IV. Debt Freedom!
We have already covered the dangers of debt both fiscally and Islamically. There is one more facet to this, and that is the evils of dealing with interest. After that we will discuss how to get out of the debt and interest traps for those who are stuck in them.
The Evils of Interest
It is the only sin mentioned in the Qurʾān where Allāh (swt) tells the one who commits this sin to take notice of war from Allāh. In one narration it is mentioned that ibn Mas'ood (ra) said that such a person will be resurrected, handed a sword, and told to go fight Allāh.
In many hadith the Prophet (saw) has condemned ribaa, and declared Allāh's curse upon people who engage in it. In a saheeh hadith in Musnad of imām Ahmed it is related that a man who consumes just one dirham of ribaa while knowing it is a sin is committing a sin more than committing adultery 36 times.
The seriousness of ribaa is not something unknown to us. We're all well versed in it's evils, so I will not expand too much in this section. The problem we run into is in trying to justify using it (a whole different discussion), and being stuck in dealing with it without any hope of getting out. Inshā'Allāh we will address the latter.
Debt Counseling and Programs Available
These are very common, cash advance, payday loans, and similar types of services.
There's a variety of programs available, the vast majority of which are made to exploit the poor (kind of like the whole credit system in general).
I'm going to mainly cover the issue of people overcome with consumer debts here (i.e. excluding cars and houses). There are tons of ads on TV for debt consolidation services and the like. The main thing to know about them is that in most cases they will not benefit you, and get you further involved in dealing with interest.
Debt Consolidation. Basically, this involves taking out a new interest based loan to pay off all your debts, but with a lower overall monthly payment (and a couple of years of extra payment tacked on the end). I don't want to focus on the merits of this here, but rather that for the Muslim in debt, two things should be kept in mind. 1) This is doing one haram to try to rectify another haram, and 2) It does not fix the real issue. The real issue is that for a Muslim in debt, their perception about money and how to manage it must change. Similar to bankruptcy, if someone is really at the point of needing it, they need to consult an imām and a financial expert (or ideally an imām who is a qualified in finance) to make sure this really is their only/best course of action.
Debt Counseling. This one is interesting. I remember hearing some Muslims discussing a program created by some guy named John Cummuta, called Transforming Debt into Wealth. I found someone who tried it. You buy their online documentation for $40. The package includes a bunch of audios, a few pdf files, and a free phone consultation. The pdf files themselves do not give anything really earth shattering, just a bunch of stuff about living without debt, making your money work for you, the usual pie-in-the-sky dream everyone has of never worrying about money. To get the real meat, you have to call them up for a consultation. Here's how it works:
They go through all your finances with you, and you fill out some sheets. How much you make, your debts, your savings, interest rates, car payments, house payment, etc etc etc. Then they have a 30min-1hr call with you in which almost all you do, is tell them about how much you want to be rich, and why you want financial freedom. Make a list of all the things you would do with your money, where do you want to travel, what places do you want to visit and on and on and on. How much money do you want? How much money do you wish you made in one year, how much money do you need to retire on to live the way you want to live, it is never ending. To this point, there is never any actual debt advice given. Then you have another phone call with them where they start discussing the levels of wealth building. Debt freedom, tax breaks, retirement, etc. Now they are pushing you to needing financial counseling. The whole time they are pushing you, making you prove to them, why you deserve to be counseled by them (as if they're actually going to reject anyone). After nearly an hour of pushing and selling, they finally discuss the pricing scheme for their counseling. It should be mentioned that they guarantee you to increase your monthly income by a couple of hundred dollars by freeing up “wealth you didn't know existed” and increasing all these avenues to money if you follow their instructions.
The build up of all of this is to sell you financial counseling. How much? Good question. They save this part til the end. They have different packages ranging from debt freedom all the way through advanced wealth building. Sticker price: 8 – 14 thousand dollars for one year of 'tuition' to pay for this. So how does someone, who is in so much debt already, pay for this? How do you pay for this counseling that promises to get you out of the evil perils of credit card debt? That promises you wealth building and financial freedom? By taking a line of credit out from the John Cummuta Program at 0% interest for 6 months, and 24% after that!! They do guarantee that you will make that money back, otherwise they will give you another year of tuition for free (why would you take it at that point though? Get more coaching to pay off the additional 14k debt you have at 24% because of them?). Also I personally have serious doubts about how they would actually help you make that money aside from some type of interest earnings. As for freeing up income that you didn't know you had, what more could it be other than budgeting money, and making sure you have the correct amount of tax deductions from your paycheck so you are not withholding too much money.
I'm not discounting the fact that some people do need serious financial counseling for large amounts of debts, however, this – to me – reeked of a scam. For most people, it's simply a matter of putting in the dedication to regain control of their financial situation.
The reason I spent so much time on this though, is that the basic premise of it is what hooks people in. If you have even 5k of debt to maybe even 30-50k of debt, it can seem like the end is never coming. Seemingly reputable finance books, and programs like this try to make it look like you can all of a sudden become rich, never work another day in your life, have all this magic money in magic investments that will let you live the life of your dreams, all with some quick fix solution.
Wake up people. Get these notions out of your heads. I am here to give you the kick in the pants that you need. For every success story of someone living the pie-in-the-sky life, there's hundreds more falling further and further into financial hell with no way out. It is like KG, Kobe, and Lebron all making it to the NBA right out of high school vs. the hundreds of other kids who blew their chance at college trying to chase this dream they were told was so easily attainable.
If you want financial success, you have to work hard, control your spending, and be smart with your money. Financial success is not defined by the size of your portfolio, or the luxury level of your house and car – but it is by saving your money, being debt free, and living within the means that Allāh (swt) has blessed you with. We should never forget that whatever level of income we have it's a blessing. If we were richer, maybe we would become arrogant and destroy ourselves, or if we were poorer if we might despair too much and lose hope in Allāh. He has given us all what we have as a test, and our test is to make sure we earn it from halal and spend it on halal. And of course, as seen from the preceding sections, one of those harams is interest, and one of the things we are warned against is debt.
Debt Snowball!!! This is probably the best strategy I have come across. It is practical, takes hard work, patience, and will actually work. Of all the (limited) research I was able to do in the venues of Islamic finance, the most Islamic advice I found regarding debt is actually from an Evangelical Christian (go figure). I have to say I found it very unfortunate to find Muslims lacking in having developed personal finance programs to help get people out of debt and teaching them how to manage money. Most Muslims are too busy trying to figure out ways of making interest halal under a different name (you know.. like calling things Return of Capital [RofC] and Return on Capital [RonC] instead of 'principal' and 'interest' but thats for a later post ;) ).
This plan comes from Dave Ramsey's Total Money Makeover. Not only is the best book I have read on personal finance, it is the easiest to understand, and the most in tune with Islamic values. I had skipped this book and read other finance books due to what I read in some reviews of his book being too evangelical and quoting the Bible. However, a very dear (and anonymous) brother – may Allāh(swt) reward him – recommended this book and Ramsey's finance strategy so I decided to read it. I couldn't put it down. It was the change of pace I needed from the pie-in-the-sky stuff that I had been coming across, books trying to give you vague strategies on investments and real estate and tax evasion loopholes to make a quick buck. This book wakes you up to the reality of debt and how to change your behavior regarding money to get back on track.
Regarding the evangelical aspects of this book, I found that Ramsey makes a good case from the Bible as to why debt is looked down upon, and this is obviously something we agree on whole heartedly. I wish that more Muslims would take up this type of cause and work with the communities in order to start counseling our communities. Ramsey has an entire certification program set up in which churches all across the country are doing debt elimination plans and helping each other out. This is one area that the Ummah in the West is severely lacking in.
The steps in his program are: 1) Save $1,000 emergency fund, 2) Debt Snowball, 3) Finish the emergency fund, 4) Maximize retirement living, 5) College fund, 6) Pay off the Mortgage, and 7) Build wealth like crazy.
Budgeting Money. To start out you have to first establish a household budget. This is difficult, and also easy at the same time. Take the amount of money you make every month. Now set aside all your utilities like rent, car, insurance, etc. Then make categories for your other expenses like gas, groceries, eating out, pocket money. There is no right or wrong way to really categorize this, but it's important to be as specific as possible, and tailor it to what your house needs. If you have a young baby, you might have a category for baby formula and diapers. The important thing though, is that you sit down and spend every dollar you will make that month on paper before actually getting paid. Let's say for example that your monthly income is $5,000. Your worksheet may look something like this,
Rent – $1500
Elec/Water – $300
Groceries – $500
Eating Out – $200
Insurance – $50
Car Payment – $300
Gas – $200
Clothes – $50
Cell phone – $80
Kids Allowance – $100
Credit Card #1 – $35
Credit Card #2 – $50
…. you get the idea.
Every single dollar should be accounted for before you get paid. Then when you get paid, take out the money you need and put it into envelopes (it sounds lame, but it works). Make an envelope called Grocery money, and put your grocery money in it. Same with eating out, same with all the other envelopes. Let's say you need to buy a new laptop. Well, make an envelope called laptop and start putting money in it every month. The important thing here is to stick to your budget, and if you are in debt to cut back your budget as much as possible. It's not complicated, but it can be difficult (hey who said this life was supposed to be easy?).
Now about your savings and debts. List them out in order from smallest to largest, with the minimum payment on each one. Include your house, car, student loans, anything that is a debt. It might look something like this for a month:
Savings – $100
American Express – $25
Fridge – $30
Furniture – $40
Mastercard – $75
Visa – $125
Visa #2 – $150
Car – $300
House – $1500
The first step is to CUT YOUR CREDIT CARDS UP. Stop using them. Period. Take it out of your wallet. Don't leave home with it. Get rid of the temptation. And please get the whole halal/haram debate out of your head on this issue. It's best to not use them whether you're approaching this from a religious OR strictly fiscal perspective.
Now you need to establish a $1,000 emergency savings if you do not have one. Chances are, if you are paycheck to paycheck and/or in credit card debt, you do not have $1,000 in savings. The credit card is your emergency ticket. Even if you budget your money, let's say 2 days before you get paid, you run out of milk. What do you do? Go charge $3.50 to your credit card. This will not help you get out of debt.
Using the above numbers as an example, a family sticking to their budget will establish a 1k savings in 10 months. This savings is used to cover emergencies only. There is a great wisdom in this. This is your fallback for emergencies. I remember going through this step when I started Ramsey's program, and it took me *forever* to do it because of “things” that keep popping up – medical bills, trips, miscalculating budget, etc etc etc. If you aren't using credit cards, it forces you to dip into this emergency fund. But at least you are now using cash. Your debts are no longer increasing. Just keep working at it. Any money you have leftover needs to get put into the savings. Let's say instead of spending 200 on gas this month, you spent 194 dollars. Put 6 bucks in your savings. Throw every penny you can into the savings bucket until you hit 1k.
If you aren't establishing a savings, you will forever be borrowing against yourself, even if its $3.50 the night before you get paid to buy milk, the cycle will never end, and before you know it you're a few hundred behind to yourself. Almost every personal finance book I have read starts with the advice of “pay yourself” first. I never really understood this concept until reading Ramsey's book. Pay yourself means give yourself some breathing room. This 1k will help with doctor's visits, getting an emergency pair of glasses made, etc etc. If you have to dip into the emergency fund, then immediately work to replenish it.
The next step is to attack the credit cards. Take your smallest one first. Let's say the AmEx in the above example has a balance of $500 with a minimum payment of 25. Now that your savings is at 1k, you take the 100 a month you were putting into the savings, and add it to the 25 minimum payment. Now your monthly payment to AmEx is 125 a month. When it is paid off, you add the 125 to the minimum payment of 30 on the fridge, and so on until your debts are paid off.
This gives you a strategy to pay off your debts. More importantly though, by taking the 'baby steps' of a 1k savings fund and knocking out some smaller debts it gives you motivation because now you can see tangible progress.
Avoiding Credit Card Interest
There's a couple of quick strategies here, and they are very simple. First is to call your credit card company and ask them to lower your rate. Tell them about some new offer you found online with a 0% balance transfer option and ask them to lower your interest. Simple as that.
Second step is if you do have a number of credit cards, one option is to balance transfer to a card offering you 0% for a fixed amount of time. This is a dangerous game though. First, according to AMJA the balance transfer fee you pay is itself interest, so that is something to be aware of, but if you're already paying a ton of interest, this can be one way to decrease it. Second, it still does not change your actual spending habits and is just another band aid.
Some Budgeting Tips
The key here is to be frugal. Take serious account of what you spend and budget accordingly. If you are currently spending 500/month on groceries, and your budget is only allowing you 400, then start working to hit that target. You can save a lot of money – and unhealthy calories – by cutting out sodas, candy, and unnecessary snacks. Buy a Sunday Paper and use coupons. Be mindful of your electricity and don't leave lights on unnecessarily. If its cold outside, put the thermostat at a reasonable temperature and put on a sweatshirt. Simple things, but they make a big difference.
The main key to budgeting your money though, is self discipline. You have to force yourself to stick to it. Also, if you do the envelope system, don't start shuffling money around. For example, if you have an envelope for diapers, dont 'borrow' from it in order to treat yourself to some Biryani since you did not feel like cooking. Keep the money for what it is for, that way when it needs to be spent, you can do so without stress.
Coming up next.. Car and House buying!