Smart Banking Guide

how about spending Money You Don't Have?

Written on May 1, 2009 – 7:56 PM | by dodolovesme

It is a strange thing that most people who have made fortunes could not have done it without borrowing money, and yet borrowing money has sent many others bankrupt. How can it be such a good thing for some and so bad for others? Borrowed money is like fire — “a good servant but a bad master”.

Let’s think about the whole concept of borrowing. The best definition of borrowing I have ever heard is “spending money you don’t have” and a fair question is to ask why we do it? The only reason we borrow money is because we want something now but don’t have the cash to pay for it. Why would a sensible rational human being, like you or me, want something so much that we would pay an extra price (called interest) just to have it straight away? There are some good reasons and some bad ones — here are some of them:

Good Reasons

It’s a genuine bargain — I can save heaps by getting it now. (After Christmas sales)

The price is going up faster that I can save (house). Ownership will save me money and time (motor-car).

It is cheaper overall to replace it now than wait till it wears out (car).

It will increase my income by more than it costs (study course or a new piece of machinery).

Bad Reasons

The salesman talked me into it (you could have walked away).

To buy gifts for people (why should you get into debt to buy other people presents?).

I had to give my daughter a big wedding (how will she ever learn good money management if you don’t set an example?).

To put all my little debts into one monthly payment (you want to convert all your “hard to pay” bills into one “impossible to pay” bill!).

I needed a new outfit to make me feel better (you will feel worse when you get the account for the payments every month — why not treat the cause rather than the symptoms?).

I wanted to give my son a car (why can’t he save up for his own car — he will appreciate it more).

Notice that the good decisions were made on logical grounds and with the main purposes of eventually saving or making money. The bad decisions were made on emotional grounds or out of sheer desperation. So borrowing money is not necessarily a bad thing —the problem is that often the need to borrow is a symptom of bad money management.

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Tags: borrowing, borrowing money, money, why