Why do you borrow money? Usually, you borrow money because you don’t
have enough to buy something you want or need — like a college education. If
you want to buy a four-year college education, you can easily spend $100,000,
$150,000, or more. Not too many people have that kind of spare cash. So borrowing
money to finance part of that cost enables you to buy the education.
How about a new car? A trip to your friendly local car dealer shows you that
a new set of wheels will set you back $20,000+. Although more people may
have the money to pay for that than, say, the college education, what if you
don’t? Should you finance the car the way you finance the education?
The auto dealers and bankers who are eager to make you an auto loan say
that you deserve and can afford to drive a nice, new car, and they tell you to
borrow away (or lease, which I don’t love either). I just say, “No! No! No!”
Why do I disagree with the auto dealers and lenders?
For starters, I’m not trying to sell you a car or loan from which I derive a
profit! More importantly, there’s a big difference between borrowing for something
that represents a long-term investment and borrowing for short-term
consumption.
If you spend, say, $1,500 on a vacation, the money is gone. Poof! You may
have fond memories and even some Kodak moments, but you have no financial
value to show for it. “But,” you say, “vacations replenish my soul and
make me more productive when I return. In fact, the vacation more than pays
for itself!”
Great. I’m not saying that you shouldn’t take a vacation. By all means, take
one, two, three, or as many as you can afford yearly. But that’s the point:
Take what you can afford. If you have to borrow money in the form of an outstanding
balance on your credit card for many months in order to take the
vacation, you can’t afford it.
have enough to buy something you want or need — like a college education. If
you want to buy a four-year college education, you can easily spend $100,000,
$150,000, or more. Not too many people have that kind of spare cash. So borrowing
money to finance part of that cost enables you to buy the education.
How about a new car? A trip to your friendly local car dealer shows you that
a new set of wheels will set you back $20,000+. Although more people may
have the money to pay for that than, say, the college education, what if you
don’t? Should you finance the car the way you finance the education?
The auto dealers and bankers who are eager to make you an auto loan say
that you deserve and can afford to drive a nice, new car, and they tell you to
borrow away (or lease, which I don’t love either). I just say, “No! No! No!”
Why do I disagree with the auto dealers and lenders?
For starters, I’m not trying to sell you a car or loan from which I derive a
profit! More importantly, there’s a big difference between borrowing for something
that represents a long-term investment and borrowing for short-term
consumption.
If you spend, say, $1,500 on a vacation, the money is gone. Poof! You may
have fond memories and even some Kodak moments, but you have no financial
value to show for it. “But,” you say, “vacations replenish my soul and
make me more productive when I return. In fact, the vacation more than pays
for itself!”
Great. I’m not saying that you shouldn’t take a vacation. By all means, take
one, two, three, or as many as you can afford yearly. But that’s the point:
Take what you can afford. If you have to borrow money in the form of an outstanding
balance on your credit card for many months in order to take the
vacation, you can’t afford it.
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