Money Mistakes Ministers Make and How to Avoid Them
As a pastor, you try to take good care of your church’s finances. Are you taking the same care with your own?
Financial success has little to do with how much we make and everything to do with how much we spend. Ironically, despite a growing emphasis on wise financial stewardship in today’s church culture, it is our pastors who most often find themselves lacking sufficient financial resources to meet their needs as they age.
When it comes to managing money, ministers generally do two things well: tithing and giving. But frequently, other important areas fail to receive proper attention.
I have had the privilege of consulting with ministers on personal financial management for nearly 15 years. In that time, I’ve noticed a pattern of well-intentioned mistakes. Some may surprise you.
Mistake No. 1: Short-Term Thinking
A recent study by the Employee Benefit Research Institute found that 36 percent of American workers have less than $1,000 saved for retirement.1
The most detrimental mistake in financial management is a short-term perspective: thinking about now, next week, next month, or next year. In contrast, long-term thinking starts with the future and works its way back to the present. If you are in your 20s or 30s, thinking this way can be a challenge. Answer this: What can I do now to provide for my future self and my spouse’s future self? Putting aside a little bit early in life goes much further than delaying.
Mistake No. 2: Focusing Only on Debt Reduction
Although church culture tends to emphasize debt reduction and avoidance, it is only one aspect of good financial management. The big picture is net worth. Net worth is the sum of your total assets minus total debts. You can build net worth in two ways: reducing your debt, and increasing your assets.
When deciding which debts to pay off, consider the amount of interest accruing. For example, it’s wise to eliminate high-interest credit card debt. (For additional debt reduction strategies, see sidebar, “Overcoming Debt.”) However, too many people focus on becoming debt free and forget about increasing assets.
One of the best ways to increase assets is by saving. Some wrongly feel they can’t effectively save until they’ve eliminated all debt. By waiting, you may lose out on the potential growth of your savings. So while you may not be able to eliminate every debt right now, you should start saving now to build net worth.
Paradoxically, certain types of debt can have a strategic place in building net worth as long as what you are gaining is more than what you are paying off, and you have favorable low interest rates locked in. A mortgage is a perfect example, which brings us to the third mistake.
Mistake No. 3: Paying Off the Mortgage Too Soon
After eliminating credit cards, vehicles, and student loans, some believe they should eliminate the mortgage next. A better approach is to evaluate the optimal time to reduce a mortgage in light of building net worth. I have worked with ministers who put all their extra funds toward paying off their mortgage, only to find themselves using home equity loans and/or reverse mortgages to finance their retirement. After the mortgage was paid off, they had much less time to accumulate retirement savings and were forced to tap into their home equity. It’s fine to pay off your mortgage, but not at the expense of building net worth.
Over the past several years, mortgage rates have dropped, making it more favorable to the borrower. These lower rates call for a different perspective than we have traditionally been taught. By making minimum payments on your mortgage, you can have the capability to save more each month, putting you in a better financial position for retirement.
For example, compare a 30-year mortgage loan at a 4.5 percent interest rate to a low-risk investment option such as bonds or a fixed-income fund inside of a retirement plan. After factoring in historical earnings and tax deductions, you could expect to make 4.5 percent, or possibly more, from such an investment. Over 30 years, your investment could yield an amount greater than or equal to the amount of total interest you’d pay on your mortgage. This example illustrates one way to balance debt repayment with asset building to effectively increase overall net worth.
Keep in mind it is crucial to know how much house you can afford. A general rule of thumb is to spend no more than 30 percent of your total gross monthly income on your mortgage payment, including property tax and insurance. However, I recommend no more than 25 percent to maximize monthly cash flow for saving.
At this point, you may be saying, “Hold up. It’s all well and good to talk about building net worth and saving for the future, but right now I’ve got kids, bills, and a minister’s salary. How can I make it happen?”
I’m glad you asked.
Mistake No. 4: No Budget
No personal finance article would be complete without mentioning budgets. Nine out of 10 people fail to grasp the reason for budgeting — to spend modestly enough to have money left over to save.
Identify your spending by listing every single expense, focusing especially on the small ones. I once read a fortune cookie message that stuck with me. It said, “Beware of little expenses. Small leaks will sink great ships.”
Two bucks here, four bucks there never seems like much, but it adds up quickly. To identify your small “leaks,” track every expense for a few weeks.
Once you’ve pinpointed where your money goes, ask: Do I have anything left over? Most people find they don’t. At that point, they have two choices. Ask the church board for a raise — an unrealistic option for many — or reduce spending.
What are the things you need in your life, and what things can you live without? What are things you may be able to enjoy in a couple of years but not now? Are you willing to make a lifestyle change today to benefit your family’s future? You can still enjoy life, just in a manner that costs less.
Consider shopping for better prices on car and home insurance, as well as services you use frequently. This is where pastors often have an advantage because they can draw from the pool of professionals in their churches for advice and options.
In addition, look into refinancing your mortgage. When the goal is increasing monthly cash flow, choose a 30-year term rather than a 15-year mortgage. This puts your monthly obligation to the lowest level so you can build up cash and still pay extra when you desire.
For creative ideas to build savings from limited resources, I recommend the free eBook 52 Ways to Save, available at blog.agfinancial.org/52-ways-to-save/.
Mistake No. 5: Wrong Priorities
Once you’ve reduced spending and freed up cash, the next question is: What should I save for? Most people improperly prioritize their savings because of short-term thinking. (See Mistake No. 1.) I recommend allocating extra cash in the following order for optimal long-term benefit:
Create an emergency fund. The purposes of this fund are reducing your stress and mitigating financial risk. Use this bucket to set aside insurance deductibles, out-of-pocket health or dental expenses, and home and car maintenance. At minimum, build up three to six months of income in a savings account you can access easily. Don’t worry about earning high interest on these funds.
Create a retirement fund. As of last year, Assemblies of God ministers ages 61 to 70 had an average of just over $90,000 in their 403(b) retirement accounts.2 Assuming an earning rate of 4 percent, that amount will provide a slim $12,000 a year for just nine years. What’s more, younger ministers ages 18 to 30 had an average of just under $4,300, putting them on the exact same trajectory to be where their older peers are now, unless they begin saving more. No matter your age, I encourage contributing the maximum amount allowed by law to your retirement account each year. However, even if you’re not able to do that, the first savings you have after building an emergency fund should go toward retirement.
Create an opportunity fund. Common advice is to tithe 10 percent, save 10 percent, and live on 80 percent. Don’t let these ratios limit you. At a certain point, if you keep building up cash, it transforms from an emergency fund to an opportunity fund. Maybe you’d like to purchase a rental home, complete a home renovation, or take a short-term missions trip. By making saving more important than spending, you’ll be able to take advantage of such opportunities.
How much do I need to have for emergencies? What is my current net worth? How much will I need to save for retirement? For answers to these questions and others, check out the free financial calculators at agfinancial.org/calculators/.
Mistake No. 6: Saving for Kids’ College
As parents, we want to provide for our children and set them up for success. Although well intentioned, one of the most common mistakes parents make is saving for their kids’ education rather than their own retirement. Truly, the best financial blessing you can give your children is a secure future for you and your spouse. I’ve never spoken with a minister who intends to rely on his or her children for financial support in their senior years. Yet I have seen many who must.
The only point at which I suggest saving for kids’ education — or putting extra toward a mortgage, for that matter — is when a family is first doing two things: maintaining a healthy cash reserve, and maxing out annual contributions to retirement accounts.
You may ask, “What am I supposed to do — stand by and watch my child sink beneath a wave of student loan debt?”
If you save properly for yourself and your spouse, especially early in life, you can be in a position to more effectively help your children when they reach college age while teaching them about money at the same time.
Here is one idea: Rather than simply paying for their schooling, have them apply for scholarships, grants, and student loans. Keep in mind that many loans are interest-free while they’re in school. Continue to save during that time, investing the money so it can earn interest during those years. Then, upon graduation, offer to pay part or all of their debt as a loan to them. This lets them learn the discipline of paying a debt while allowing you to control the terms for their benefit. Give them as long as you want to repay the loan, at the interest rate you set. As time goes on, you can forgive some or all of the remaining debt, as a gift to your child, up to the maximum annual gift amount allowed by law.
Related to this topic is the importance of training our children to value saving over spending from an early age. It sets them up for financial success as adults. Have your kids save portions of their allowance and money they receive from relatives. When they wish to buy something, consider making them wait several weeks before they purchase the desired item. Intentionally delaying gratification is an effective way to help kids learn the difference between needs and wants and develop long-term thinking. In addition, as it is age-appropriate, involve kids in family financial discussions. Explain to them how and why you tithe, save, and budget.
Mistake No. 7: No Tax Knowledge
Every minister should know how to fill out a tax return, even if an accountant does it for you. Ask questions and let an expert explain the process to you. Understand the system, your tax rate, and deductions for which you qualify.
Stay informed of changes in tax laws that affect you. One recent example involves the Minister’s Housing Allowance a federal court struck down last year as an unconstitutional preference for religion. This ruling affected the states of Wisconsin, Illinois, and Indiana and has been appealed. You can follow this case, stay informed of other ministry-related tax changes, and obtain the Ministers Tax Guide, prepared annually by Richard R. Hammar, at agfinancial.org.
Because tax deductions can fluctuate, they should not influence purchasing decisions. It is safest to view money received from deductions or credits as a bonus to help build your cash bucket.
Mistake No. 8: Chasing Returns
Over the course of hundreds of conversations with pastors, a common pattern I’ve observed is the human tendency to believe in the fallacy of greater returns with little risk. If a different investment is paying a higher rate, we chase it. Before investing in anything, ask two questions:
Do I understand the investment? A big mistake is choosing investments based on who is having success with it and what they know, rather than what you know. It may be fine to invest, but do you understand it? Never put your money in something you don’t understand.
Do I understand the risk? In the investment world, risk and reward are directly related. If one investment promises to pay more than another, ask how it is able to do that. In other words, what is the underlying risk? If I’m making 10 percent or 20 percent, there’s a good chance I could lose that much as well. Everyone is fine making money, but what happens to your emotions when you lose it? Answering that question will tell you something about your risk tolerance. Wise financial stewards do not invest without regard for risk. Even investments that offer guaranteed returns may have a catch. Often, such guarantees mean your funds will be locked up with hefty penalties if you try to move them. Do your research first.
It’s my desire to see every minister thrive financially, both now and during retirement. Switching from short-term to long-term thinking is the first step — one everyone can take. I encourage you to make saving a priority. Your future self will thank you.
1. Nanci Hellmich, “Retirement: A third have less than $1,000 put away,” USA Today, March 18, 2014. Found at http://www.usatoday.com/story/money/personalfinance/2014/03/18/retirement-confidence-survey-savings/6432241 (accessed March 21, 2014).
2. Statistics are based on the AG 403(b) Retirement Plan account balances as of December 31, 2013.