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 never find myself falling short on ideas for articles on Provident Planning. Personal finance includes so many different areas that the topics are endless. Budgeting (and every area you might spend money), retirement, investing, insurance, estate planning, taxes, education, and strategies to increase your income are all fair game.

       I tend to want to start by writing about the basics and build up from there. I’d like to see Provident Planning become a place where people can learn most everything they need to make smart personal finance decisions that will honor God. But that takes time and it can be really boring, too. And there’s information on the basics everywhere. (I think the basics are essential though. They’ll get you 90% of the way and they’re all most people ever really need.)

       I want to be useful to you all, my readers, while I’m building up the material on this website. So I’m asking you: What are your money questions? They can be questions about personal finance in the Bible or just personal finance in general. Your questions will make the articles I write more interesting and relevant for you.

       If you have a question or topic you’d like to see me write about, you can leave a comment on this post or you can contact me directly. Either way, I’ll respond to you and write an article to cover the questions you have. Sound like a good deal? Great! Now just start sending in those questions!!!

Amish Ingenuity

Corey —  June 10, 2010 — 4 Comments

       Living in “Amish country” often affords me the privilege of seeing some interesting sights. Take this one for instance:

Amish Ingenuity

       And in case you can’t tell what’s wrong with the picture, I’ve zoomed in and highlight the problem for you:

       This is an example of the dangers of extreme frugality (frugality at the expense of safety). I hope this was just a temporary fix!

       This was just an interesting picture I wanted to share with you all. Hope you got a laugh like I did! :)

       And yes, the Amish do drive tractors occasionally. Some even own tractors, but those tractors won’t have rubber wheels. Instead, they use steel wheels. I’m guessing this guy was borrowing the John Deere from a neighbor.

       Previously, I’ve talked about God’s Provident Plan in detail. I’ve looked at what His plan is for our finances as Christians. If you look around on the site long, you’ll see a free e-book titled Contentment Is Wealth and you’ll find a Bible study series on work as well. I spent a lot of time looking at contentment and work up front because they play a very important role in God’s Provident Plan.

The Engine That Makes It All Go

       Contentment in Christ and hard work form the engine that make all the other parts of God’s Provident Plan possible. Together, these two principles are the driving force that give you the “extra” that you need to follow God’s plan for your finances. Contentment in Christ helps you spend less and less money on your own wants and needs as you realize what’s truly important in life. You no longer see Stuff as desirable or Money as a goal in itself. Instead, the Spirit gives you a burning passion to help others – especially the poor. Hard work helps you earn more income so you’ll have more money to manage according to God’s principles and to give in His name. Together they give you the momentum you need to walk faithfully with God in your finances.

       A budget has three main parts: income, expenses, and what’s left over. If you increase your income, you increase what’s left over. If you decrease your expenses, you also increase what’s left over. When you follows God’s plan of hard work and contentment in Christ, you do both at the same time – drastically increasing what’s left over. This leaves you with more to give to those in need. That’s why contentment and hard work are the foundation of the Provident Plan. Without them, you won’t have much at all to manage well and give in the name of the Lord.

Our True Motivation

       While anyone could apply these principles and find success, there’s a drastic difference between a Christian finding contentment in Christ and working for God and a non-Christian who wants to spend less and earn more. The non-Christian’s motivation can only come from their desire to achieve those goals. If they fail to reach their goals, it can be a crushing blow to their personal value and self-esteem. And some who actually reach their goals find themselves lost and without purpose because they based their identity on their attempt to achieve those goals.

       This doesn’t happen for the Christian who makes it their goal to follow God’s Provident Plan. Our value and identity come from being children of God – not in what we do or fail to do. While we can stray from the path, our motivation comes through God’s Holy Spirit and not the goals we set for ourselves or our own efforts. We rely not on our own power – but on God’s. We don’t do it for our own glory or satisfaction – we do it for God and others.

       I wish I had a better way to describe the difference between a Christian applying God’s principles and a non-Christian attempting to do the same. If you have a good example or the Spirit has given you the words to make this distinction, please leave a comment and share what you can.

       In our last Investing Basics article, we talked about bonds. Today we’ll discuss mutual funds. Later, we’ll look at options, futures, and short-term savings options.

What Is a Mutual Fund?

       A mutual fund is simply a portfolio of securities. Multiple investors go in together to provide the money needed to buy those securities. Then a professional fund manager chooses which securities the fund will invest in – often within a set of guidelines called the fund’s “objective”.

       Basically, mutual funds provide diversification at a low cost for investors. Many mutual funds own thousands of securities. It would be extremely expensive for an individual to own that many securities on their own. Transaction costs and higher prices (due to buying small quantities) make it impossible for all but the very richest of people to duplicate the massive number of securities in a mutual fund.

       When you buy a mutual fund, you’re buying an interest in the fund’s portfolio of securities. If you’re buying directly from the mutual fund company, you’ll pay a price that represents the actual value of the securities in the portfolio. If you buy from other investors, you might pay a higher or lower price than the actual value of the securities in the portfolio.

       If the securities in the portfolio provide dividends, capital gains, or interest, the mutual fund company will pass these along to you. However, mutual funds still cost money to maintain and operate. These expenses are covered by the assets in the mutual fund, so your total return will be lowered by these expenses. For this reason, it’s important to choose mutual funds that have low expenses.

What’s in a Mutual Fund?

       Mutual funds can hold just about any kind of security you can imagine. There are stock mutual funds, bond mutual funds, and mutual funds that invest in stocks and bonds. There are mutual funds that use options, those that invest in commodities, and even mutual funds that own other mutual funds. It would take several articles to go through all the different types of mutual funds available.

       For right now, you don’t need to know about every little detail of every single type of mutual fund available. What you need to remember is that mutual funds can be a cost-effective way for you to diversify your investments across thousands and thousands of securities. And that’s a good thing.

There’s Much More to Learn about Mutual Funds

       This is just the tip of the mutual fund iceberg. I haven’t explained net asset value (NAV), expense ratios, loads, turnover, 12b-1 fees, open-end funds, closed-end funds, and so much more. But those are things for the next level. If you want to keep learning about investing, make sure you sign up for free updates to Provident Planning!

       Last week, I talked about the identifying your values. The next step is to examine and evaluate your values. You’ll want to make sure the list you’ve come up with reflects your true values. Then you can start to evaluate your life and begin living according to your values.

Examine Your Values

       Now that you have your prioritized list of personal values, it’s time to examine these values closely. Are there any that you feel do not fit? Are there any you’d like to change? This can mean dropping a value, adding a value, or tweaking your priorities. Your values may change over time, so feel free to reexamine this list as needed.

       After examining my prioritized list of values, I decided to drop 3 of the values I had listed leaving me with 10. Here’s the list of my top ten values in order of importance:

      Paul’s Top 10 Values

  1. Faith & Relationship with God
  2. Devotion to Family
  3. Compassion & Love
  4. Giving
  5. Integrity
  6. Curiosity & Wonder
  7. Contentment & Simplicity
  8. Fun & Youthfulness
  9. Prudence & Wisdom
  10. Balance

Evaluate How Your Values Should Affect Your Life

       Finally, it’s time to consider how your specific list of values should affect your life. If these are the things that are most important to you, how should they guide your decisions? You might feel like you’re not following your values very well at this point in your life, but you have the ability to change that starting now.

       With your list of values in hand, you can evaluate each decision with intelligence and confidence. You just have to ask yourself: What should I do in this situation if these are my guiding principles in life? Apply this method to every area of your life, and you’ll see your actions becoming more aligned with your values. As your situation changes, you might need to revise your values. Adapting to changes in your life will be crucial to your success in accomplishing your goals and living with integrity.

       Now that you have your list of personal values, you can proceed with evaluating and planning your personal finances. These values should help you in making the necessary decisions about your goals, priorities, necessities, and the things you’re willing to sacrifice. All of these are important in reaching a financial future that aligns with your values.

       This entire process is especially important for Christians. We must strive to live according to the example we have in Jesus. Our values should reflect that fact – and our lives should reflect Godly values. From my list of values, I can see some areas where I am following God closely and others where I need to make improvements.

       Life as a Christian is about denying yourself – your wants and desires – and following God’s will instead of your own. How do your values align with God’s will for your life? And are you living out those values in your day-to-day actions? Remember that becoming like Christ does not happen overnight. It’s a process – a lifelong process. And we won’t fully attain the goal until we are reunited with Him in Heaven.

Your Take

       Now it’s time for you to share your thoughts on this process of identifying and examining your values. Did you find the process helpful? How would you improve it? Did writing down your values open your eyes to areas of your life that are not congruent with your values? Share your thoughts and stories in the comments and let us know!

       You’ve heard that you should be diversified, but do you know why? Diversification reduces your risk and your volatility. Here’s how.

Diversification Reduces Risk

       This aspect of diversification is simple. By spreading your portfolio out among several investments, you reduce the total amount committed to any one investment. If you evenly split your portfolio between 5 investments and one goes down the drain, you’ve still got your other 4 investments to fall back on. If you’d put everything in that one bad investment, you would have nothing left.

       In this sense, diversification is putting your eggs in different baskets. By not betting everything on one investment, you lessen the risk of losing everything all at once.

Diversification Reduces Volatility

       Volatility is that nasty stuff that makes your investments go up and down until you can’t stand it anymore. But you can reduce the volatility of your portfolio by diversifying among investments that don’t all move the same. (Technically, you would say you’re investing in assets that are not “correlated”. It’s possible to be very diversified without reducing volatility. We’ll assume that your diversified investments include assets that are not correlated.)

       When one investment goes up, another might be going down. Your portfolio will do something in between. An illustration can help you see how this works. We’ll use just two investments in our sample portfolios to keep this simple. If your investments move in the exact same way, diversification won’t help. This is because your investments are correlated. “Perfect correlation” looks like this:

No Diversification (Perfect Correlation)

       As you can see, investments A and B move in lock-step. When one goes up, so does the other. This means your portfolio will also move in exactly the same way. You haven’t reduced your volatility.

       The best scenario possible is that your investments are perfectly non-correlated. This means that one always goes up when the other goes down and vice versa. If your portfolio was invested in two investments like this, you’d get a constant return all the time. “Perfect non-correlation” looks like this:

Complete Diversification (Perfect Non-correlation)

       The only problem is you’ll never find a real investment C and D. Perfect non-correlation doesn’t exist in the real world. The best we can do is “non-correlation”. In this case, some investments generally move opposite of others (but not always) OR they generally move the same direction (but not always). Here’s what non-correlation looks like:

Some Diversification (Non-correlation)

       An example of investments E and F might be stocks and bonds. Generally, they don’t move together but sometimes they do. A real-world portfolio is going to look something like the dotted line in that last chart. It’ll have some volatility, but not quite as much as its individual components. This is the goal of good diversification – spreading out risk while using assets that aren’t correlated.

Good Diversification Means Investing in Different Types of Assets

       As I pointed out before, you can be “diversified” but still not reduce your volatility. If you invest in ten different banks but the financial industry goes down, your portfolio is going to go down despite the fact that you’ve “diversified” your money by not putting it all in one stock.

       But if you want good diversification – the kind that reduces your volatility – then you need to invest in different kinds of assets. You’ll want stocks from different industries and different countries, large companies and small companies, growth stocks and value stocks. Then you’ll want assets that are different than stocks – real estate, bonds, commodities, etc. By mixing all of these together, you’ll have a portfolio that reduces your risk and your volatility at the same time.

       If you want to see what a diversified portfolio might look like, check out my free portfolio allocation calculator. It shows you how to split up your investments using Vanguard mutual funds (because that’s the cheapest, most effective way to get good diversification easily). Try it out!