Debt: What’s It to You? - Questions for Bill McKinney, vice president, Member and Market Development

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Bill McKinney

Education: BA in history, Carleton College; MBA in finance and strategy, University of Minnesota.
Volunteering/Outreach: On the board of directors for the Minnesota Children’s Museum and Admission Possible, a nonprofit helping low-income students gain admission to college.

Q: What is your role with Thrivent Financial for Lutherans and its affiliates?
A: I work on new business development—finding ways we can meet new and different member needs. For example, I helped create the Thrivent Financial Advice Center, a telephone-based means for meeting with members. I’m also working on a variety of debt solution programs with Thrivent Financial Bank.

Q: Is the debt struggle growing in the U.S.?
A: As a nation, it’s clear we have more consumer debt. We also have less equity in our homes than previous generations. A number of things have played into this, including the rapid increase in real estate prices during the first half of this decade. People really were stretching to get houses. Higher costs for heating the house and running the car can get you into debt. And people without adequate health care or with significant medical bills often find themselves in debt.

Q: How much debt is too much?
A: It depends on a number of factors, including your age, how close you are to retirement and what’s happening with your income. The amount of debt that’s OK is what you can handle and feel good about. It doesn’t keep you up at night, and it isn’t going to cause serious issues if your income decreases suddenly. For some people, the answer is zero.

Q: Isn’t it hard to not have any debt?
A: If you’re going to own a home, in most areas of the country, you’re going to have debt. But we have to differentiate between “good debt” and “bad debt.” A mortgage would be called good debt because it’s tied to an asset that can increase in value. Conversely, car loans and credit card debt would be considered bad debt. But it’s important to keep even good debt at a manageable level.

Q: What’s the easiest way to get out of debt?
A: Take a hard look at your budget, especially your expenses, and find ways to free up significant money. First, focus on your home. If you can get by in a smaller home or put off major remodeling projects, you not only keep your mortgage down but also reduce other expenses like heating, cooling and homeowner’s insurance. Next, consider your transportation expenses. Buying a used car instead of new or starting to carpool are a few ways to save. If you don’t know where to start, get help. Thrivent Financial Bank has a debt guide that can help you find ways to make debt a healthy part of your financial life. Another option is to find a competent credit counselor. Or, go to www.thriventfinancialfitnessclub.com for a debt roll-down calculator and other tools.

Q: How can I avoid debt in the first place?
A: Practice good savings habits; avoid credit card use. Many people use rewards credit cards, which can be a great tool. But remember: Experts say people typically spend 15 percent to 20 percent more when they use a credit card rather than cash. Also, interest and fees can eat up the benefits if you’re late on a payment or carry a balance on the card. Finally, make sure you have an emergency savings account so that when someone gets sick, the furnace goes out or the roof needs replacing, you can use cash instead of a credit card.

Q: What impact does debt have on savings?
A: Good debt is often associated with things that can go up in value, such as a mortgage or a loan for college. In these cases, taking on reasonable levels of debt can help improve your overall financial situation. Bad debt would include car loans, which pay for a depreciating asset (something that is losing value), and credit-card debt. All of the interest paid on bad debt is considered negative savings—it’s money not going into a savings account. Maybe you’re saving 5 percent a month, but if you’re paying interest on a credit card, it counts against what you’re putting into the bank.

Q: What do people misunderstand most about debt?
A: One of the riskiest things many of us do is to take on debt in a “best case” mindset.  When we take out a mortgage, for example, we might be stretching a little, but we assume that our income will go up and life won’t bring surprises. If something does happen—our employer issues layoffs, a family member gets sick— our small stretch becomes unmanageable. It’s important to consider how you’ll make your loan payments if something unexpected happens. To do this, you might plan an annual “financial fire drill.” Sit down with your bills and your family, and talk about what would happen if a financial emergency arose. What expenses could you cut—cable, cell phone, gym? How long would your savings last? What if you had to take a 20-percent pay cut at work? This kind of exercise can help test your real comfort level with your debt.

There also are a number of misconceptions related to credit score—what impacts it and how it impacts what you pay for debt. For example, some people believe it’s a good idea to carry a balance because it helps you build credit. That’s generally not true. It’s much more beneficial to have a mortgage you pay every month and a credit card you pay off each month. Another misconception is that using a credit card for miles is a good idea. It can be for the small percentage of people who make sure they never miss a payment, never carry a balance and actually use the miles/points they earn. But if you miss on any of those three things, any gain from using that card goes out the window.

Q: We often hear that Lutherans are more frugal. Do we face the same debt struggles?
A: Anecdotally, we run into lots of Lutherans with debt issues. We may beat the averages, but there are still plenty of Lutherans who would like to have less debt than they do. 

Q: If you want to save for retirement, but you have debt, too, what should people do?
A: It depends on your situation. I would encourage people to talk to a financial representative who can help them sort through their options. If you have a 401(k) with your employer and there is a match, generally, you will want to take advantage of it. After that, it’s usually better to pay off your debt, especially high-interest credit card debt. There’s almost no way to guarantee a 15-percent to 20-percent investment return, but if you have high-interest debt, paying it off does just that. It’s almost always a no-brainer.

Q: Is one age group more in debt than another?
A: In general, younger people have more debt than older. Baby boomers have more debt than their parents did, and that continues on down. Certainly, we see more people moving into retirement with debt. But depending on how they’ve saved, debt, in itself, may not be a problem—it’s how they see it and how they manage it.

It’s a great goal to be debt-free by retirement, and there are ways to achieve that. For most people, by age 55, their kids are through college. There may be some lingering student loans they are helping pay and they may still have a home mortgage, but it can be a good time to think about buckling down and getting debt paid off. Consult a financial advisor about your debt situation, because everyone’s different.

Q: What have you done personally to improve spending habits?
A: I’ve learned that sharing some of my personal issues and goals with a group and having accountability makes a difference. One of my big goals was to have a larger cash cushion—the recommended six months of funds set aside for emergencies. I found some simple ways to help achieve that goal. We rented a storage locker when we needed more space. After three months of reminders from my friends in the Thrivent Financial Fitness Club, I took the stuff out, closed it down and got back my $70 a month. Small things can make a big difference.

It’s also important to shop your car insurance and homeowner’s insurance every few years to make sure your coverage is adequate and your rates are competitive. And if you have an emergency savings account, you can raise the deductible on your insurance, which will usually get you a lower rate.  That savings can go right back into your emergency fund, where it can earn interest for you.

Q: What role does Thrivent Financial and its affiliates play in helping people with debt?
A: We are working very hard to develop solutions at Thrivent Financial Bank, Thrivent Financial and our affiliates and in other parts of the business to help members with debt. According to the LIMRA Mid Market Consumer Finance Survey, 78 percent of American households with income under $100,000 want to eliminate or reduce their debt. We want Thrivent Financial and its affiliates to be there to help these people, and during the next six months, Thrivent Financial Bank will be introducing some new solutions. These debt solutions are not just for people who consider themselves in trouble. They are for anyone who wants to make debt a healthier part of their overall financial picture.