Higher Rock Education - Economics Blog

Wednesday, December 28, 2016
Happy New Year! I enjoy the New Year. It is a time to take stock in all my blessings, and reevaluate ways I can improve my life. Like many, every year I set goals for myself and make at least one New Year's resolution. Like almost everyone, more often than not, my resolutions are broken within a month. Many of us set resolutions related to our finances. It may be to get out of debt, or to save more. Many financial planners, most notably, Dave Ramsey, advocate having no personal debt (except mortgages). According to an article by Erin El Issa published in NerdWallet the average American family owes $93,638, excluding mortgages. This is almost twice as much as the average household income of $55,775 in 2015. (The Census Bureau will publish 2016 figures in September 2017.)

The Bible teaches us that we cannot serve God and money, Matt. 6:19-24. Too much debt can cause stress that impacts our health and families. Most of us know someone who has suffered from losing a job and not having enough money to meet all their obligations. The debt enslaves you, much like the ancient Israelites agreed to become slaves to the pharaoh of Egypt when they were starving. Usury, charging a high interest rate or ensnaring people with debt, was forbidden by the Israelites. This is why every seven years the Israelites had a Year of the Jubilee, where people were relieved of their debt. The fundamental lesson is that we are not to make each other slaves to debt as the ancient Israelites were in Egypt.

Most Christians accept debt as a tool that should be used effectively and with caution. Much is written in the Bible about the abuse of debt because it prevents us from serving and loving our neighbor. However, I could find nothing in Scripture that forbids the responsible use of debt to build a business or purchase a home. The question is how much is too much. The answer is when we become slaves to the debt. When this happens, we love money and what it can buy us more than we love God. I believe many families and our nation have become enslaved by our debt.

In Islam, there is a belief that debt is evil and should be avoided. I asked a recently retired Pakistani teacher to write of her struggles in deciding how to invest her retirement. Her conviction to avoid debt has actually placed her in a more tenuous position since she is not permitted to put her money in savings. (When you deposit your money in savings, you are lending your money to a bank.) Instead, she considers placing her money in some investment funds that help small businesses. Musharhah are Islamic funds that invest in businesses usually managed by an Islamic bank. It carries the risk of an equity owner where no money is paid unless the business earns a profit. Here is what she wrote about her experience:

Retiring after 30 years of service as a teacher in a local Government Model School in Aligarh, Pakistan has been the biggest achievement in my life. I gained much pleasure, relief and comfort from becoming a senior faculty member where I taught. I made many great friends with whom I shared many wonderful and memorable experiences. I was able to save a retirement fund that now has to support me. I hope to fetch another job to stay busy and keep earning. However, it will be hard because I am a 60 year old single woman with a cardiac medical condition. I must use my retirement fund wisely because it alone may not be enough on its own for the lifestyle I am used to by now.

I must manage my retirement fund to pay my medical expenses, daily groceries, and of course the house rent. What options do I have? As a practicing Muslim, I must avoid interest baring investments. My faith requires that I opt for a strictly profit and loss sharing arrangement on my investment. An investment opportunity that does not account for losses between all the transacting parties is not considered Halal or permissible in Islam. No matter what proportion of loss is shared, based on the agreed arrangement, the element of risk and its associated losses is an integral part of every business or transaction in Islam. I am permitted to invest in Mudarabah and Musharkah based Islamic funds. Mudarabah and Musharkah are business sharing arrangements or partnerships between banks and consumers or traders or enterprises for that matter. I can be a part of this arrangement to finance a small business or to start a small business of my own. I would be able to earn profit on a pre-defined or market free float arrangement while also baring the risks associated with it. This is a lot riskier than interest based investments practiced globally. I can lose my principal invested too, but driven by the practices of my religion, I must only go for permissible investment opportunities. Interest and interest backed financing promotes moral hazards in the economy and I must not be a party to that. Insurance options like Takaful can also be considered to ensure my medical, property, and travel.

I must choose wisely. Perhaps I should contact and take appointment from the experts at Islamic banks for guidance. They can brief me better in managing my funds.

Both Christianity and Islam recognize the harm debt can cause. Islam forbids it to the point followers must invest in riskier investments. The lure of getting too much into debt is just too great. Christians are not forbidden to borrow money, but they are warned that too much debt can cause much stress and ultimately cause a great deal of hardship. The first step before choosing to borrow money to purchase an item is to evaluate the true cost of the good or service. Too often we think of the price as being the price tag on an item. It is more. That cost includes the interest you must pay. It also includes the opportunity cost resulting from giving up the use of the money to acquire another item or invest. Ask yourself, "Is it still worth the price? Do I have to give up buying something else if I purchase this item?" (See our lesson, Opportunity Cost – The Cost of Every Decision.)

Many people are slaves to debt. Seek help if you or a loved one fall into this category. There are many suggested strategies on-line. Dave Ramsey has written several books that include the subject of debt consolidation. He also offers a course. This link is a good place to start: Dave Ramsey – Debt.

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