if you buy before midnight (EDT) August 31st, 2010. Be sure to read through to the end of this carnival because I’ll be giving away two FREE copies to two lucky winners!

Editor’s Choice

       Here are my top picks from the submissions this week:

  • Mike Piper from Oblivious Investor presents Dealing with Investment Confusion, and says, “What’s the best approach to dealing with the confusion that comes from being a new investor?” – [Mike shares some good advice for people who are confused about investing. It won’t immediately cure your confusion, but applying this strategy over and over will help you make informed decisions you can stick to.]
  • Briana Ford from Go Banking Rates presents Why Americans Can’t Afford to Die [Infographic], and says, “If you never thought about this problem before, take a look at how expensive funerals really are. You may discover you, like many Americans, simply can’t afford to die.” – [What can I say? I’m a sucker for infographics.]
  • Len from Len Penzo dot Com presents A Simple Trick to Get Your Credit Card Interest Charges Waived. – [I wish more people realized the power of Len’s simple trick!]
  • Lauren from Richly Reasonable presents 4 Bad Deals, and says, “The term “Bad Deal” is relative. Not only is Necessity the mother of Invention, she is also the mother of many a Bad Deal. Necessity has a TON of children.” – [Funny, smart, and witty – and likely to open a few eyes at least!]
  • Jacob A. Irwin from My Personal Finance Journey presents Adjusting My Monthly Budget to Account for Home Ownership, and says, “A look at the steps I have recently taken to adjust my personal budget to account for the various elements of home ownership.” – [At our current rent rate owning a home just doesn’t make sense. Just look at all the costs involved!]

       Congratulations to the editor’s choice picks! Here are the rest of the articles from this week’s submissions.

Money Management

  • MD from Studenomics presents Quick College Students Guide To Personal Finance.
  • Jason from One Money Design presents How Do You Live Well on Less Pay?, and says, “There are plenty of people that don’t make a lot of money and have trouble covering basic expenses each month. There are 5 essential tips to follow to live well on less pay.”
  • Revanche from A Gai Shan Life presents Shopping for the single life .
  • ispf from Grad Money Matters presents The American Dream of Home Ownership: 10 Things You Can Do as a Student.
  • Jim from Wanderlust Journey presents Royal Caribbean Cruise Lines Shareholder Benefits.
  • Jason from Live Real, Now presents Check Your Bills, and says, “Can you automate your finances too far?”
  • Elle from Couple Money presents Financial Tips for College Success, and says, “Many college students are surprised to see how easy it is to build a financial foundation for themselves. Learn how to set up bank accounts, pay your bills, and start a graduation fund.”
  • DE(a)BTh from Murder Your Debt presents Your Wasted Life, and says, “You thought financing a house and a fast car meant freedom. That an expensive education would lead you to a rewarding career where you could earn lots of money. You were wrong, weren’t you? You hate your career but you’re stuck. You’re stuck because you swallowed the lies you were sold. The lies that material possessions bring success. The lies that more money means more happiness. And now what? You’ve got it all; the cars, the house with the huge yard, the sexy outfits and shiny shoes. But you’re STILL not happy!”
  • vh from Funny about Money presents Social Security’s Bizarre Rules, and says, “Social Security’s restrictive rules make it impossible to get out of poverty when unemployment forces one into early retirement and stock-market losses militate against retirement fund drawdowns.”
  • J. Money from Budgets Are Sexy presents What would you do with an extra $1,000?, and says, “Montel Williams wants to know ;)”
  • Bob from Christian Finances presents How to spend unexpected income: 3 questions to ask, and says, “It can be tough to know what to do when you receive a large sum of cash – this article will give you some questions to help you figure out what to do with it…”
  • Mr. GoTo from Go To Retirement presents How Much Long Term Care Insurance Should You Have?, and says, “Insuring against a long term care event is part of personal risk management. Estimating the amount of long term care coverage to obtain requires careful consideration of several factors.”


If you are working 40 or more hours a week to earn your money, don’t you think it is worth an hour or two to set up a budget?

Isn’t it worth spending about an hour every week to manage the money you work so hard to earn? It is always better to manage what you have than to work yourself crazy trying to get more money.

- from page 21 of The Secret to a Successful Budget by Craig Ford


Finance


Investing

  • Dividend Growth Investor from Dividend Growth Investor presents 33 Dividend Champions to Consider, and says, “Dividend investor David Fish has created a list of dividend stocks which have raised distributions for 25 consecutive years and has named it the dividend champions list. His list includes 100 companies, which is more than twice the size of the Dividend Aristocrats. I ran a screen on the list in order to identify stocks for further research.”
  • Mike from The Financial Blogger presents Use the Loonie’s Strength to Invest in the Eagle Market, and says, “Canadian dollar is strong compared to the US dollar at this time. Use this as an opportunity to invest in US stocks.”
  • Div Guy from The Dividend Guy Blog presents Dividend Investing with Less Than $1,000 Part 3: How to Pick Your ETFs and/or Dividend Funds, and says, “Starting to invest is quite motivating but as a young investor, you must put greed and hype aside and start by looking for sound investments.”
  • Squirrelers presents Small Stocks = High Return and High Volatility, and says, “Small stocks, particularly those in the lowest deciles, have performed very well over the long-term. They can be an important part of your asset allocation, provided you can stomach the associated risks.”
  • D4L from Dividends Value presents My Top 6 Performing Dividend Stocks Just Might Surprise You, and says, “As I have stated many times, my goal is to create an ever growing income stream from dividend stocks. Secondarily, it is my desire to beat the S&P 500 over time. With that said, I rarely look at the capital performance of individual stocks. However, I recently sorted my portfolio by Total Gain % (total gain/basis) and was mildly surprised at the top performers.”
  • ElizabethG (Modern Gal) from Modern Gal presents Investing for Inflation in 2010.
  • DSO from High Dividend Stocks presents Big GE and it’s big dividend, and says, “One of America’s oldest and most prestigious companies has become an accidental high yielder.”


Budgeting in and of itself is useless.

Budgeting is part of a larger financial plan.

- from page 9 of The Secret to a Successful Budget by Craig Ford


Budgeting


Saving


Frugality


You need to focus your finances on accomplishing one major task at a time.

If you don’t, the danger is that every dollar will be diluted to a point that it makes little impact helping you reach your goals.

- from page 9 of The Secret to a Successful Budget by Craig Ford


Debt


Credit


The goal of the budget is to help you spend less than you earn.

Therefore, this becomes the single criteria for an effective budget – does it help you spend less than you earn?

- from page 12 of The Secret to a Successful Budget by Craig Ford


Reviews

  • PT from PT Money presents Free Prepaid Credit Cards, and says, “A thorough, original review of the best free prepaid credit cards, including those that are free of activation and monthly fees. These cards are great for those who need to avoid debt, or those that can’t get a traditional bank account.”
  • Silicon Valley Blogger from The Digerati Life presents Citi Dividend Platinum Select MasterCard Review, and says, “Here’s a review of a credit card I actually like.”


Real Estate

  • FMF from Free Money Finance presents How to Hire a Home Inspector, and says, “When you buy a home, you need to be sure you hire a good home inspector to identify any potential problems. This post gives tips on how to do this.”
  • Jeff Rose from Good Financial Cents presents Should You Upgrade to a Larger Home”, and says, ”
    In many markets, home owners are looking at homes in the next price range up as good buys, since foreclosures and a slow market are resulting in good deals. But, as tempting as it is to upgrade to a larger home, is it really a good idea? Here are some things to consider before upgrading to a larger home.”
  • Rob from Two Wise Acres presents 3 Things to Avoid When Buying a Home, and says, “When buying a home, it’s critical that you avoid these three credit mistakes.”
  • ctreit from Money Obedience presents Do renters really save money in the end?.


Taxes

  • pkamp3 from Don’t Quit Your Day Job… presents Tax Incidence, and says, “Who really pays for a tax when it is enacted? If the government enacts a new tax on washing machines, is the entire tax on Maytag? The consumer? Cameron Daniels breaks down the details.”


A budget lets your spouse see your values and priorities in a tangible way.

A budget forces you to communicate not just about your life goals, but also about your daily financial preferences.

- from page 16 of The Secret to a Successful Budget by Craig Ford


Career

  • Kristina from Dinks Finance presents A DINK in The Office, and says, “As a married or unmarried employee with no children, are you treated differently than your colleagues with kids?”
  • Nicole from Nicole and Maggie: Grumpy Rumblings presents Why did you go to graduate school?, and says, “Nicole and Maggie discuss reasons for graduate school and how sometimes we’re directed into a career for the right reasons and sometimes we fall into it for the wrong reasons. But it turns out OK anyway (or maybe it doesn’t, but you can always change your mind).”


Economy

  • Bret from Hope to Prosper presents Trillion Dollar Public Pension Shortfall, and says, “An article in the New York Times stated that there is a $1 Trillion dollar public pension shortfall. Despite repeated denials from PERS and public employee unions, public pensions are in big trouble.”
  • JLP from AllFinancialMatters.com presents Democrats, Republicans, and the Federal Debt Since 1979, and says, “Though the title may suggest it, this is not a “political” post.”


Budgeting is a process, not an event.

You won’t wake up tomorrow with an effective budget. Instead, you will start with a decent budget that later becomes a good budget. Eventually, it is a great budget.

- from page 16 of The Secret to a Successful Budget by Craig Ford


Other


The Secret to a Successful Budget eBook Giveaway!

       As promised, I’m giving away two free copies of The Secret to a Successful Budget courtesy of Craig. To enter, all you need to do is leave a comment on this post telling me how budgeting has helped you OR your biggest struggle with budgeting. I’ll use random.org to select two winners tomorrow evening (August 24, 2010) at 5:00 PM EDT so be sure to enter by then!!! I’ll update this post to announce the winners, but use a valid email address when you comment so I can reach you if you win. Good luck!

[Update: Laura has won a free copy of The Secret to a Successful Budget! Congratulations!!!]


The Secret to a Successful Budget eBook

Conformed or Transformed?

Corey —  June 15, 2010 — 1 Comment

       If someone were to look at your bank or credit card statement, would they see a Christian? Are the choices you make still following the pattern of the world? Or have you been transformed by the renewing of your mind and presented your body (and your money) as a sacrifice to God?

       1 Therefore I urge you, brothers, by the mercies of God, to present your bodies a living sacrifice, holy, acceptable to God, which is your spiritual service. 2 Don’t be conformed to this world, but be transformed by the renewing of your mind, so that you may prove what is the good, well-pleasing, and perfect will of God.

Romans 12:1-2 (WEB)



       These verses encourage us to live changed lives in light of God’s overflowing mercy toward us. I would not begin to imply that it relates specifically to finances. However, the choices you make with the money God has given you can clearly reflect where your heart is focused. When you make your money decisions are you thinking in terms of God’s will, or are you continuing in the patterns of the world?

       This doesn’t mean that you are perfectly holy and good if your account statements show that you give all your money away (or even live on very little and give the rest away). Outward appearances are not necessarily an indication of the heart. Jesus spent most of His time teaching this exact idea. If you do not have God’s love and your actions are not motivated by that same love, then your pious actions will help you in no way.

       The challenge I want to present to you (and myself) is simply this: In your earning, spending, and managing money, how are you presenting yourself as a sacrifice to God and seeking His will? In other words, are your money decisions in alignment with God’s principles and values?

       It’s very easy to live just as the rest of the world does. In many ways, Christians are indistinguishable from non-Christians. But we are called to live differently. This doesn’t necessarily mean rejecting everything the world does, but it will often look that way. Rather, we must give everything over to God (as a response to the gift of salvation) and seek His will.

       A transformed life may not look very different from the world. Much personal finance advice is good regardless of your faith (though the motivations may be quite different). On the other hand, it may be the exact opposite of the world’s ways. Giving is one example. It simply doesn’t make sense if you look only at the numbers.

       How your life will look is not the point. A transformed life could look different from one Christian to another (though there will be some similarities). The point is whether or not you are seeking that transformed life, seeking God’s will, and striving to persevere until the end. A life of following Jesus is not marked by the absence of sin. It is marked by striving against sin, by denying your own will, by giving up those things that keep you from God, and by taking up your cross each day. If you’re willing to do that (you’ve counted the cost), then God will transform your mind and your life as you grow in the likeness of Christ.

       So take time (at least each month, if not more frequently) to ask yourself this question as you review your finances: Am I following Jesus, or am I following the world?

       I recently discovered Jacob at Early Retirement Extreme. I’m not sure how I got there – maybe from this post at Monevator – but I’m glad I did.

       Jacob is a bit of an anomaly in our culture – he’s a retired 34 year old, but he’s not rich (based on typical standards). He was able to retire early by saving 70-80% of his income for five years. He did not make a ton of money during that time. I think his salary was around $40,000-50,000/year while he was saving. He simply lived very frugally and saved the rest. Now, he still lives frugally but no longer needs to work to cover his expenses. Despite the fact that he doesn’t need to work, he does – and he makes enough to cover his expenses.

Cheap Living

       Jacob lives on about $7,000 per year. He’s able to do this because he’s learned to live cheaply – especially when it comes to the major areas of most budgets (housing, transportation, food, etc.). He doesn’t have a car, finds cheap/free forms of entertainment, and eats healthy meals with little to no meat. He currently lives in an RV with his wife, but he admits it’s not a necessary choice to duplicate his results.

Should We Retire Extremely Early?

       I don’t highlight Jacob as an example to be followed for extreme early retirement. I don’t think early retirement as a goal in and of itself as admirable or desirable for a Christian. (I also don’t dismiss it as a goal because I can see how God could use a person in this situation for full-time volunteer work or missionary work – a self-funded missionary if you will.) I’m highlighting Jacob and his choices because he offers insights that Christians can use to question the cultural norms and make choices that can lead to extreme generosity.

       For example, Jacob’s views on housing, insurance, and “sacrifice” greatly coincide with my own. (I don’t really agree with him on investing, but that’s irrelevant.) He doesn’t see money as necessary to have fun or live comfortably. He avoids waste. He learns new skills so he can make and do more stuff himself. His approach to living cheaply so he could retire extremely early can be adapted by Christians who want to give generously.

       If you want to get a better feeling for what Jacob did and why, check out his frequently asked questions, about himself page, and about Early Retirement Extreme. You can also see his best posts of 2008 and 2009.

How Can We Use Jacob’s Examples to Honor God?

       What I ask is that you read his articles from the perspective of how they can help you better serve God in your finances. Unless God has a specific purpose for you retiring early, that’s probably not a goal that will glorify Him. But we can use the same ideas Jacob used to enable extreme generosity in our lives by reducing our expenses and questioning the cultural norms. If you find something particularly insightful or helpful on his website, please feel free to share it in the comments below.