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How to Handle Healthcare in Retirement

Health Insurance is one of (if not the) biggest concerns for early retirees.  Giving up employer-sponsored coverage can feel like the golden handcuffs that can keep us in the same job longer than we might otherwise choose.

You might have questions about your options for coverage.  Is Obamacare a viable or good option?  How about a Christian health-share option instead of traditional insurance?

Health insurance and other medical costs are becoming a larger and larger portion of our budgets, but if you know what you’re doing, you can lower your costs dramatically.  Let’s take a look at your major options, how you can play the health insurance game to win, and how to enter the retirement phase with confidence.

COBRA Coverage

If you have been employed and received employer-sponsored health insurance, there’s a likelihood that you’re eligible for COBRA insurance coverage.  COBRA gives workers and their families who lose their health benefits (even voluntarily) the right to choose to continue group health benefits provided by their group health plan.

COBRA can be a good option for short-term needs, as it can last for up to 18 months from separation of service.  It is generally one of the more expensive options, as you’ll need to pay for the entire cost of coverage (employee cost plus employer subsidy) plus a 2% administrative charge.

However, if you only have a shorter gap until Medicare and several pre-existing conditions, it may be your best bet.

One note is that you can retroactively choose COBRA up to 60 days after separation for service, so you could in theory wait to find another health plan for up to two months and hope you don’t have any health incidents, which may save you several hundred dollars in other health insurance costs.

You can download a full guide to COBRA coverage here.

Marketplace Insurance

If you need or want to get private insurance, another good option is a marketplace (aka Obamacare or Affordable Care Act) policy.  The full cost of these policies is likely similar to what you could get through COBRA, but there is one big advantage to an Obamacare policy – subsidies! These subsidies are based on your Modified Adjusted Gross Income (MAGI; this is usually the number on line 11 of your 1040).  In general, the lower your MAGI, the more of a subsidy you’ll qualify for.  However, there is one major caveat.  If your MAGI is too low (below 100% of the Federal Poverty Line, you won’t qualify for any subsidy at all as the government will deem you eligible for Medicaid.

Unfortunately, most early retirees who won’t qualify for a subsidy because their income is too low also won’t qualify for Medicaid because they have too many assets.  Fortunately, there is an easy fix for this.  Just make sure your income is high enough (usually around $18,000 depending on age and number of dependents) through taxable retirement distributions or Roth conversions.  Roth conversions can serve here as a double-win as they can help you qualify for low-cost health insurance while converting part of your retirement assets to grow tax-free for the rest of your life.

If your income is too high (again, depending on age and dependents, but usually around $40,000 – $50,000), you may not qualify for much or any of a subsidy. If this is the case, private health insurance may still be your best bet if you are uncomfortable with the alternatives or if you have significant pre-existing conditions which may not be covered by Christian health-share options.  While there are many things I disagree with about Obamacare, it is nice to know that everyone is eligible for some sort of insurance, even if it is exorbitantly priced.

We’ll cover tax-planning strategies in further detail next week, but know that tax planning and insurance planning can be vitally linked for early retirees and should be done in concert with one another.

Christian Health-Share

Christian Health-share ministries are becoming a more prevalent option for those seeking alternatives to traditional insurance.  The major players here are Medi-Share, Christian Healthcare Ministries, Samaritan Ministries, and Liberty HealthShare.  Each is slightly different in terms of the cost, what they cover or exclude, and how the coverage actually works.  Some are set up to look more like traditional insurance, and some operate more like self-insurance where members help each other out.

One facet of these ministries that many Christians find attractive is that there are certain procedures and medications that are not covered, such as abortions and pregnancies conceived out of wedlock.  Some of these companies require an affirmation of faith, a prohibition against drug use or drunkenness or other provisions.  In some cases these are for faith reasons and in others they help keep members cost lower.

These ministries are not considered insurance for tax purposes and are not eligible for things like Health Savings Accounts (HSA’s).  They do, however, meet the qualifications for qualified health care coverage under the Affordable Care Act, so the government will consider you insured even if they won’t give you a tax break for it.

Our family has used this type of coverage and have had a great experience.  I’ve similarly had clients and friends use it with generally positive experiences as well.  There are pros and cons to each of these companies and you should evaluate the best one for your family based on projected medical needs, prescriptions, and overall frequency and severity of doctor’s visits.

This is a very high-level look at these programs.  If you are considering making a switch to one of these, I highly recommend an in-depth comparison. Michael Kitces has an excellent write-up of the ins and outs of these, as well as a thorough comparison of the four major providers.

The Bigger Picture

Regardless of which option you choose, I think there are a few main points of consideration:

Stewardship – When it comes to our finances, Jesus encouraged us to be “shrewd as serpents”.  If you play the health insurance “game” well, you can save thousands of dollars per year.  This can make a substantial difference and may free you up to retire earlier, be more generous, or just not be stretched so thin.

Conscience – You may also find yourself with two similarly-priced options, but one supports large insurance companies while the other is supporting other believers.  Stewardship in this case might mean opting for non-traditional coverage.

Providing for Your Family – 1 Tim 5:8 instructs us that “if anyone does not provide for his own, and especially for those of his household, he has denied the faith and is worse than an unbeliever.”  In addition to providing income and basic needs, this should also include access to doctors and health care when needed.  So make sure that you have a plan in place whatever it is.

Faith – If we knew exactly what illnesses and injuries we would go through, this process would be much easier to navigate.  Not only can we not know the future, but we’re not called to worry about it or try to control it.  In the end, we can trust the Father to watch over our health and financial needs.  So don’t obsess over making the perfect decision or over the small chances that something bad could go terribly wrong.


Contemplating Early Retirement?

In recent years the concept of early retirement has gained tremendous popularity, and it doesn’t seem to be slowing down. This idea of having a large nest egg to retire as early as possible can be alluring in offering freedom to pursue things that might seem more fulfilling than a career. Retiring early can be both a great aspiration as well as a path fraught with pitfalls.

Retirement in and of itself isn’t a very biblical concept. It’s only really mentioned for Levitical priests, who were to retire at the age of 50. For the rest of us, it was presumed we’d keep on keeping on at working until our kids would take over the family business and support us in our old age.

I also think of the parable of the man who had riches and tore down his barns to build bigger ones to store it all, telling himself “You have plenty of grain laid up for many years. Take life easy; eat, drink and be merry.” It seemed like a good plan, but God had some other thoughts.

In my experience as an advisor, I’ve seen folks enter into retirement and it be everything they had hoped for. I’ve also watched clients flounder and take years to try to figure out their new identity and rhythms of life. We’ve gleaned a few things from conversations and observations and wanted to share a few insights that might help you process retirement for yourself.

Keys to Successful Retirement

Retire Towards Something – One of the most important things about retirement (whether it’s early or late) is to retire towards something, not just retire away from working. Being financially independent can unlock new opportunities, whether that’s pouring into your family, friendships, church, community, etc. It can take the form of teaching, mentoring, volunteering, missions work, writing – the sky’s the limit! But be intentional with your time and talents; we weren’t meant to take our light and hide it under a bushel, or to bury our talent in the ground. You likely won’t have this totally nailed down by the time you retire from your career, but it’s important to have an idea of the things you’d like to try out and pursue in the next season.

Take Advantage of Relative Youth – While we’re not advocating for a life of leisure, there is the reality that our bodies will deteriorate quicker than we’d like and there will be a window of opportunity to pursue more active things like adventure and travel. Sometimes we put these things off because of the fear of spending down our savings, and sometimes we just don’t make time for it.

So long as these aspirations are apart of your overall financial plan, there are no prizes for dying with a big of money and unpursued dreams. With that in mind, use your money well to see part of the world, visit old friends, and enjoy some of the fruits of your many years of labor.

Stay productive – Retirement doesn’t have to mean you’re useless to society. Many of our most satisfied retired clients are engaged in their church, volunteering with a non-profit, or have a part-time job at Home Depot just for the fun and fellowship of it. It could also mean taking up a hobby of woodworking, painting, or finding other talents that have been hidden behind the curtain of a career. God loves the idea of rest – it’s why He gave us the sabbath. But the day of rest is meant to be a break from being productive, not a full-time state.

Pitfalls of Early Retirement

Giving up Identity and Impact – Our careers should never define us, but often our identities can get wrapped up with them. It’s only natural after spending 40 hours a week for 30-40 years and then no longer having that thing to feel at a bit of a loss. It can create a bit of a void for us to deal with. It can also lead to sadness and depression, and a feeling of lostness.

The best way to deal with this is to both retire towards something and to stay productive. But be prepared to deal with feelings of loss and insecurity as it can be a normal part of the process.

Avoiding too much leisure – When we do have voids in our time and identity, we’re on average not very good at filling them well. A recent Wall Street Journal article details how much time is spent doing certain activities in retirement. Retirees on average spend 4.5 hours a day watching TV, and 6.25 hours on “relaxing and leisure”, compared to a half an hour or less of time spent reading, socializing, or exercising. The results are as you might guess – an unsatisfied and extremely unhealthy retirement.

Stress of Withdrawing from Savings – You’ve saved and accumulated for decades, all for the very purpose of having funds to spend during retirement. But there’s a real visceral challenge for some of us (I’m talking to you “savers”) in transitioning, often suddenly, from putting money into a savings account into pulling money out of the account. It just feels wrong. Couple that with a bear market like we’ve been in and it results in feelings of stress and anxiety. There’s nothing wrong with intentionally spending down investments and savings over time, but beware of the emotional challenges that can accompany this season.

Where to Find Direction

Ecclesiastes 3:1 reminds us that “For everything there is a season, and a time for every matter under heaven”. There is a time for work and time for rest, just as there is a time for planting and a time for harvesting.

Whether in our working years or in retirement, finding joy and purpose in what we do is a principle that transcends age. Early retirement can be a means to explore new passions, interests, and hobbies that bring fulfillment and satisfaction. Also, early retirement is a personal decision, and it varies from one individual to another.

The Gospel emphasizes the importance of seeking God’s guidance, finding contentment, serving others, being good stewards of our resources, and finding joy in all seasons of life. Whether you choose early retirement or continue working, let your decision be rooted in faith, guided by biblical principles, and motivated by a desire to advance His kingdom.

Estate Planning Beyond Your Will

A will is important in any estate plan, as it serves as the backbone document of what will happen when you pass away.  But there are several other pieces to a good estate plan that go beyond a will.  If you don’t tie up some loose ends, you might be surprised at how wrong things can go even with a shiny new will in place.  So keep reading to discover some key non-will factors you need to consider for your estate plan.

Beneficiary Designated Assets

For many if not most Americans, the majority of their estate won’t be controlled by their will.  The will controls the probate estate, but there are many assets that won’t be included in this.  For example, life insurance proceeds, IRA and 401(k) accounts, and Jointly held accounts won’t be directed by the will but rather by the beneficiary designations on file.

So while you think you’ve protected  one of your kids from receiving too much of your estate too early, you may have them listed as a primary or contingent beneficiary on an insurance policy and they could receive a sizeable windfall. Or you may intend to give 10% of your estate to charity and designate this in your will but it turns out that the will only controls 25% of your actual estate, leaving the charity with 2.5% rather than 10%.

With this in mind, be sure to look at all of your accounts and insurance policies to make sure that beneficiaries are up to date and that they are coordinated with your will.

Adding Beneficiaries Whenever Possible

With the above in mind, adding beneficiaries is a great way to minimize your probate estate.  Probate assets are subject to probate fees, and are also subject to public record.  So whenever possible we often recommend that you add beneficiary designations to banking and investment accounts so that they’ll go directly to your loved ones and not get caught up in probate.

Investment accounts that aren’t jointly owned can have a Transfer on Death (TOD) designation added, and bank accounts can have a Payable on Death (POD) designation added.  Talk to your financial advisor or bank representative to get these added – it’s simple to do and can make things much easier down the road.

Another benefit to these designations is that if your desires change down the road, it’s much simpler to update the TOD or POD designation than it is to update your will (and it’s free!).

Should I Use a Trust in my Estate?

When a basic will doesn’t seem to be sufficient, a trust can coordinate with your will to help achieve your estate goals.  Revocable Trusts (or Living Trusts) are made during your lifetime and can be altered, edited, and revoked as long as your live.  They are often used as a will substitute than can shelter assets from probate (particularly useful for real estate in other states that would have to go through multiple probates) and can keep more of your estate out of public record.

Irrevocable trusts, on the other hand, are permanent and, yes, irrevocable.  They become a separate tax entity and can be useful when you’re needing to limit estate taxes, are trying to do some Medicaid planning for long term care coverage, etc.  Once assets get placed in an irrevocable trust, they are no longer property of the grantor but instead belong to the trust permanently.

Testamentary trusts are trusts that are established through your will at death, and can be used to hold assets for minors or young adults, for spousal benefits, and many other uses.

There are also special trusts that can be useful for special needs situations, blended families to make sure that assets get distributed properly at a second death, and many more uses.  The bottom line is that if you’re trying to pull something off through your estate, there’s probably a trust that can help you out if your will can’t do it!

Ancillary Documents

While a will can help control your assets when you pass away, it won’t help with the other planning for end of life.

A Power of Attorney document will enable a spouse, child, or other loved one to help you with your financial affairs if you become incapacitated or mentally unable to perform the necessary tasks.  If you don’t get this in place before you need it, you’ll have to have the courts appoint someone for you.  This could be for something as simple as paying your bills to helping you sell your home.

A Healthcare Power of Attorney gives someone you choose authority to make medical decisions on your behalf.  The last thing you want is to require a major procedure with the doctors unable to consult anyone about it.  You can choose how wide of a scope you want this to have if desired.

A Living Will or Advanced Medical Directive will take the pressure off of your Healthcare Power of Attorney by pre-deciding how you would like your end of life care to be.  Do you want to be kept alive under all circumstances?  Do you want to be resuscitated?  These simple decisions can help accomplish your will and will be a huge weight off of your loved ones.

Communicating Your Desires

Once you have your documents in place, it’s important to let those involved know if they may have a role to play in your overall estate plan.  This will give some folks the chance to opt out of the responsibility or to ask any questions they might have.

Some folks want to prep their heirs for any large sums that may or may not come their way, or to leave some notes along with their wills to be delivered after their death that offers some insights as to why certain decisions were made.

It’s also a great idea to sit down with whoever would be in charge of your funeral/memorial and discuss your desires.  That in and of itself is a big gift to your loved ones so they don’t have to spend the first few days after you pass away event planning rather than grieving.  Let them know some of your preferences such as location, officiants, and maybe even a few songs to take this responsibility off their plate.  You may want to give them some guidelines for any obituary as well.

As always, we’re only peeling back a few layers of this onion. There are many possibilities and decision points, but the main point is that you should take some time to think through these non-will decisions before it’s too late.  We’d be glad to process them with you if need be, and help hold you accountable for getting these important yet not urgent tasks done!

Should I Redo My Will?

I’m going to give you the benefit of the doubt and assume that you already have a will in place.  Sadly, nearly 60% of adults don’t and could have the state decide who gets their money and their children if they were to pass away.  If that’s you, please stop reading this and get that done ASAP!


If you were responsible and got a will done several years ago, how do you know when it’s time to redo your will?  When does it become outdated, irrelevant, or possibly harmful?  Thankfully, estate law has become much simpler over the past few years, but there are some key mistakes to avoid that could leave your loved ones with a mess on their hands if something were to happen to you.


Mistake #1 Naming the Wrong Trustees and Guardians


Relationships are funny things, and even more so when dealing with money and our kids.  When you wrote your last will, you might have had a great relationship with your brother-in-law who now you’re not so certain about or who may not even be your brother-in-law anymore!

Check your will to make sure that the people who will take care of your children (guardians), money (trustees), and settling the estate (executors) are still the folks you would most trust with those tasks.  Trustees and executors don’t need to be legal or financial professionals per se, but you want to be sure they are folks who will handle the responsibility well.   You may also have grown children that can now help with some of these tasks.  In either case, it’s likely time to redo your will.



Over the past several years, the amount of assets that can pass free of estate tax has ballooned.  In addition, married spouses now have “portability”, essentially meaning that you can focus on one higher estate-tax-free amount rather than two individual ones.  This translates into an estate of $6.46 million for singles and $12.92 million for married couples.  Unless you plan on h


Mistake #2 Overcomplicating your estate plan


Having an estate higher than those thresholds, you’re more likely to overcomplicate things than anything.  This can happen by having old wills that put assets into marital trusts, credit shelter trusts, and other irrevocable trusts to try to avoid estate taxes.  While these won’t necessarily hurt you, they result in additional entities, tax returns, and headaches that you could be stuck with for a long time.


If you’re planning on having an estate of a few million dollars or less, you’re likely going to be fine with a simple will.  So check your old will to see what happens to your money when you die and make sure it’s still appropriate.


Mistake #3 Leaving the wrong amount of money to your heirs or at the wrong time


If you made your will when your kids were young, you had no clue how they would be able to handle an inheritance.  When they’re older, you have a better sense of their ability to steward wealth and whether it would be a blessing or a curse to them.


It may be that you would be leaving them too much money for their own good (this is way more common than leaving them too little in my opinion), or giving it to them too early (you can stagger distributions if need be) or late (at an age beyond when it would be most useful).  So check your will to see who your beneficiaries are and when they would be entitled to receive how much money.


Mistake #4 Naming the wrong (or no) charitable beneficiaries


Giving money to your favorite church or charities is easy to do through your will, and you don’t have to worry about whether it will cause you to run out of money before you die!  I always encourage folks to consider making a charitable bequest through their will as it could be the largest gift they ever get to make.


On occasion I’ve seen money left to a church that someone attended 20 years earlier, or to an organization that doesn’t even exist anymore.  This should either be updated to current desires (can be done through a simple amendment, aka “codicil”, to your will) or left to a donor advised fund at a public foundation such as the National Christian Foundation.  If you set up a “legacy fund” at NCF, you can leave a portion of your estate to your fund, and then direct where you want the money to go through your giving fund.  This prevents you from needing to update your will in the future if your desires were to change again as you can just update your legacy fund online.  You can also leave your heirs as successor advisors to the fund and let them decide where some or all of the gifts go to let them be a part of the stewardship process.


We also want to make sure you’re aware that while we’re not attorneys and don’t draft estate documents, we have a great partnership with My Advocate and can offer discounted pricing for online estate document preparation, including wills, revocable trusts, and ancillary documents.  We can walk you through the process and review your documents before you sign them to help make sure everything is in good order.  If you’d like to stop delaying and get the process started, just shoot us a line and we’d be glad to assist!

Is it Time to Bail on Bonds?

While the stock market had a terrible year last year, bonds didn’t do much better.  In fact, when you look at it on a risk-adjusted basis, bonds were much worse.  The S&P 500 lost 19.44% in 2022, while the Barclay’s Aggregate Bond index was down 13.0%.  While we expect stocks to go through rough stretches every so often, it’s usually during those same periods that investors look to their bonds to keep their portfolio afloat.

To put the bond return in perspective, this was only the third time recorded that bonds have lost any money when stocks were down more than 10%, and the only other two times were before 1942 and the loss was less than 3% each time.  To say that last year was an anomaly is an understatement.

In 2023, bonds haven’t done themselves any favors.  With the S&P 500 up over 17% YTD, bonds have been continuing a bit of a slow bleed, down around 1.75% for the year.

And with cash earning upwards of 5% with zero risk, it’s hard for many to make the case for investing in bonds. Why take on the added interest rate risk when you can get a risk-free rate of return of 5% on your non-stock investments?  And what happens next for bonds?

Bonds: After the Hikes

The Fed is mostly done raising rates at this point, indicating that they may in fact raise them one (possibly two) more time(s) if needed, but with a target rate that begins to lower sometime early next year.  As you’re likely aware, bond returns are inversely related to interest rate movements, so lower rates are like bonus returns for bonds. That’s why as the Fed has continued to rapidly raise rates, bond investors have been punished.

Once the Fed does stop raising rates, it can be a very good environment for bondholders.  As you can see below, the one-year returns following Fed hikes can offer stock-like returns for bondholders who haven’t given up on beat-up bonds.

How bonds have responded after the Fed stopped raising rates

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Another source of encouragement is the inverted yield curve you’ve heard about in the news.  The yield curve gets inverted when the yield for 2-Year Treasuries is higher than 10-Year Treasuries.  In a normal environment, you get paid more for loaning out your money for a longer time.  But the lower 10-Year number points to a consensus projection that yields will be falling in the future.  And future falling rates points to…you guessed it – higher returns for bonds.

So we certainly haven’t bailed on bonds.  The big questions for us are “when?” and “how much?” We don’t know precisely what the Fed will do (nor do they at this point), nor do we know how sharply rates will lower.  Forecasts are just that, and are subject to change just like weather forecasts.

What does seem highly likely is that the worst of the bond carnage is behind us.  So at this point it’s mostly a waiting game.  We can see the value in having some of your conservative investments in a bond-alternative like cash or shorter-term treasuries, but when you take too big of a gamble in either direction, it can often lead to more harm than good.

In the end, I’m reminded of Ecclesiastes 11:2: “Divide your portion to seven or even eight, for you do not know what misfortune may occur upon the earth”.  Diversification makes sense as it always has.  That doesn’t mean you shouldn’t be making some tactical changes, as we have been doing for our client’s portfolios.  But it does mean that you shouldn’t put all your eggs in one basket, or abandon one basket that hasn’t gotten many eggs lately.

Drifting Away

My wife and I recently got back from a trip to Wyoming to celebrate our 20th wedding anniversary. It was fantastic to 1) get away and 2) be overwhelmed at the majesty and beauty of God’s creation.  One of our favorite parts was a float trip we took down the Snake river.  It was a nice break from hiking to sit back and enjoy the scenery while we lazily floated down the river.  While we drifted, I was reminded of a few lessons along the way…

Coasting Can Get You In Trouble

While the Snake River seems mostly calm at first glance, we covered 10 miles of river in about 2 hours.  There wasn’t any need to paddle, motor, or strain to move the raft – it just hummed along with the current.  For the most part you can just follow the river on down.  But there are fallen trees, big rocks, and other hazards along the way that we would have gotten stuck on if we just drifted on our own.

In life, floating has that same allure.  If I can just eliminate the frustrations and stresses in life, it seems like floating along for a while would be pretty appealing.  Life with five kids in the home certainly can suggest that!  But there is no true safe coasting in life or on a river.  There is always debris and danger lurking if we’re not careful.  No matter how much I try to plan things out, I can’t get to a place where I can simply float without eventually drifting into trouble.

There Is No Standing Still

Just as on the river, there is no standing still in life.  It took absolutely zero effort to get going down the river.  The moment you enter, the current zips you off on the way.

In fact, if you don’t want to be carried downstream, it takes considerable effort to paddle against the current.  Not losing progress is work, while going against the current is a non-stop battle.

Hebrews 2:1 warns us of this – “We must pay the most careful attention, therefore, to what we have heard, so that we do not drift away.”  It takes careful attention (i.e. hard work) to not drift in life.  The older and more tired I get, the more alluring coasting seems.  It seems like surely just resting for a bit won’t be that bad.  But God instructs us that resting for any length of time frankly isn’t an option.  We’re to run our races with perseverance to the end, until one day when we get to enter true rest in heaven.

We Need a Guide

Jay was a great guide for us on the river.  Informative, experienced, and fun.  He manned the oars the entire time, keeping us heading in the right direction.  Having led around 200 trips a year for 12 years, he knew every inch of the waters and where to spot bald eagles, moose tracks, and how to avoid the hidden obstacles.

Proverbs 15:22 reminds us that “Plans fail for lack of counsel, but with many advisors they succeed.”  Having Jay onboard allowed us to not have to give a moment’s thought to any of those things and allowed us to simply enjoy the ride.

At Shepherd, we delight in serving as a guide for your finances, helping our clients to avoid hidden obstacles and navigate the waters to get to the finish line as smoothly as possible.  We love being in the raft with you and allowing you to benefit from our years of guiding others along the way.

Rafting with Jay reminded me of the privilege that is, and how necessary it is to have a guide along for the ride with you.  So thanks for allowing us to travel in the boat with you and share the journey.  We’ll do our best to continue to navigate the waters and hopefully the adventure will be just as enjoyable for you!

Marrying Bank Accounts

A recent study out of Indiana University has shed light on an intriguing connection between combined finances and the longevity and happiness of marriages.  There’s now scientific research that supports the merging of financial resources and bank accounts in a marriage. The study recruited and followed 230 couples over their first two years of marriage and tracked their marriages over time.  The researchers found that those who shared their bank accounts to be generally happier and with stronger marriages.  On the other hand, they even found that there was “a significant percentage of those who separated after not merging bank accounts”.

Money is a particularly sensitive topic, something that is seldom discussed even amongst close friends.  It’s one of the primary sources of conflict in marriages, so there can be a temptation to want to keep some separation.  After all, shouldn’t that lead to fewer conflicts, not more?  On the contrary, the research lines up with biblical wisdom that sharing really is caring!

The Perils of Separate Accounts

Separate bank accounts seem to make sense to some.  We tend to see it more often among younger couples, who desire freedom to spend their incomes without needing permission, as well as among blended families and second marriages that occur later in life. The latter scenario is a bit understandable, as it can involve protecting the interests of children from previous relationships as well as a fear of going down the same path again.

However, separate finances can easily become a transactional mess of who pays which bill, who paid for something last time, and what’s “fair”. If ones spouse earns substantially more than the other, should things be split evenly, or by income levels?  Does the person who pays more get more say? Determining the amount to properly split can be exhausting, and lead to conflict and hurt feelings.

Maintaining separate accounts can also lead to temptations of financial secrecy, creating an environment prone to distrust and brokenness. This opens the door to being able to hide purchases or participate in self-indulgence.

The Power of Shared Finances

Conversely, combining finances is powerful, practical, and biblical.  When we combine our finances with our spouse, it sends a profound message of trust and unity, aligning with the meaning of marriage, two becoming one.  Our money is important, and what communicates trust more than giving someone access to all of your money as well as the records of how you spend it?

What the research shows (and experience can attest to) is that by pooling financial resources, couples develop a deeper connection that fosters mutual support and a shared sense of purpose. Rather than approaching finances as a transactional give-and-take, combining resources promotes a mindset of working together towards shared goals and aspirations.

On top of all of these reasons, you are now creating accountability and honesty with each other.  There’s no place to hide secret spending, and that fact alone can help us curb some spending that would otherwise be harmful.  And we’re forced to actually talk about some of our spending decisions, as every decision affects not just you, but your spouse.

As if this wasn’t enough reason, shared finances take out the need to do separate accountings, make sure things are “equal”, and just simplifies the entire situation

Lessons from the Early Church

The Bible takes shared finances a stop further.  Beyond just a husband and wife (which there would have been no thought to the contrary), the early church promoted all believers as sharing their finances.  Believers in the early Christian community willingly shared all their belongings and did not claim anything as their own.

“All the believers were one in heart and mind. No one claimed that any of their possessions was their own, but they shared everything they had.” -Acts 4:32

This emphasis on communal ownership highlights the significance placed on trust and a spirit of oneness, even in the realm of finances.

We also have warnings of what can happen when we don’t do this. When Ananias and Sapphira sold a piece of land in Acts 4, they tried to deceive the apostles by holding some of their proceeds back for themselves.  What happened?  The Lord ended up striking them dead! Now I don’t think that’s going to happen should you choose to not combine your finances, but the message rings loud and clear that God values sharing, trust, and a spirit of oneness with our finances.

In This Together

Please know that in advocating for combined finance I’m not trying to promote communism or socialism. After all, forced sharing is never really sharing.  When we focus on equality and self-protection, it becomes challenging to truly demonstrate love through our financial decisions. Rather, the biblical teachings encourage us to love one another through our financial actions, prioritizing trust and a willingness to support each other.

Likewise, in our marriages, sharing our checkbooks is an act of love and trust.  It says, “I love you enough to trust you to with our money.  I love you more than our money.  I’d rather have your heart than all the money in the world!”

In line with biblical teachings, the concept of two becoming one is perfectly exemplified through shared finances. The notion of maintaining separate bank accounts after joining one another contradicts the whole point of this union. If spouses have become one flesh, it seems a bit odd to keep their financial matters separate.  So if you haven’t already, go ahead and combine those bank accounts!  We think you’ll be glad you did!

Debt Ceiling Crisis

We’ve all heard about the country’s debt ceiling, and how we’re coming up to a potential breaking point in a few weeks if Congress can’t figure out a solution.  But what exactly is the debt ceiling, what are the potential consequences, and how should we as Christians view all of this?

What is the debt ceiling?

For starters, a debt ceiling is just a pre-approved borrowing limit that the government has to keep under – currently a cool $31 trillion.  That’s enough to stack dollar bills and wrap them around the Earth over 84 times!  Currently, the government is spending 29% more this year than it will earn in revenue, and the measured share of the economy – spending, revenue and the deficit – are larger now than they’ve been on average for the last 50 years.  Washington has made financial promises that it has no way of keeping other than going further in to debt.  If they were a family, I’d have them cut up all their credit cards and go through bankruptcy counseling and a spending freeze.  Unfortunately, they’re like that bad family member that you’re stuck with and have to learn to deal with best you can.

Government deficits have been a continuous issue for virtually every country as long as money has been printed.  Governments want to print more to carry out their agendas, so they can get reelected and remain in power.  It’s pretty simple really – they promise us more money, and in exchange they get to keep power.  Two very powerful forces at work.

Few countries in the world have debt ceiling laws (I suppose we can be thankful that at least we’re one of them!), and Congress’ periodic increase of the borrowing limit merely allows it to pay for spending the House has already authorized.  Of course, whenever there’s money involved, both Republicans and Democrats take the opportunity to fight for their agenda, prove to their constituents what a great job they’re doing, and put on a bit of political theater in the process.  Solutions to the debt limit usually include compromise and negotiations from each side.  This go round, it seems that Republicans want to cut spending while Biden wants to spend more. Biden’s plan involves raising taxes to make up for increased spending, which you can guess is particularly aimed at the wealthy.

Politicians also have a few tricks up their sleeve if they can’t reach a compromise. There’s been mention of Biden potentially invoking the 14th amendment (which he said is unlikely), which says the validity of the public debt of the United States “shall not be questioned.” Another possibility is for the Fed to mint a $1 trillion platinum coin, because, why not!?  In the end, a compromise will likely be reach, and most likely at the 11th hour.

What are the consequences?

If the government fails to reach a solution and can’t its debt obligations, people will lose faith in the government’s capacity to repay its debt, thereby leading to greater borrowing costs, higher interest rates, and a negative impact on the economy.

Specifically, it could send the dollar spiraling downward, government employees to be temporarily unemployed, and could cause Treasuries to lose some of their value.  A default of interest payments is pretty unlikely, but plausible if it goes on long enough.

It seems like we go through this every couple of years, and we end up at the same place – just keep on raising the debt limit so we can keep printing money like it’s going out of style.  The only other solutions to this basic math problem are to reduce spending which no politician wants to do, or to raise taxes which is what every politician campaigns against.  So we just kick the can down the road and hope that we don’t inflate our grandkids’ futures away.

What are we to do in light of this?

As believers, we – unlike the government – are called to not presume upon the future.  We’re told that money and wealth are uncertain at best. Debt isn’t evil or outlawed in scripture, but we shouldn’t use it like a blank check, with no practical plan of repayment.

Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, ‘This person began to build and wasn’t able to finish.’ – Luke 14:26-28

Now listen, you who say, “Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.” Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. – James 4:13-14

It’s important to count the cost before committing to any endeavor. Just as a builder would not begin constructing a tower without first estimating the necessary resources and cost, we too should exercise prudence in our financial decisions. By doing so, we can avoid the embarrassment of starting something we cannot finish.

As we consider the ongoing debate surrounding the debt ceiling, it is important to remember that as believers, we are called to approach financial matters with wisdom and discernment. While debt is not inherently evil or outlawed in scripture, it is important to avoid using it recklessly and without a practical plan for repayment. We’re also called to not worry about anything, especially the things we can’t control.

Therefore I tell you, do not worry about your life, what you will eat or drink; or about your body, what you will wear. Is not life more than food, and the body more than clothes? Look at the birds of the air; they do not sow or reap or store away in barns, and yet your heavenly Father feeds them. Are you not much more valuable than they? Can any one of you by worrying add a single hour to your life? – Matthew 6:25-27

In fact, that’s not just a suggestion or feel-good promise, it’s a command!

As we navigate the current economic climate, let’s be intentional about placing our trust in God’s provision rather than becoming consumed by worry or fear. So while it’s good to be informed as a citizen about the decisions that our government is making and the crisis they’re facing, let’s not let it cause our own crisis.

Instead, we should remain calm, trusting in God’s provision and exercising wisdom in our financial decisions. As we continue to seek His guidance and direction, we can navigate these uncertain times with grace and confidence.

Risks and Rewards of Credit Cards

The reality of credit cards is something that many people fail to truly comprehend. This reality is that they can be a huge advantage when utilized appropriately and a huge liability when used poorly.

The level of credit card-related household debt in the United States is at an all-time high. Americans have more than $925 billion of credit card debt, or an average of $5,474 per borrower.

Americans pay $120 billion in credit card interest and fees each year, or around $1,000 per year per household.

If you haven’t noticed, we’re slightly addicted to credit cards due to the convenience and ability to “buy now and pay later”. Banks don’t mind one bit – they’re able to charge interest rates that range on average from 16% – 24% for the privilege of going into debt!

Credit cards can both help and hurt your credit very easily, as well as make or break your budget. While we’re not fans of going into debt, credit cards aren’t all bad and can be used as a weapon if you wield them carefully.

With that in mind, we’ve put together a few rules of combat to follow that can help you maximize their benefits as well as avoid some of the pitfalls…

Treat it Like a Debit Card – Not Free Money

Credit cards are super-convenient, which is precisely what makes it easy to overspend and regret it later.  Credit cards don’t elicit the same emotional response that comes from using cash or a debit card, as we don’t see our wallets or bank accounts diminish immediately.

To avoid this natural tendency to over-spend using credit, we always recommend a few ground rules:

  1. Use them in concert with a budget.  Budgets are just pre-determined spending plans, so as long as you’re living within your means via a balanced budget, credit cards tend not to lead to overspending.
  2. Always pay off the full balance at the end of each month.  This helps keep your spending in check by seeing what you spend each month, and it also avoids interest and penalties since those are only incurred when you don’t pay them off each month.
  3. Don’t allow the rewards to accelerate your spending. They should only be viewed as an additional bonus for the regular spending you would typically make. This includes necessities such as groceries, gas, and eating out. Spending more just to receive rewards from your credit card is a fool’s errand.

Keeping these simple rules will keep you from 99% of the problems that are associated with credit cards!  If credit cards are so fraught with problems, then why even bother?  There are two main benefits – to build credit and to get rewards keeping the above-mentioned rules.

Maximizing Rewards

Most credit cards offer a reward of 1-2% back per dollar spent, whether it’s in the form of cash, airline miles, hotel points, etc.  Certain cards provide boosted rewards ranging from 3-10% if you hit certain criteria or spend on certain categories.  Ultimately, if you were going to be spending the money anyway, you might as well receive cash back while doing so. If you use your credit card like a debit card, focus all your spending on the credit card, and pay off the balance in full every month, you’ll accumulate rewards over time for this small shift in the card you use to spend your money on.

Credit card companies offer introductory offers or sign-up bonuses to entice new users. These can be lucrative, as they may offer free cash back or rewards just for signing up for the card. For example, a card may offer 70,000 points or $700 in cash back rewards when you spend $3,000 in the first three months of using the card. If your day-to-day spending exceeds this amount, you could be essentially getting paid $700 for your regular expenses.

In addition to sign-up bonuses, credit card users can also benefit from boosted cash back rewards on certain spending categories. Two great resources for finding the best credit card(s) can be found at this link or at this link. While one card may offer a flat 2% cash back on all purchases, another card may offer 4% cash back on dining and groceries, 3% cash back on gas, and 6% cash back on travel. By using different cards for different categories of spending, cardholders can maximize their rewards without changing their spending habits.  If you’re willing to keep track of multiple cards and diligently pay them off, you can enhance the rewards benefits substantially.

For business owners, using a business credit card for expenses can also offer rewards benefits. By using a business credit card for all business expenses and accumulating points, business owners can redeem those points for cash back or travel. In some cases, they may even be able to combine their personal and business credit card points for even greater rewards.

Travelers can also benefit from credit card rewards programs. Many credit cards offer high rewards for purchasing travel with the card, and some offer bonuses for redeeming rewards points for travel. Additionally, some credit cards allow users to transfer rewards points to travel partners for even greater rewards. These rewards are increased as often you can get 4 to 6x the points if you take your credit card points and transfer them to a travel partner to redeem. So, if you had 70,000 as in the above scenario, those points might be worth $700 (1% back) in cash, your card may offer the option to transfer them to a travel partner where you could redeem them for a $2,000 plane ticket with those same points.

Every situation is different, and everyone’s spending and rewards preferences are different.  The key is to figure out where you tend to spend money consistently, and lining up the card to accumulate the most points as well as make the redemptions the most lucrative. It’s also important to remember that responsible credit card usage is key to maximizing rewards. Cardholders should never spend more than they can afford to pay off each month and should always pay on time to avoid interest charges and fees.

Building and boosting your credit score

Having a solid credit score is critical for obtaining favorable interest rates on everything from vehicles to homes, and even for renting a property. Using a credit card can be one of the most important and easiest ways to establish and build credit starting out. A credit score serves as a gauge for lending companies, determining whether you are a credible borrower. The most widely used credit score is the FICO score, which is comprised of five main components:

  1. Payment history, which represents 35% of your FICO score and indicates whether you consistently pay your bills on time
  2. Credit utilization, which accounts for 30% of your score and compares the amount of credit you use to your total credit limit, with lower percentages indicating greater creditworthiness
  3. Length of credit history, comprising 15% of your score, measures how long you have used credit, with longer histories indicating more credibility
  4. New credit, worth 10% of your score, evaluates how frequently you apply for new credit and the amount of credit derived from recently opened accounts
  5. Credit mix, which  accounts for 10% of your score, with lenders preferring borrowers who have a variety of credit types.

Maintaining a strong credit score requires effort and attention, but it can pay dividends in the form of favorable interest rates and other financial opportunities. By understanding the factors that comprise a credit score and taking proactive steps to build and protect it, you can position yourself for success in the long run by using a credit card. With this in mind, here are a few tactics to consider:

  1. Avoid canceling credit cards if they’re not causing problems.  The more available credit you have, the higher your score will be.
  2. Ask for credit limit increases as the lower amount of your total balance you carry on the card carries weight to your score.
  3. Always want to pay off all credit cards before the statement closing date so that it is not reported that you carry an open balance.
  4. Don’t open a bunch of cards at once, as this will negatively impact your score.

What to do if you get yourself in trouble…

In addition to building and protecting a strong credit score, it is important to manage credit card debt responsibly. If you find yourself in debt with a credit card, the first thing to do is to stop using credit cards!  Perform plastic surgery by cutting them up.  Give yourself a credit freeze by putting them in the freezer. Reverting back to just a debit card can reinforce the strategy of only spending what one has. While credit cards can be a useful tool when used responsibly, it is important to evaluate personal spending habits to determine if a credit card is right for individual circumstances. If a credit card is likely to cause overspending and debt, it may be best to avoid using them altogether.

Another option that you have is to look into some of the 0% APR credit cards that are out there. These cards will have sign up bonuses where you do not pay any interest for anywhere from 12-18 months. This can be a great option for you as you can transfer your balance from one credit card to another and allows you to focus on paying it off during that time period while you get your spending back under control. Keep in mind that these transfers fees that can be anywhere from 1-3%.

After that, the best approach to paying it off is the “snowball” method. This involves paying off the lowest balances first, which allow you to pay them off quicker since they are smaller amounts. This then frees up the money from those payments to then be allocated to the credit cards with the higher balances, creating a larger and larger “snowball”.

Credit cards can be a double-edged sword – on one hand, they provide a convenient way to receive rewards and benefits. However, it’s all too easy to fall into the trap of overspending and accumulating debt that can be difficult to pay off. As Proverbs 22:7 says, “The rich rules over the poor, and the borrower is the slave of the lender.” the Bible doesn’t prohibit the use of debt, but it gives us a lot of “use with caution” warnings!

By using credit cards like debit cards and only spending within our means, we can avoid falling into the trap of being a slave to our lenders. Remember, credit cards can be a useful tool if used correctly, but if we’re not careful we can become a slave to the lender!

Overcoming Uncertainty

They say that there’s only two certainties to life – death and taxes, neither of which are particularly pleasant to think about!  As investors, and humans, we desire certainty. We want to know that there is a clear path to follow with our investments to so that our financial plan works out and we reach our long-term goals.  Strategy A leads to Result B, which then leads to Outcome C. Yet as the Preacher of Ecclesiastes reminds us:

If the clouds are full of rain, They empty themselves upon the earth; And if a tree falls to the south or the north, In the place where the tree falls, there it shall lie. He who observes the wind will not sow, And he who regards the clouds will not reap. As you do not know what is the way of the wind, Or how the bones grow in the womb of her who is with child, So you do not know the works of God who makes everything.” Ecclesiastes 11:3-5

Often its tempting to want to wait for the perfect time to invest, for when the stars align and the coast is clear.  Conversely, uncertainty feels dangerous, risky, and even costly at times.  And we can’t avoid it – it’s a part of life.  It’s why we (rightly) buy insurance, why we have emergency funds, and why we have generators.

Investing is a great case study in the area of uncertainty.  Investing is by nature giving up some money now in expectation of a higher future return later.  And it’s because of all of the unknown things that can happen between now and “later” that offer us a reward for that investment.

There will always be something that makes us hesitant and uncertain when investing into stocks, bonds, commodities, etc. (rain-filled clouds). However, uncertainty is precisely the part of investing that allows for our successes. We’re firm believers that you cannot separate risk from return.  If you want to be rewarded, you have to take on some level of risk.  And the more risk you take on, you will almost always experience 1) higher short-term volatility and 2) higher long-term returns.

In other words, stock investors (company owners) have many things to be uncertain about – company profits, market conditions, inflation, and competition.  Bond investors, on the other hand, are really only concerned whether a company can stay solvent enough to pay back their bond debts (which doesn’t always happen, e.g. SVB Bank).

In the investing world, we refer to this as the “risk premium” of an investment, or the amount by which the return of a risky asset is expected to outperform the known return on a risk-free asset. Right now, it can be tempting to pile up the risk-free assets of cash and Treasury bonds, since they’re paying around 4-5%, an incredible amount more than they were paying just last year.  At first glance stocks don’t look very compelling in comparison given the large amounts of volatility we’ve experienced.

However, it’s important to keep in mind a few things.  One is that this risk-free return still isn’t keeping up with inflation and so you’re losing purchasing power even though you’re getting a handsome return on your cash.  The other is that with prices being depressed on stocks, there’s statistically a lot of opportunity you could be giving up.

What will the market do for the rest of 2023?

Of course, as you’ve probably guessed by now, these returns are…uncertain!  There are no guarantees out there once you leave the certainty of cash and other risk-free investments.

While we have very little knowledge as to what will happen to stocks or bonds this year, this isn’t any different than any other year!

The Policy Uncertainty Index, a group who develops indices of economic policy uncertainty for countries around the world, has tracked the amounts of perceived uncertainty in the markets over time based on headlines, tax provisions, and professional economic forecasters.  When you look at data from the past several decades, the lowest recorded measure of uncertainty (i.e. the highest amount of certainty recorded) took place in July of 2007, right before the Global Financial Crisis of 2008.

On the other hand, the American Association of Individual Investors has tracked weekly investor sentiment since 1987.  Can you guess the week that it hit the lowest level on history as measured by % of Bearish investors?  Yep, it was March 5, 2009, the same week the S&P 500 dipped to its lowest level of the Great Recession.

What do we do with all of this?

Since we can’t control or eliminate uncertainty, what should we do with all of this?  Bury our head in the sand?  Set it and forget it?

For starters, let’s not make certainty an idol.  It’s not a bad thing to desire predictability or stability, but when we allow our need for certainty to color our decisions too much, we can be like the servant who buried his talent in the sand.  He acted out of fear, and that almost always leads to disobedience and bad decision making.

Second, let’s allow uncertainty to work for us.  Tragedy will continue to strike, jobs will be lost, markets will go crazy.  But as Warren Buffet has said, it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”  It’s precisely in times like March of 2009 when we have the most opportunity to grow our investments, much more than the 4-5% we could achieve in risk-free investments.

In fact, since March 5, 2009, the S&P500 has a cumulative return of 533.33%, or an average of 14.00% per year!  If you had invested in 3 month Treasury Bills (the standard for risk-free returns), you would have ended up with a cumulative return of only 8.36% through the end of last year! As humans, we’re much more prone to remember negative experiences compared to positive ones.  But let’s be intentional about remembering the rewards that all of the uncertainty of investing has brought consistently over time.

Lastly, in this battle of optimism vs pessimism, we need to remember who is ultimately in control.  Proverbs 16:9 instructs us that “a man’s heart devised his way: but the LORD directed his steps.” There’s nothing wrong with planning (we are, after all, financial planners!), but we have hold our plans with open hands.  Write your plans in pencil, knowing that God holds the eraser!  Our ultimate trust has to be in the One who is sovereign.  He is the only one who knows the future.  He is the only One who is certain.  God isn’t wringing His hands, wondering how the markets are going to play out in the next year or two.  And mostly, He loves us.  Instead of controlling the uncontrollable, let us keep our trust in Him and what He has in store for us.

The Truth About Dividends

The idea of “dividend investing” appears to be extremely simple at first glance. Invest in businesses that provide dividends (share their profits), reinvest the earnings frequently, and gradually build up your wealth over time through compounding interest. But is implementing a passive income plan for your portfolio as simple as that? While it can be tempting to chase after dividends, it’s always smart to try to peel back the layers and understand how dividends work as well as the pros and cons of what they do for our returns.

What Exactly Is A Dividend?

The goal of every business is to make a profit.  For those that do, they have three main options – pay the employees/executives a bonus, reinvest those profits back into the growth of the business, or disperse a portion of them to its shareholders as a reward for their investment.

A good analogy of this would be to think about the process of McDonald’s selling the Big Mac. When McDonald’s sells a Big Mac, it doesn’t keep all the money. It needs to pay for wages and rent. They also need to cover the cost of the ingredients for the Big Mac. After it’s paid for all the expenses then the money left is the PROFIT. McDonalds then needs to decide what to do with this left over money. There are generally three things McDonalds can do with their profit:

  1. Pay everyone who works there a bit extra – BONUS.
  2. They could use the money to open new restaurants or create new burgers to make even more money – REINVEST.
  3. Give money to the investors as a thank you for supporting the business –  DIVIDEND.

For dividends, the “yield”, or dividend amount, will be paid out to investors as a fixed dollar amount per share of stock owned.

Dividends are typically paid on a quarterly basis and can be taken as a cash payment  or reinvested into more shares of the company. A company is not required to pay dividends, and in a down year financially they can choose to reduce or suspend the payment of dividends.


Investors commonly see dividends a way to reduce risk as you are generating a return on your investment that is separate of the capital appreciation you receive from the stock. Dividends benefit investors because they create passive income, and allow them to receive profits of the business.

Often investors will attempt to compound their returns by purchasing more shares of stocks slowly over time with the earned dividends, which will then earn even more dividends as a result (compound interest!). Most, but not all of the time, companies who pay regular dividends tend to be consistently profitable, and many are longer-standing companies who have made it through various economic seasons.


While this may all seem like the “cheat code” to investing (who wouldn’t want to invest in companies that consistently are profitable and pay out bonuses to shareholders?), this isn’t the entirety of the story. Dividends aren’t simply free money after all. Receiving the dividend may seem lucrative but there are some downsides to it as well.

The return of the stock you own is independent of the dividend payment. Remember McDonald’s options?  Profits that they paid out to their investors means that there’s less money to reinvest in the company.  Also, if a company pays out a percentage of its profits, the company actually becomes less valuable.


If XYZ stock is trading at $100/share, and pays out a $1 dividend to its shareholders, then the stock price will automatically be reduced to $99, since it dispersed 1% of the company’s value to shareholders.  Of course, if you had reinvested your dividend, then you would still end up with $100 worth of XYZ stock, but the same thing would have resulted if XYZ had just reinvested the profits into the company themselves.

Without a dividend, investors could also do the same thing, generating their own “passive income”, by simply selling a few shares at their discretion instead of relying on the company’s quarterly payouts.

Something else to keep in mind is that receiving a stock dividend means that investors will need to pay taxes on that dividend, even if they reinvest it.  So if you’re reinvesting your dividends, you’re likely ending up with less all other things equal because you’ll have to pay taxes along the way.

Their Proper Place

Please don’t hear us say that dividend-paying stocks are bad.  Again, companies that pay dividends are often resilient, consistently profitable, and have a proper place in a diversified portfolio.  They can be a great way to generate consistent income, and can provide stability especially during volatile markets.

While dividend investing may be very reliable and seem like an easy way to generate extra returns, be careful as investing solely focused on dividends can cause over-exposure to one stock or sector. The main takeaway is that dividends aren’t a driver for higher returns in and of themselves. Keep your focus on total return with dividends being one component.  Remember, there aren’t any free lunches, er, dividends, when it comes to investing.

Update on Silicon Valley Bank Crisis

What Happened to Silicon Valley Bank?

The collapse of Silicon Valley Bank has been the huge news story over the past week, driving many into a frenzy of panic. Silicon Valley Bank (SVB), which is based in California, was the top bank for tech companies and venture capital organizations. As a “partner for the innovation economy,” Silicon Valley Bank claimed to work with up to 65,000 tech start-ups and 2,500 venture capital organizations as clients. While formerly being near the top of the banking sector, that position was quickly lost when a “run on the bank” ensued from poor risk management.

Much of the funds acquired by the Silicon Valley Bank were from high-risk startups. Initially, this didn’t pose a significant threat to the bank, but it complicated matters when they started to lend the funds out. As a bank, they needed to generate revenue and had two options: lend the money out to clients seeking loans or invest in government-backed securities. The bank chose to invest in long-term, low-yield treasury bonds, which were adversely affected by the fluctuating interest rates. This created a “perfect storm”, as the bank’s tech-start up clients were facing economic hardships and needed to withdraw funds while the bank’s bond holdings were losing value due to rising rates.  The Silicon Valley Bank was forced to sell off its risky investments, leading to a loss and triggering a bank run. Consequently, the FDIC had to take over the bank’s operations when clients withdrew 42 billion dollars in a single day.

What is the Risk of Contagion?

Can the SVB incident happen again to other banks?  Possibly, but not likely. SVB had a high concentration of uninsured deposits due to its tech industry customer base, making it an outlier.  To mitigate the risk of another bank run, the Federal Reserve created the Bank Term Funding Program (BTFP) as a safety net for banks and financial institutions. This program allows banks to lean on the Deposit Insurance Fund, which has enough money to back up the entire banking system. The BTFP was created to break the psychological “doom loop” that could occur across the regional banking sector and provide security for investors. This means that banks no longer have to worry about sudden withdrawals and customers can be assured that their bank accounts will remain whole.

Something else to consider is that this “non-bailout” is a bit of a two-edged sword.  On one hand, this back-stop provided by the Federal Reserve will certainly calm some fears of both depositors and the markets as a whole.  But how much does this end up incentivizing poor conduct by allowing banks to take bigger risks in order to obtain higher profits?

It is helpful to recall how President Franklin Delano Roosevelt felt about establishing the FDIC during the Great Depression. Roosevelt agreed that deposit insurance would prevent bank runs in the United States, but he argued that it would also create moral hazard among depositors, who would lose interest in whether bank executives managed institutions safely or not because they would know their money was safe no matter what happened.

This is indeed what played out in the 1980 financial crisis, where many unstable and insolvent banks remained open due to the FDIC, despite their high-risk, high-reward gains that didn’t pay off.

While this may be a short-term worry reliever for what might be a long-term problem, monetary policy and financial regulation must be taken more seriously to prevent banks from exploiting this. But at least for now it has helped customers and investors feeling a bit of assurance that the system isn’t on the brink of collapse.

What do we do now?

First and foremost it’s important to remain calm and not let fear and anxiety take over. Remember the wise words of Philippians 4:6-7, which tell us “Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God. And the peace of God, which transcends all understanding, will guard your hearts and your minds in Christ Jesus.”

The next step you can take to ensure your financial security is to make sure your deposits are under the FDIC insured amount of $250,000. That’s the maximum amount (or is it!?) that you can have insured in any one account per institution (link to FDIC limits here).  In this way, even if your bank were to totally fail, the government would be insuring that you get your deposits back without any risk of loss.  There are some other great alternatives for your excess cash if you’re not so certain about the stability of your bank (no, not cryptos!).

Finally, it’s crucial to be shrewd in choosing who you entrust with your money. This means doing proper due diligence on the bank or financial institution you plan to use to protect your nest egg. You can research Systemically Important Banks, which are deemed safe and secure by the Federal Reserve, or you can investigate the background of the individuals who run the bank and what they stand for. By taking these steps, you can protect your financial well-being and sleep a little easier at night.