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What is Financial Planning for Pastors?

by Monday, August 16, 2021
Picture of Amy Artiga from Guide Financial Planning with blog post title: What is Financial Planning for Pastors?

Recently, I explained to you what financial planning is. Just like pastoring is a whole lot more than just preaching, financial planning is a whole lot more than just investments. If you haven’t read that article, I would recommend reading it here before continuing on. 

I gave an overview of the different areas of financial planning in that article and now today we will do a deep dive and look at some examples of how that plays out for pastors and the strategies that we use that are unique to people in your position. Let’s start with the clergy housing allowance. That’s an easy one, right? Just maximize it and save on taxes? Not always. Let me show you how a financial planner approaches these things.

Housing Allowance

Sometimes maximizing your housing allowance can actually cost you money. Take, for example, the child tax credit. A portion of the child tax credit is refundable, meaning the government gives you the money even if you don’t owe any taxes. However, the refundable portion is limited by your taxable income. Claiming a lower housing allowance increases your taxable income and your refundable credit. In this manner, you can actually end up ahead by lowering your housing allowance. (This doesn’t apply under special rules for 2021 and President Biden would like to make changes to this, so stay tuned.)

Your tax preparer isn’t going to tell you this, though. Their job is to report your numbers accurately, not help you strategize and plan for the future. That’s what a financial planner does. A good planner understands the interplay between the child tax credit and the housing allowance and will help you calculate a housing allowance amount that allows you to maximize the benefits of both. 

Charitable Giving

One thing I know about pastors is that you are incredibly generous. Not just because you’re laying down your life and the potential for a more lucrative career for the church, but you tithe. You give to missionaries. You support children in Rwanda. You help finance church plants. Those are all things that can be tax-deductible if you itemize your deductions. Unfortunately, hardly anyone itemizes their deductions now that the standard deduction is so high. When you claim the standard deduction, you don’t get a tax benefit for charitable giving. While your treasure in heaven is increasing, your tax bill is staying the same. 

There are strategies for getting a tax benefit for your current level of charitable giving, even if you usually claim the standard deduction. You can utilize a bunching strategy and donor-advised fund. These things get a little complex, but a financial planner can walk you through it as if they do it every day. Because, well, they do.

Retirement

What about retirement? Thinking about retirement is one of the most common things that inspires people to look for professional financial help. What does a financial planner do that an online retirement savings calculator and an account-rebalancing robo-advisor can’t do? Strategize. Apply the tax law to you personally. Help you understand your trade-offs and weigh them before making a decision. 

Housing Allowance in Retirement

The generic advice is to roll your 403(b) account into an IRA when you retire. However, if you read this blog, you know that leaving your money in your 403(b) makes it eligible for the housing allowance in retirement. But should you leave all your money in your 403(b) or move some of it out? That can only be determined by a financial planner addressing your unique situation, not this blog. 

You see, it might be best to move some of the money from your 403(b) into an IRA. You can only claim a housing allowance as long as you, the pastor, are alive. Your spouse can’t claim a housing allowance after you die and your heirs cannot claim one either. Everything in your 403(b) will be taxable once you are gone. Depending on your situation and the costs and investments available in your 403(b), you might want to move some of your money.

Qualified Charitable Distributions

Once you reach age 70 ½, you can do something called a Qualified Charitable Distribution (QCD) from an IRA where you send a check directly from the IRA to a charity and it completely bypasses your tax return. It is never reported to the IRS and does not count as taxable income. If you’re planning on making charitable donations in your later years, this is a great way to do it. 

QCDs can only be made from an IRA, so it might be best in your situation to move some of your 403(b) into an IRA for charitable purposes. The money still comes out tax-free and you lower the balance of the 403(b) that your spouse or heirs may have to pay taxes on. Remember, we never know when God will call us heavenward and it’s all taxable after that. 

Roth Conversions

Another way to minimize taxes from your retirement accounts is through Roth conversions. This is where you move money from a traditional pre-tax account to an after-tax account by paying taxes on it in the current year. You may have some low-income years, perhaps after you retire and before you start collecting Social Security benefits or while you take time off to go to seminary and live off of savings (so much better than student loans!). If your income is lower than the standard deduction, then you can convert the difference from a traditional account to a Roth IRA completely tax-free. It may even make sense to convert some of the account at a 10% or 12% tax rate if you think that your taxes will be higher in the future. 

How I Can Help

How do you know how to balance keeping money in your 403(b) for the housing allowance and rolling it into an IRA for QCDs or converting it to a Roth? Work with a financial planner! If you wanted to figure this stuff out yourself, you would have been a financial planner instead of a pastor. Tax strategies just don’t excite you the way that saving souls and helping people does. 

The thing is, tax strategies actually excite me. It’s a little embarrassing because it proves that I’m a total nerd, but it’s true. Since I’m into this stuff, I figured I might as well embrace it and use my nerdiness to help people like you. So I became a financial planner. 

Yes, I’m now officially a financial planner, state-registered and everything. I can now legally take on clients. The best part is, I don’t work alone. I’m part of an amazing team at Guide Financial Planning, so if you work with me, you’ll probably get to meet some of them too.  

If you’re looking for professional help, our team at Guide Financial Planning would be honored to have the opportunity to serve you. You can schedule a call with this link so we can get to know you, tell you more about ourselves, and see what the future may hold for us. 

PS – While I love pastors, I’m trained to work with the sheep as well. If you know any nice ones looking for financial help, go ahead and send them my way. We would be honored to serve them as well.

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What is Financial Planning?

by Monday, August 2, 2021
Picture of a financial planning meeting with blog post title: What is Financial Planning?

I am now officially a financial planner. When I tell people I’m a financial planner, they usually say something like, “So you do investing?” Most people think that financial planning is managing people’s stock and bond investments and some think it involves selling insurance. But it’s not that at all.

It’s just like when you say you are busy and people say, “Well what do you actually do besides preach on Sunday? What could possibly keep you busy Monday through Friday?” Sometimes that makes you want to smack your forehead or curl up into a fetal position and cry out, “Why, Lord?” Doesn’t it?

That’s because you are not a preacher, you are a pastor. Your job is to shepherd the people of God into Christlikeness and preaching is just a tiny part of that. If all you did was preach, the vast majority of the people under your care would not get to where God wants them to be. Your job is so much more than just preaching. It is counseling, studying, investing in your own relationship with God so that you are in a position to lead, coordinating volunteers so that people’s needs can be met, developing discipleship programs, training small group leaders so that more people in the church can receive one-on-one care, reviewing financial statements and making decisions so that you have a place to meet and staff to meet people’s needs, etc. You know that you could add a whole lot more to that list. 

Just like preaching is only a small part of pastoring, investments are only a small part of financial planning. Let me tell you what else there is.

Financial Planning is a Process

First of all, financial planning is a process. That’s why you add the -ing because it’s an ongoing process. There is a difference between a financial plan and financial planning. Financial planning is a holistic process of recognizing what matters to you in life and figuring out how to apply your finances to help you get from where you are to where you want to be. My job as a financial planner is to help people understand and manage their finances in a way that aligns with their values and moves them towards their goals. 

One misconception I had getting into this field is that a financial planner is supposed to tell people what to do with their money. My introduction to the financial world was through Dave Ramsey, so that makes sense. However, I’ve learned that my job is not to tell people what to do. My job is to analyze people’s finances and then educate them on their various options and the consequences of each. My job is not to make decisions for people but rather empower them to make their own decisions with confidence. The process of financial planning is ongoing because life is always changing and there are always new options, priorities, and decisions to be made. 

Financial Planning Vs. A Financial Plan

Now, at my firm, we offer both financial planning and financial plans. The difference is that while financial planning is ongoing, like discipleship, a financial plan only addresses where you are at one moment in time, more like a one-time counseling session. A financial plan looks at every area of your financial life (we’ll go over them below) and fits them all together like a puzzle in order to create the personalized picture that you want for your life. 

We always start everyone with a financial plan, but then each person gets to decide what they want to do moving forward. For some, the financial plan is enough of a foundation where they can take it and do their own financial planning going forward. Others decide that they want to work with us on an ongoing basis so they have someone to keep them accountable, bounce ideas off of, and help them navigate their ever-changing life and complex financial landscape. 

The Components of Financial Planning

If it’s “so much more than investing,” what do a financial plan and financial planning entail?

Goals

It starts with your goals. Do you ever get in the car and start driving without knowing where you’re going? I know some people might, but to me that’s ludicrous. You have to start with the end in mind in order to know what steps to take to get there. Financial planning is the same. Do you want to be able to serve a poor church? Do you want to be financially independent by age 50? Those are very different goals and the same person would end up with completely different financial plans depending on which one they wanted to achieve.

Cash Flow

Getting a handle on how much money you have coming in and how much money you have going out is the foundation of a financial plan. If you don’t know how much money you have, you don’t know what you have to work with to help you achieve your goals. It’s like when you cook from a recipe. You need to make sure you have all of the ingredients on hand, otherwise, it won’t work no matter how great the recipe looks. You need to plan your meal based on the ingredients you have on hand or go out and get more ingredients! So, the first step in financial planning is checking your pantry (or your income and spending) so you have a good idea of what you have to work with.

Financial Independence/Retirement Planning

One of the most common reasons people seek professional financial help is that they are thinking about retirement. Either they are younger and want to make sure they are doing what they need to in order to be able to retire someday, or they are getting close to wanting to retire and want to know if they can afford to. Even if you never want to retire, like me, it’s important to plan for a season of life in which you may not be able to earn an income. You never know when your health will fail or you’ll need to care for a loved one full-time or something else like that. As such, retirement or financial independence planning is a very important part of a financial plan. 

Investment Planning

Finally, investments! While they aren’t everything, investments are an important part of a financial plan because they help fund your goals. How well you do your investing affects how soon you’ll have the money necessary to achieve those goals. Whether your goal is retirement, a college education, or purchasing a home, it’s important to make sure that your investments align with your needs. 

What is your time horizon; do you need the money in two years or twenty? What is your risk tolerance; how much of the stock market’s ups and downs can you stomach? How much are you actually paying for your investments and how will that affect the amount of money you end up with? Good financial planning doesn’t stick you into a one-size-fits-all investment model or product, but rather provides concrete advice based on proven principles and your own personal financial and emotional needs. 

Protection Planning

I mentioned earlier that some of us don’t want to retire and saving for retirement is more of a defensive move. Well, there are some other defensive moves that you will want to take as well. You see, it’s just as important to watch your back as it is to charge forward with your financial life. One incident could completely derail a great plan or completely wipe out all of the gains that you worked so hard for. 

That’s where insurance comes in. Insurance protects you from the things that would keep you from moving forward. It doesn’t actually move you forward financially (no one likes paying premiums when they feel they get nothing in return) but it keeps you from going backward. Some of the protection we touch on in financial plans are emergency funds, life insurance, health insurance, disability insurance, long-term care insurance, homeowners or renters insurance, auto insurance, and umbrella insurance. 

Tax Planning

Usually, optimizing your finances means minimizing your taxes. Taxes can be a major drain on your income, so every area of your financial life, from the kind of retirement account you invest in to the type of investments you have in each account to how you do your charitable giving, needs to be viewed through a lens of not just how to minimize your taxes today, but how to minimize them over your entire lifetime. 

Charitable Giving Planning

God has called us to be generous givers. Some of that giving can help us save on taxes. If charitable giving is a part of your life (as I suspect it is), then your financial plan should also address strategies for maximizing the tax benefits of the charitable giving that you already do. 

Real Estate Planning

Now we’re getting into the sections that aren’t in every financial plan because they don’t apply to everyone. However, if owning a home or rental real estate is in your future or part of your current reality, then it needs to be addressed in your financial plan. This is especially important for pastors because you are eligible for the clergy housing allowance, which can save you a lot in taxes. Because of the expertise I’ve developed with this blog, I get brought in on every financial plan our firm writes for a pastor to ensure that they are optimizing their housing allowance and not leaving any money on the table. 

Education Planning

If you have kids that you want to send to college (or you want to go yourself), that needs to be a part of your financial plan. How much should you save? Where should you save it? Is there anything else you can do to avoid student loan debt? Those are all questions that financial planning should address. 

Debt Planning

Speaking of student debt, what do you do once you have it? With so many different repayment plans available, there are financial planners out there who specialize in working specifically with student loans. Your financial plan should include a plan for when and how your debt (of all kinds) will be paid based on your personal financial situation and priorities.

Estate Planning

Estate planning is a topic that needs to be addressed in a financial plan though the bulk of it belongs to lawyers. Financial planners cannot write wills or other estate planning documents, but it’s our job to help you see the importance of having those documents in place and making sure all of the beneficiary designations on your various accounts actually align with your final wishes. 

I just listed eleven areas of financial planning. And that’s not all there is! If you’re planning a large purchase, like a car, that should be included in your financial plan. If you have a special needs child, caring for them should be included in your financial plan. Parents that you’re responsible for? That needs to be in your plan as well. The above areas are the most common to each plan, but the areas that a plan addresses are as varied and countless as the people they are written for. 

I hope this gives you a clearer picture of what financial planning is. Don’t feel bad if you didn’t know before. Most people don’t know because it’s such a new profession. It was birthed out of insurance sales and stock brokering, so it isn’t any wonder most people think it’s all about investments and life insurance. Let me tell you, if that’s what it was, I wouldn’t be doing it. 

While financial planning does deal with numbers, the true focus is the client as a person with a specific and unique call of God on his or her life, and the numbers are simply a means to an end. In fact, I have heard it said on more than one occasion that financial planning is like secular pastoring. (Though at my firm we don’t keep it secular!)

Come back in two weeks to hear about how financial planning applies specifically to pastors and some of the strategies we use at my firm.

If this article has made you curious about the firm I work for and our approach to financial planning, check out our website. Schedule a free introductory phone call if you think you’re ready to do your own financial planning with us.

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Making Sense of the Advanced Child Tax Credit Payments

by Monday, July 19, 2021
Picture of an IRS letter with blog post title: Making Sense of the Advanced Child Tax Credit Payments

If you have kids, there’s a good chance that you received some money from the IRS in the last couple of days. It is a part of the American Rescue Plan legislation that was passed in March, an advanced payment of your 2021 child tax credit. Along with money in people’s pockets, it has caused an incredible amount of confusion. 

I honestly don’t think I’ve ever seen so much confusion surrounding something that so broadly affects Americans and has had good press coverage. As pastors, you’re used to confusing rules (seriously, dual-status taxation?!?), but this is widespread among the general population, not a unique group like ministers. So, I decided to spell it all out for you today. I’ve seen all kinds of questions regarding how it will affect taxes in the spring, what to do with the money, and if people should opt out of the payments. Let’s start from the beginning. 

What is the Child Tax Credit?

If you make under a certain amount of money ($400,000 for a married couple) and have qualifying children, you get a break on your taxes. You basically get a discount. After calculating your tax liability based on your income, etc. you get to knock a couple thousand dollars off your bill. Pretty cool, huh? Even better, some of that tax credit is refundable, meaning they’ll give you the money even if you don’t owe any taxes. 

Child Tax Credit Changes for 2021

They made some changes to the Child Tax Credit (CTC) in the American Rescue Plan. The changes only apply to the 2021 tax year, though some people want to make them permanent. The biggest changes were increasing the amount and a provision to pre-pay some of it. This is a good article if you want to read more about the changes. 

The prepayment part is what this blog post is about. They decided that instead of making people wait until they file their tax return to receive the benefit of the higher amount, they would give them some ahead of time, starting on July 15. 

How the Prepayment is Calculated

How much did you get on July 15? The IRS calculated the payments as if they were paying out the entire CTC over the course of the year. But they’re only paying over half the year, so only half of the credit is being pre-paid. 

For example, let’s say you have a 10-year-old and a 12-year-old, so for 2021 tax purposes they are worth $6,000 total. If you divide that by 12 months, you would get $500 a month. You will only receive payments from July to December, for a total of $3,000. The other $3,000 you will subtract on your tax return, the way you usually do it. 

Why Wouldn’t You Want the Prepayment?

While the government is sending out this money to try to help people, not all of us want it. Personally, as a self-employed person, I have to pay quarterly estimated taxes just like a lot of you do (even though you’re not self-employed, it’s that dual-status taxation again!). I don’t want the government sending me money because I just have to turn around and send it back to them.

Also, a lot of people with steady income have it figured out so that they pay just the right amount and don’t owe or have a refund when they file their tax return. These prepayments can mess things up in that situation. 

Let’s look again at our above example, the people who got $3,000 of prepayments and took $3,000 off on their tax return. Normally, they would not have gotten any prepayments and instead taken $4,000 off when they filed their taxes (the usual value of 2 kids). When they go to file next April, they will only be able to take $3,000 off (since they already got the other money) and will therefore end up owing the IRS $1,000. I hope they’re setting some of those payments aside to give back in April!

How to Opt Out of the Prepayments

Of course, the IRS recognizes that not everyone wants the CTC paid in advance. They have provided a way to opt out. You can go to this website to check your eligibility and also unenroll from payments. I went in and unenrolled. It was easy for me because I already have an account with the IRS that I use to pay my quarterly estimated taxes. 

I wasn’t able to completely unenroll, though. I am married, so I was only able to unenroll from half of the payment. To unenroll for the full amount, my husband needed to unenroll also. And he tried. Boy, did he try. 

He submitted so many documents and so much information to prove his identity, I almost thought it was a scam. Finally, they told him that they were unable to confirm his identity and he would have to speak to an identity specialist with a webcam on and sent him to a queue with a 3 hour wait (which had increased to 3 ½ hours 45 minutes later). He never made it far enough to opt out. It simply wasn’t worth the effort. I would have thought he was a unique case or it was a user error, except I have heard from clients and others that also had a terrible time trying to unenroll. (And after all that we got a letter saying we would receive the full amount!)

So, technically you have the ability to unenroll from the payments, but whether or not you can actually do it is still to be determined. It has to be done three days before the first Thursday of the next month that you’re scheduled to get a payment by 11:59 pm Eastern time. In case that’s as clear as mud, this page has a chart with exact dates. Good luck!

How the Prepayment Affects Your 2021 Taxes

Now you can see why there’s so much confusion, can’t you? Not even the deadline to opt out is clear and simple! The major point of confusion for most people, though, is the effect it will have when they file their tax return next April.
What impact will it have?

The prepayments will not affect your tax liability. That is how much money you actually have to give to the government. The amount of your income that you keep in the end is not affected by the prepayments.

However, it likely will affect your tax return or the amount you have to pay. Those are both different from your tax liability. They are just what’s left of your tax liability after subtracting out the money that has been withheld from paychecks or paid as quarterly estimated payments throughout the past year. A big refund doesn’t mean you paid less in taxes, it just means you prepaid too much. The total amount you pay the IRS is the same whether you pay too much ahead of time and get a refund or don’t pay enough and have to pay more with your tax return. 

Well, I hope that helps to clear up some of your questions. I’m sure I’ve missed some, so go ahead and leave them in the comments and I’ll get back to you!

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How Can A Church Sponsor A Retirement Plan?

by Monday, June 21, 2021
Picture of an empty boat at sunset with blog post title: How Can A Church Sponsor A Retirement Plan?

This is a guest post by Paul McWilliams, an independent financial advisor with Inspire Advisors who specializes in helping organizations set up and administer retirement plans. In addition to his technical knowledge, Paul is also a pastor’s kid! Paul can be reached for questions at paul.mcwilliams@inspireadvisors.com.

Retirement is a popular topic these days because most Americans are financially unprepared for it. Pastors and church employees are no different. While many workers have employer-sponsored 401(k)s to save into, a lot of pastors are left on their own. Over half of the churches in the country have less than 100 people in attendance each week, so many churches feel they are too small to sponsor a retirement plan for their pastor and staff. 

I’m here to tell you that it’s not true. No matter how small your church is, there are ways for you to sponsor a retirement plan and it doesn’t even have to be a financial burden. 

What Kinds of Retirement Plans are Available for Churches?

As both a church and an employer, churches can sponsor all kinds of retirement plans. They include 403(b)s, 401(k)s, SEP IRAs, SIMPLE IRAs, and even defined benefit pension plans. Each kind of plan has unique features and rules that apply to it.

One benefit that churches have is that they can choose whether they want to sponsor a plan that is subject to ERISA or not. ERISA stands for the Employee Retirement Income Security Act and is the legislation that governs most employee-sponsored retirement plans. ERISA has a lot of rules and requirements, which is why it can be a benefit for churches to be able to choose whether or not to be subject to it. 

In my experience, a non-ERISA 403(b) is often the best choice for churches. A 403(b) is a lot like a 401(k) as far as tax benefits and contribution limits, but they don’t have to be subject to ERISA. Not being subject to ERISA makes things a lot simpler. You don’t have to file Form 5500 or complete nondiscrimination testing, which is a huge opportunity for cost savings in comparison with a “typical” employer-sponsored retirement plan, like a 401(k). 

Before you start shopping for a retirement plan, you may want to check to see if your denomination or association of churches already has one that your pastor and staff can participate in. However, you should also know that just because they do, that doesn’t mean it’s the best option. You may still want to sponsor your own. My dad’s denomination offers a plan, but his church still decided to sponsor their own. 

What Features Should a Church Look for in a Retirement Plan?

One of the best features of a non-ERISA plan is the fact that you can favor certain employees, or discriminate. For example, let’s look at a church that has one pastor and a couple of regular full-time employees that are not pastors. The church could make the same employer contributions to each person’s account or they could offer the pastor one amount and the other employees a different amount (or even nothing). For churches who want to help their pastor but can’t afford to do as much for their staff as well, this is a great opportunity. 

I have seen churches address this in a variety of different ways. Some churches match up to 6% while others do not. Some don’t do matching contributions but rather contribute a fixed amount. Some contribute only for their pastor while others make contributions for all employees. It really is that flexible. 

Other beneficial retirement plan features that are often overlooked are the available contribution types. You can offer both pre-tax and post-tax (Roth) employee contributions. Employers can offer matching contributions and discretionary contributions. When I design plans for my clients, I like to make them as flexible as possible with a wide range of options. 

With contribution limits much higher than individual IRA limits, having a church-sponsored plan can be a real blessing for pastors and also gives churches more flexibility in how they compensate their staff. 

Considerations When Choosing a Retirement Plan

There are a number of different things you should take into consideration when choosing a retirement plan. One is how financially “healthy” a church is. You don’t want to promise matching contributions if you may not have the cash flow to make them. Still, you can design the plan so that employer contributions are “discretionary” so that you are not locked into a requirement to match or contribute as an employer. 

In my experience, when you have an open conversation with the church board and key members about the need for staff benefits like a retirement plan for pastors, they are “normally” 100% supportive. They want to make it happen for the benefit of their pastor that leads them. Pastors who want their church to sponsor a retirement plan often have me come in and present to the decision-makers so that I can explain how it all works and answer any questions they may have. 

Cost is an important consideration, but the decision should not be based on cost alone. While SEP IRAs or SIMPLE IRAs may cost less, they are often not optimal. Increased contribution limits and flexibility are often worth the increased cost. One thing that affects the cost is whether the plan has a plan document or a third-party administrator. Some plans require a plan document (such as a 403(b)(9) church plan) while others do not (like a 403(b)(7) plan). That being said, plan documents are helpful even if they are not required by law. Among the church plans I have helped set up, some have a plan document and third-party administrator and others have neither. 

Another thing to consider is who on your staff is going to manage everything? A lot of retirement plan responsibilities can be outsourced but there is always a cost to that. Alternatively, a board member or church member who is not on staff could also help with the administration. Where there is the most opportunity for error is in depositing money and making sure that the employees’ salary deferrals get into the plan properly and in a timely manner. 

How Pastors Can Claim a Housing Allowance in Retirement

One of the greatest benefits for pastors, besides being able to save more money in a tax-advantaged manner, is being able to claim a housing allowance in retirement. The minister’s housing allowance can only be given as compensation for ministerial services. However, if you wait until retirement to receive that compensation, it is still from ministerial services and therefore eligible for the housing allowance.

The key to claiming a housing allowance in retirement is that it must come from a church (or other housing allowance eligible organization)-sponsored retirement plan. Even if your IRA account was built with money you earned as a pastor, you won’t be able to claim a housing allowance from an IRA. It has to be from a church plan. For that reason, it’s extra helpful for a pastor when the church is willing to sponsor a plan. It also means that pastors should be careful not to roll all of their money into an IRA in retirement. 

This article is for informational purposes only and is not legal, investment, or tax advice. Consult your CPA or legal counsel when establishing a retirement plan and make sure to follow all IRS guidelines.

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Why All The Hate Against Dave Ramsey & Is There Any Truth In It?

by Monday, June 7, 2021
Picture of a microphone with blog post title: Why All The Hate Against Dave Ramsey & Is There Any Truth In It?

This post is based on Dave Ramsey’s Financial Peace University and not his radio show. As such, it may not address everything that he has ever said publicly.

Dave Ramsey is a polarizing figure. Honestly, though, anyone who dares to be different and open their mouth about it is. Donald Trump. Alexandria Ocasio-Cortez. Jesus. (I had to end on a positive note since one of those other names probably got a rise out of you.)

Just like other polarizing figures, Dave Ramsey has throngs of loyal followers and many who actively hate him. That’s to be expected. Today we’re going to take a deeper look at the opposition. Why do people hate Dave Ramsey and is there any merit in their allegations?

What Normal People Have Against Dave Ramsey

He Is Convicting & Not Always Nice

A lot of normal, everyday people don’t like Dave Ramsey. Why? Because he is not afraid to call people stupid and he advocates for a lifestyle where personal pleasure is subjected to personal responsibility. That doesn’t sound like fun, does it?

We live in a hedonistic society where the concept of personal responsibility is slowly evaporating. That is very gratifying for our sinful nature. Think of a 3-year-old. What do they do? Whatever they want without regard for the consequences to themselves or others. We are born this way, so our natural tendency is to want to be this way. 

Dave Ramsey goes against this, so people don’t like it. And he does it in a very confrontational way that can sound arrogant and insulting, which only serves to further irk people. It makes sense that people don’t like him when he brings conviction and tells them to act in a way contrary to their natural tendencies. But is Dave Ramsey wrong? You can argue his methods, but in the end, his ideas are right. I say he’s right because the Bible also tells us that we are to crucify our sinful desires, put others first, and be wise stewards of our finances.  

He Doesn’t Like Debt

Dave Ramsey makes it abundantly clear that he hates debt and some people hate him for it. They say that his ideas are impossible and no one can live without debt, in fact, that society couldn’t even function without debt.

I would ask, why are you such a fan of debt? Why do you feel the need to defend it so vehemently? Take a minute to reflect on that. Debt makes instantaneous gratification possible. So it has a lot of fans. Because we all just want what we want when we want it. Remember our sin nature discussion above?

What about the idea that life is impossible without debt? Even Dave Ramsey acknowledges that some things are very hard without debt. That’s why he doesn’t yell at people for having a mortgage and instead teaches people to do it responsibly. The dissenters get a point here, but it doesn’t count as a point against Dave Ramsey because he agrees.

Another debt that a lot of people say you can’t live without is student loans, which Dave Ramsey is not willing to be flexible on. I would have to side with Dave Ramsey on this one. I’ve earned four college degrees without a cent of debt and never had a college fund (though I didn’t study anywhere prestigious or have time/money to party, either). It is possible to get a college education without debt. However, unlike Dave Ramsey, I would not yell at someone for taking out debt to pursue a degree that is a direct pathway to a career that generates enough income to pay off the loans quickly. Here I’m talking about things like engineering, not seminary. I believe in education and I believe in seminary, but I don’t believe most entry-level pastors earn enough to be able to pay off student debt. 

He Is Rich

Dave Ramsey is rich. He’s not rich because of illegal activities or an inheritance, but because he offered the world something that people found valuable enough to pay for. Many, many people. And then he managed that money that he earned wisely. 

I know it’s popular to hate the rich these days, but if you hate someone because they are rich (or beautiful, or smart, or whatever attribute you are envious of), that is a personal issue that has nothing to do with them. You have a heart issue.

There is nothing wrong with being rich. The Bible doesn’t say that there is anything wrong with being rich. It says that being rich can be very dangerous, but that doesn’t make it wrong. In fact, wealth was often a way that God blessed people in the Bible, a sign of his favor. He didn’t commit any crimes to get that way, so there’s nothing inherently wrong about Dave Ramsey being rich. 

What Financial Advisors Have Against Dave Ramsey

While many financial professionals agree with a lot of the complaints outlined above, there are a few points of contention unique to the financial services industry. Most of those, though, can be explained by their perspective and the regulations they are subject to. 

You see, if you are a financial advisor in the eyes of the law, you are subject to A LOT of regulations. There are so many things that you must do or can’t do that wouldn’t even make sense to an outside person. For example, I work for a registered investment advisor, and even though I’m not an advisor yet myself, I am not allowed to contribute more than $150 to a political candidate that I can’t vote for ($350 if I can vote for them) and I have to report to my boss about contributions I make to any political candidates. 

You see, while Dave Ramsey provides financial advice by most people’s definition of the term, he is very careful not to cross the line to where he would have to register as a financial advisor and be subject to all of the accompanying regulations. For financial advisors who have to bend over backward to comply with regulations to protect their livelihoods, that can be incredibly frustrating. 

He Gives Blanket Recommendations

A major complaint that financial advisors have is that Dave Ramsey gives blanket recommendations, meaning he applies the same advice to everyone without personalizing it. Legally, that is an unethical business practice for financial advisors. However, that is what Dave Ramsey’s business is. 

While a financial advisor’s job is providing personalized advice to optimize an individual’s financial situation, as a media producer, Dave Ramsey’s job is the opposite. He seeks to provide a framework that is generic enough that anyone could apply it to their situation and his ultimate goal is behavior change, not financial optimization. If you look at what he is doing as if he were a registered financial advisor, it is terrible. But he’s not a registered financial advisor and he isn’t trying to be one (though I’ll bet he has a good team of legal counsel helping him get as close as possible without crossing the line).

It’s a lot like what I do here at Pastor’s Wallet. I provide financial education and generic advice for pastors. But I am not acting as a financial advisor. If one of my readers needs a financial advisor because they want personalized advice, I refer them to Guide Financial Planning where I work. Guide is registered with the state and also has state-registered financial planners on staff, so Guide can provide services that Pastor’s Wallet cannot. 

Dave Ramsey sometimes provides more personalized advice on his call-in radio show. I have not listened recently enough to comment on that.

He Talks About 12% Returns

Probably the most popular reason to hate Dave Ramsey among those who are financially literate is his penchant to discuss 12% stock market returns (though I’ve also seen 11% more recently). Boy, do people like to crucify him for that. From a regulatory perspective, a financial advisor could get into big trouble for making claims about 12% returns. However, as I said, Dave Ramsey is not a registered financial advisor so, as he says, it’s his show and he can use whatever numbers he wants. 

Are 12% returns realistic, though? One challenge is that there are different ways to calculate stock market returns, so you can get different answers with the same data. Then, if you take into consideration inflation, taxes, and things like that, your numbers will change again. If you google “stock market historical return,” you will find that most results reference the S&P 500, which is a proxy for the US stock market as a whole, and the results will range from 10-11%. 

Is that 12%? No. One point for the frustrated financial advisors! Is his use of 12% a problem? As a financial professional, I would never promise someone a 12% return and I would never use that number when doing projections. It would be irresponsible. However, I’m okay with him using it.

While that may sound hypocritical, let me explain. What is Dave Ramsey’s goal? To get people to spend less than they make and save money for the future. It is not to predict the likelihood of an individual having enough money to survive a long retirement as a financial advisor does. 

If you walk over to your local park right now, you might find some kids playing little league baseball. If you get close enough, you may hear the coaches and parents talking. There’s a good chance someone will mention making it to the Major Leagues and playing professionally. Now, are you going to butt in and tell those irresponsible adults that the probability of those children going pro is next to nothing and what they are saying is akin to child abuse? No! Many children dream of becoming professional athletes and the adults in their lives use those dreams to motivate them to make an effort. As they mature, it is expected that they will have a more realistic understanding of their skills and adjust their expectations accordingly.

Dave Ramsey is like those parents and coaches. He uses a number that makes compound interest graphs look interesting to motivate people to action. And, like the aging athletes, as people grow in their financial literacy and savings, they usually seek professional help where they get personalized projections with more realistic numbers.

Is a 12% return realistic? Probably not (I acknowledge that there are investments that generate those returns, but in general, most people’s entire portfolio will not), but I think the way Dave Ramsey uses it still does much more good than harm.   

He Recommends Commissioned Salesmen & Actively Managed Investments

Dave Ramsey does not outright recommend working with a commissioned salesman for your investments, but he has SmartVestor Pros that he endorses that include them. The SmartVestor Pro program is a referral program where a financial advisor pays a fee in exchange for being recommended on the Ramsey website. Dave Ramsey’s company vets these advisors, though I do not know what standards they use other than that he says “they have the heart of a teacher.”  

Personally, I do not trust the conflicts of interest inherent in the commission-based model for advice. That is why, for my own career, I have chosen the fee-only route. However, I know there are some trustworthy people that work for commissions, so I cannot give a blanket condemnation of all advisors who use that business model. 

Dave Ramsey also promotes actively managed mutual funds, though he doesn’t speak against passive index funds. Actively managed funds are more expensive and the majority underperform when taking fees into account. However, some do beat the market. This argument is much like the fee-only versus commissions argument. While they may not be the best investments, I cannot in good conscience make a blanket statement saying that they are all bad. You can’t make a solid argument that Dave Ramsey is completely wrong in this area, but if going this route, I would definitely say to proceed with caution.  

How To Have A Healthy Perspective Of Dave Ramsey

As with many polarizing figures, I believe that many people have an unhealthy perspective of Dave Ramsey on both ends of the spectrum, just as much those who love him as those who hate him. Usually, it comes down to the person and their perspective and is not really an issue with Dave Ramsey himself. Here is what I think is a healthy way to view Dave Ramsey and what he preaches.

He Is Not Giving Personalized Advice

The first thing to remember is that he is not giving personalized advice. He is giving general advice that is not specifically situated for any one person’s situation. As a pastor, you probably preach on Sundays and do counseling as well. Are they the same?

No, preaching and counseling are not the same because one is personalized and the other is not. When you preach, you write a message that can apply broadly to your listening audience based on principles. When you provide counseling, you tailor your advice to the specific person you are talking to. Dave Ramsey preaches, he is not counseling. Financial planners are the counselors. 

He Is Providing A Framework

Dave Ramsey provides a framework for personal financial management designed to meet the needs of the most people possible. It’s like tract homes. You know, those neighborhoods where every single house looks exactly the same except maybe the garage is on alternating sides. They are designed to efficiently meet the needs of the general populace. If you’re looking for a 3 bedroom, 2 bathroom home with a kitchen and living room to meet your family’s needs, you’ll be happy in a tract home. However, if you want your dream home, you’ll probably be disappointed. In the same way, if you want Dave Ramsey’s program to perfectly optimize your personal financial situation, you’ll be disappointed. He’s only providing a framework.

He Is Not God

We’ve come to my final point and this one is for everyone who loves Dave Ramsey. He is not God. And to his credit, he’s never claimed to be. Personally, I think the most dangerous thing about Dave Ramsey for most people is not talking about 12% investment returns, but the pharisaical, militant blind obedience of some of his followers.

I am a part of a Facebook group for Financial Peace University coordinators (yes, I help teach his classes) and some of what I see in there is very concerning. There are constantly people giving adamant advice on things they don’t understand that have potentially serious consequences. It’s dangerous. Just because you’ve heard Dave Ramsey address a topic once or twice does not mean you are qualified to dispense advice on the issue. It would be like me insisting on how you should care for your diabetic child just because I know diabetics need insulin and lack of it can be fatal. Because of my limited knowledge of diabetes, that’s an area where I would likely do more harm than good if I tried to give advice. 

I see a lot of people giving harmful advice based on one or two things that Dave Ramsey either said or didn’t say. Just because he told one caller something doesn’t mean it’s right for every single other American. And just because he hasn’t addressed something doesn’t mean it has no merit or is flat out wrong. Dave Ramsey is not God and his words are not the one-and-only source of all wisdom. (If he were here, he’d probably refer you to his wife on that one.)

How Do You View Dave Ramsey?

As I said in the beginning, this can be a very polarizing topic. If this rubs you the wrong way because you’re a faithful Dave Ramsey devotee, let me ask you: How many people have you talked to about Dave Ramsey and his way this year? How many people have you talked to about Jesus and his way this year? What does that say about your true passion?

Dave Ramsey is human just like the rest of us. He is neither God nor the antichrist. His program does not perfectly optimize every person’s financial situation, but it has helped a lot of people improve their lives in many ways. If you are a Dave Ramsey-lover, I would encourage you to remember who your true savior is and where the ultimate source of truth is. If you’re a Dave Ramsey-hater, I would encourage you to go and read Matthew 7:5. That’s all, folks. 

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What Should You Do If You Don’t Have The Money To Pay Your Taxes?

by Monday, May 10, 2021

Your 2020 taxes are due in exactly one week. That means an envelope with your check has to be postmarked by midnight on May 17, 2021. Or you’re late. 

What if you owe money you don’t have? Maybe you calculated things poorly. Or you didn’t realize you were supposed to be paying quarterly self-employment taxes. You owe, but there isn’t enough in your bank account to pay the bill. What do you do?

File Your Return Anyway

First of all, FILE YOUR TAX RETURN ANYWAY. Yes, I put that in all caps on purpose. It’s that important. Why? It’s bad enough that you can’t pay your taxes, but not filing your return is double-bad.

Penalties

You see, the IRS has two different penalties related to this. One is for not filing your tax return and the other is for not paying your taxes. Filing your tax return is a free and easy way to get out of one of those penalties, even if you don’t have the money to pay your taxes yet. 

If you don’t pay your taxes on time, you are subject to a penalty of 0.5% of the amount due for each month (or part of a month) that you are late, up to a maximum of 25%. So, if you owe $1,000 on May 17 and don’t pay it until July 4, then your penalty is $10 (0.5% x 2 months x $1,000). In addition to the penalty, the IRS will charge you daily compounding interest as well. 

What happens when you decide not to file your return until July because you know you won’t be able to pay until then? You will be subject to the IRS failure-to-file penalty on top of the failure-to-pay penalty. The failure-to-file penalty is 5% of the taxes due per month (or partial month), with a maximum of 25%. That means in addition to your $10 failure-to-pay penalty and interest in the previous example, you would also have to pay $100 for not filing on time (5% x 2 months x $1,000). For returns over 60 days late, the minimum failure-to-file penalty is the smaller of $435 or 100% of the tax required to be shown on the return. 

Extension To File

Basically, FILE YOUR TAX RETURN even if you can’t afford to pay your taxes yet. The failure-to-file penalty is ten times the failure-to-pay penalty. There’s really no excuse not to do it. However, if you do have a really good excuse, I’ve got a backup plan for you. The IRS offers a free, six-month extension to file your return each year. 

You have to ask for the extension, it is not automatically granted. All you have to do is file Form 4868, which is really easy, and you’ll have an additional six months to avoid the failure-to-file penalty. Taxes are still due on the regular deadline, so you’ll still end up with a failure-to-pay penalty. But that’s so much better than having to pay both penalties!

Communicate With The IRS

Now that you’ve filed your return to avoid the 5%-per-month failure-to-file penalty, what do you do? If you know you’ll be able to pay your bill in the next couple of months, then go ahead and wait until you have the money and pay the bill. If it won’t be that easy to clean up, you need to get on a payment plan with the IRS. 

You see, the IRS’s goal is to collect all the tax money that is owed. They aren’t interested in teaching you a lesson or shaming you or punishing you and making you suffer. They just want their money. If you are forthright and communicative, they will work with you to develop a payment plan. When you get on an installment plan with the IRS, they even cut your failure-to-file penalty in half to only 0.25% per month. 

Of course, if you stick your head in the sand and refuse to acknowledge your tax liability, it can get ugly. The IRS has the power to clean out your bank accounts without warning and without prior legal action. You don’t want to go there. Just act like an adult and talk to them about it. I’m sure you’ll be able to work it out.

Make Sure It Doesn’t Happen Again

“The definition of insanity is doing the same thing over and over again and expecting different results,” is a popular quote commonly misattributed to Albert Einstein. While I don’t know that I’d go so far as to call that insanity, it still doesn’t reflect well on your wisdom and judgment. We’ve talked already about what you should do right now about your tax problem. But what are you going to do going forward so that it doesn’t happen again?

The answer to what to do to avoid this dilemma in the future will depend on how you got into this mess in the first place. Maybe you need to adjust your employer’s tax withholdings. Maybe you need to start paying quarterly estimated taxes. Maybe you need to work with a professional tax preparer.

One thing for certain is that you probably need to build up some emergency savings. Yes, an unexpected tax bill counts as an emergency and justifies dipping into your savings. But you can only dip into savings during an emergency if you have savings. 

The first step is to live on a budget. Don’t know how to make a budget? Read this article. Having trouble with your budget? This article might help. Once you get your budget going, the next step is to spend less than you make. Those two things are not only the keys to avoiding this problem in the future, but they are the foundation of biblical stewardship and wise money management. They are essential. And, once you are using a budget and spending less than you make, you will be able to build up emergency savings for such a time as this.



Speaking of budgeting, I’m curious about something. If I put together an online course to teach not only how to put together a budget but also how to use it to improve your life instead of making it harder, how many of you would want to take it? Let me know in the comments or at Amy@pastorswallet.com. Thanks!

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Are Pastors Eligible for the Home Office Tax Deduction?

by Monday, April 12, 2021
Picture of a man working in a home office with blog post title: Are Pastors Eligible for the Home Office Tax Deduction?

Like many all over the globe, pastors did a lot of work from home last year. Whether you already had a dedicated space or had to claim a corner of the dining room table, last year was the year of the home office. Does that mean you get to claim a home office deduction on your taxes?

I’m sorry to say, probably not. Some strict requirements must be met in order to claim the home office tax deduction, and the majority of pastors likely will not qualify. 

Requirements to Claim the Home Office Tax Deduction

Self-Employed vs. Employee

The first rule, which knocks out almost everyone, is that employees cannot claim the home office tax deduction. Even if all of your work is always done from a home office. If you are an employee of a church or other organization, you cannot claim the deduction (even though you pay some taxes as if self-employed). The home office tax deduction is only available to the self-employed who file Schedule C (and some partners, but that doesn’t apply here). 

Exclusive Use

In addition to being self-employed, you must use the office exclusively for business purposes. “Business” is the term that the IRS uses, but if you’re a pastor, you can substitute “ministry” and it means the same thing. Exclusive means that nothing else can go on in that home office. One hundred percent of the time that it is being used, it has to be used for business purposes.

This is the rule that knocks me out of the running. I am self-employed and have a home office. However, my kids love to read next to the heater in my office and I use my desk and computer in the office for personal things and to teach Financial Peace University classes through my church. Because we use my office for things other than my work, I cannot claim the home office deduction. 

Regular Use

You also must use your office regularly. Even if it is set aside exclusively for your work as a pastor, if you only occasionally use the office, it does not qualify. Now, there isn’t a concrete line drawn between the “regular” and “occasional” use of an office that I can refer you to. The IRS would look at all of the facts and circumstances in making a determination. It isn’t usually a problem, though, because it’s usually one of the other requirements where people fall short, such as exclusive use. 

Principal Place of Business

Finally, the home office must be your principal place of business. If you have an office in a church or something similar, then even if you regularly use your home office exclusively for ministry, it likely will not qualify. The home office must be the principal place of business. Of course, if you go elsewhere to perform wedding ceremonies and the like, that shouldn’t be a problem. You can perform ministerial services in other places, as long as your home office is your main office.

How to Calculate the Home Office Tax Deduction

Let’s say you’ve met all of the requirements. Maybe you do traveling ministry and work out of your home office that isn’t used for anything else. How do you actually claim the home office tax deduction?

The home office deduction is subtracted from your self-employment income on Schedule C. You can use the deduction to reduce your income down to $0, but it cannot create a loss (negative income). 

There are two methods of calculating the actual deduction, the Regular Method and the Simplified Method. With the Regular Method, you divide expenses between direct and indirect expenses. Direct expenses are those that only apply to your home office, like installing blinds so you look better on Zoom. Indirect expenses are shared with the rest of the home, like electricity and mortgage payments. This graphic from financial planner Michael Kitces illustrates the difference well.

All of the direct expenses are included in the home office deduction and a proportion of the indirect expenses are included. You can calculate indirect expenses as a percentage of the home’s square footage or some other reasonable comparison. One important thing to note is that you must depreciate your home when you use this method, which can affect the taxation whenever you sell it. 

If that sounds too complicated, then the Simplified Method is for you! And it really does live up to its name. Just take the square footage of your home office (but only up to 300 square feet) and multiply it by $5. There you have it, that’s your deduction. Simple, isn’t it?

How the Home Office Deduction Affects the Housing Allowance

This is an article for pastors wanting to claim the home office deduction, so we have to address the clergy housing allowance. Does claiming a home office deduction affect your housing allowance? Yes, it does. 

The housing allowance provides you with a tax exemption for creating a home, not a business. As such, business use of your home is excluded. You don’t lose the entire housing allowance, just a proportional amount related to the business use of your home. This article explains it in more detail including how to do the calculations. Basically, you can’t double-dip. You can’t get tax-free housing and then deduct the expenses on your tax return again. 

I’m sorry if you were planning on claiming a home office deduction this year and I dashed your hopes. Look on the bright side, though. You probably saved a lot of money on gas!

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