Rules For Financial Success: Rule 2

Correspondent | Monday September 4, 2017 16:28

Never Borrow To Buy Anything That Depreciates In Value

As we continue to live our lives under financial pressure, we must create new ways to deal with over-spending and start to focus on saving and investing for our future. It is imperative to live within our means, finding ways to make our money go further so that we can start to save and plan to be financially fit.

To borrow or not to borrow? Take credit or not to take credit?

We need cars & houses, we need new furniture (and in fact P809 per month for the new Samsung Galaxy S8 doesn’t seem too bad, does it?) Students need laptops, maybe a fridge as well and a comfortable couch perhaps? P540 per month for furniture isn’t that steep, is it?

Let’s be honest, buying something that will make your life better or easier feels good. Buying it on credit – going into debt – can be easy to justify - we find reasons to reassure ourselves that the debt is OK. “Why wait until I have money for it when I can have it now?”

In a world where we know “there’s no easy way to success”, we’re actually taking the easy way out, and its making us POOR.

Why are we talking about this?

The essence of this isn’t really about whether one should borrow or not, it’s about what credit is more suited for and what isn’t.

l Good debt is when you borrow money to buy, build or start something that will generate more money, save us money, or grow in value. The best example of good debt is a mortgage to buy the house that you live in.

l Bad debt is when you borrow money to buy something that will not generate money and will not increase in value. Bad debt covers almost everything that we want for ‘status’ or ‘lifestyle’.

Why is this important to know?

Because a lot of people are drowning in debt! A lot of us are living on borrowed money and borrowed time to pay that money back. Personal loans for weddings, travel, entertainment, (or for making your account balance seem better) are all examples of bad debt.

Borrowing money to buy a car or a cellphone, buying new furniture for yourself (or your parents) on credit – these are all examples of bad debt.

None of these items will grow in monetary value.

Q: What’s so bad about “bad debt”?

A: Several things:

l you’re going to end up paying much more money than the actual cost of the item you’re buying.

l You’re reducing your savings capacity, and making your future self poorer.

l Some loans have floating interest rates which means your repayments could increase more than you budgeted for.

l You’re taking on Risk. Very few things are certain, if you lose your job then you’ll have no way of paying for those items or paying that loan back.

l Because debt makes an item easier to buy in the short term, you’re more likely to buy an item you don’t need – and then pay it off with money you earn (and need) in the future.

If what you do with borrowed money doesn’t appreciate in value then you’re working against yourself, because you’re not beating the interest rate, and you’re getting poorer as time goes by. If you have bad debt and you don’t own a growing or income generating asset then you need to urgently reconsider.

More money more problems? Not necessarily.

In an evolving world, people, things, even priorities shift. It’s an environment where everyone is trying to be a better version of themselves and innovators are creating objects in better versions as well to match the better, prettier, more elegant versions that we have become.

As the income of the people around us increases, so does our desire to own ‘status’ things. The more affluent life is around us, the more people feel the need to show off that they are indeed living better lives. That means the more they are inclined to take on debt. (Additionally, the better the salespeople selling ‘lifestyle stuff’ become)

We don’t buy apples, milk or bread in low-end stores anymore as our income increases. We want to eat in fancy restaurants, we want larger televisions, better cellphones, bigger cars.

There is nothing wrong with wanting that car or that cellphone. What is wrong is taking on more risk than we can sustain.

Question:

Why is it easier to have a P6,000 stop order paying debt on a new car than to invest P5,000 every month to pay for your child’s university education? (Or for a down payment on an asset that will actually appreciate in value or for a business venture you’ve been thinking about?)

Answer: Instant Gratification

There is a deeper rooted issue and it stems from the need for instant gratification. Think about our last article Rule 1: Pay Yourself First.

If you’ve saved up to buy an item, and you have the cash to pay for it, you’re going to make a much better buying decision.

Signing on the dotted line to buying a car for P6,000 over 5 years might be an easy decision – especially when you can smell the leather and you’re in front of a good salesperson.

However, if you’ve saved up P360,000 it’s a different matter - you’ll haggle - you’ll get a discount - you’ll get a better deal, and you’ll save yourself money. (or you might even buy yourself a real growing asset instead)

Now, there is absolutely nothing wrong with wanting a better life for yourself, that’s why we wake up every day and go to work, right? We’re trying to build better lives for ourselves and our families.

However, don’t do it by making your future-self poorer!

“The true value of money is not how much you start with, but what you do with it”

©S.C.I.Group. Author: Katrinah Mmusi – Financial Adviser with the S.C.I. Group. S.C.I. Financial (Pty) Ltd. is a registered Investment Adviser, giving financial planning advice, financial education and debt counselling distress. For help and information contact 3180111 or advice@scifinancial.com