Making Decisions As A Family

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Making Decisions As A Family

By Jerry Hionis

Economics is a study of human decision-making. The dominant philosophical view of economics, the classical/neoclassical school, has had a historical focus on the homo economicus; that is, the “economic man”. What this means is that decision-making is largely done from the point of view of an individual: with any action, how do the results of said action affect the happiness and suffering of that individual?

Yet this is not always the case. People do not just act as individuals but also as individuals within groups; individuals within groups within groups; individuals within groups within groups within . . . you get the picture. We each are members of various social groupings: families, geographical entities, nationalities, ethnicities, occupations, political blocs and so on. Out of all the various social groupings one can be apart of, the “family unit” is considered to be one of the most important. Given its importance, it should be to no surprise that the family — and, invariably, how it should be run — is highly controversial. Continue reading

Three things you can do right now to reduce your debt

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credit_card_yoke

Exhibit A: Guy with credit card debt

 

We’ve all been there and it’s no fun. Whether to pay a minimum on our credit card bill or pay back a friend, there’s a certain resistance that each of us feel when parting with our money. What’s worst though is the lack of feeling we have when spending it! Each of us have dreams and aspirations, but most of us are held back because we think our jobs and lives are limiting us. They’re not, but our debts and bad decisions are.

One of the things Prophet Muhammad would ask Gods protection from was the “yoke of debt.” Owing debt is like a yoke on your neck, a collar pulling you back and inhibiting your freedom. See Exhibit A.

Through better money management you can not only avoid parting with your cash and also avoid the hardship that comes with paying back more than necessary. A massive bill each month snowballing and hurdling towards your livelihood will wreck havoc on your future. It has to be slowed down first if not halted from the outset.

Here are three things you can do immediately to lower your debt and start on a path to financial freedom:

1- Cut the strings to (not actually) free money
If you have several credit cards right now, but aren’t using them, identify the ones that have the best rewards and will give you a better return on their use. Then cancel all your other cards. Once you’ve paid down your credit card debt, and you longer need that card, get rid of that one too.

If you still need a card for certain purchases, keep it at home with your bills and important papers, but don’t carry it with you. “Out of sight out of mind” is the key here. The less access you have to (not actually) free money, the less often you are going to use it.

2- Review your expenses and reallocate them to something better
Have a monthly subscription that you don’t really use? Maybe a reoccurring expense that’s not too essential (expensive as heck coffee comes to mind)? Don’t just cancel that subscription. You obviously did not miss that money too much. Instead of saying “Hey now I have an extra 50$ a month!” Take that extra cash and setup an automatic money transfer to your bill pay account.

Look at your daily expenses. If you drive to work and pay for parking, instead of paying 10$ a day for a garage right next to your job, pay 5$ for the lot down the street and walk a few blocks to work. 5$ of savings a day for 20 a month is 100$ a month!

Whether from coffee, subscriptions, or parking, apply that amount immediately to paying down your outstanding debts. You won’t miss it, and be better off for in health (less sugar, more exercise) and in wealth (less debt, more earning).

3- Be your own bank or Credit Card (actual free money)
Every six months, take 1% of your income and stick it in an emergency fund. Whether you take it out as cash and leave it in a safe at home, put it in an IRA, or place it in an online savings account that isn’t connected to your main bank account (remember “out of sight out of mind”) you’ll start to accumulate a surplus that you can use in lieu of your credit card when you need to make a major purchase.

Say your salary is 55k a year. Every six months put 1% away. That’s 550$, equaling 1100$ a year. That’s big enough to make a difference without making a dent in your wallet. By year end you’ll have 1100 dollars saved. Around 3$ a day (see coffee above). In three years that’s 3300k, enough to purchase new tires for both cars, buy a new home appliance, or take that anniversary trip you were planning. Its free money, because its yours to use freely without worrying about paying someone else back for it.

When do I start?
The best time to plant a tree was twenty years ago, the second best time is today. Read this prayer “Lord I seek your refuge from the yoke of debt and being controlled by others” and then crack open your books to see just how you can put that supplication into practice. Take a few minutes to put these steps into action and turn your prayers into practical steps and your dreams into reality.

The Bottom Line: Not every increase on your wealth is Riba

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When you are young you look at money as something that you use. It’s there to spend, then it is gone. If you don’t spend it, it’s just there. I personally know many people, especially in the Muslim community, who practice one type of finance: mattress finance. What you don’t realize is that you can take that same money that is sitting under your mattress and invest it, earning interest or a dividend.

Yes, Riba is Haram and there are better options

Now this is an important point, “earning interest or a dividend.” Many people in the Muslim community get stuck at this point, thinking that ANY return on their capital is interest, interest = Riba, Riba = Haram, and therefor return on capital = Haram.

This is true:  Riba is Haram and interest earned on unsecured money loaned is Riba.

But, while you may think that it’s safer to put your money under your mattress, there are better options. The first thing to come to mind are savings accounts. Place your money in a savings account, earn interest, profit. While you will earn a small return from your savings account, you are losing in two ways. You are involved in something impermissible according to the vast majority of Islamic legal scholarship, and you may be losing money by not investing. Many (if not most) savings accounts at the time of writing this article pay something like 0.1% on the money you deposit, which isn’t even enough to beat inflation much less make money. You may be better off placing your money in an index fund or similar, where it actually represents ownership in business working the real economy. Not only is this permissible, but will earn more for you as well, because for the most part index funds have shown to match the market year after year. The key here is: choose the right fund, and have enough patience to be in it for the long haul. Even if you do like some investors, choose a small basket of stocks to invest in and then wait, you will in the long run probably be better off than sitting on cash or stashing your money in an interest bearing account. If you can invest in stocks that pay dividends, you’ll even make a return on top of the stock growth.

But the stock paid me money, isn’t that Riba?

Dividends from stocks that you’ve invested are not considered “Riba” or interest. They are earnings you make on your share of ownership in a company. Think of it this way: If you took that money and gave it to a friend who owns a business with the agreement that you are funding his business activities, wouldn’t it only be fair to share in the upside when he makes a profit. Likewise, if you gave him that money knowing that if he lost money you wouldn’t get any cash sent to you, but you’d still be a partner in the business, and the value of your share may go down this too would be fair, correct?

Investing in a stock that pays dividends is analogous to this. You buy a piece of the company – some people call them stock, others call them shares – and when the company makes money you are paid your portion of the profit. This upside or profit is called a dividend. When a company has made enough money that they no longer have the ability to invest that money back into the business, they distribute dividends. Make enough dividends on your shares owned and it will be counted as income, capital income precisely. There are special tax laws for income from dividends, but if you are smart (or have a smart advisor) you can harvest the losses from your trading as well as the income, offsetting any taxes you may owe while still making a profit. Consult with a qualified tax accountant to get more details on how to do that.

The bottom line here is: Don’t just let your money sit around, but make your money work for you.

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