Borrowing is Like Using a Time Machine

Financial planning is a bit like learning a language. It is a language that deals with the future with close attention to the present and acknowledgement of what the past has brought forward. Everything works together and when you know what you want to say, you need the tools to express it.

One of the aspects is involves how money works in time. Many financial tools are time machines. Like borrowing.

It is financial tool and it can work for you or against you. It is not the debt that is the problem it is how you use it.

Getting money from your future.

That is what borrowing is about. You should be careful with borrowing because it limits your future. Every dollar you borrow and spend now plus interest will be taken from your future money.

Debt comes in two forms. Good and Bad

Good debt is money you borrow to spend today on some asset, skill, or cost saving factor. The only requirement is the cost to service the debt is less than what owning it provides you in terms of additional income or lower costs.

Bad debt is anything else.

By that method of thinking student loans are a good thing or a bad thing. If you incur huge obligations for an advantage that cannot pay the debt, they are a bad choice. Taking a program at a costly college in a field where there is no clear income advantage to having the degree is a weak choice.

Weak choices hurt you. Make as few of them as possible.

Using mortgage debt

Buying a home to replace rent might be a good idea. Owning a home is expensive beyond the mortgage payment. A mortgage is a loan where the property is given as security for the payments due. They come in may forms. The key variables are:

  1. The rate charged, the bonus you pay for using the money early.
  2. The term, the period during which the loan cannot be called by the lender
  3. The amortization period, the time over which equal payments will be made.

Sometimes lenders require you to acquire mortgage insurance. That is a guarantee by a mortgage insurer and it is usually prepaid.

There is always a concern about rate and term. At one time, short term loans were better because they had a lower rate. The assumption was the loan could always be renewed. Circumstances in some markets made that a poor assumption and people lost their homes. Pick a term and amortization period that provides you with predictability for the intermediate term.

The cost to live in your new home is a variable but the cost for municipal taxes, insurance, heat, hydro, and maintenance can easily exceed 3% of the value of the property. Owning a home is a lifestyle choice. Be sure it fits with all the other things in your lifestyle.

Car loans

Most large purchases can be financed or leased. Much like the mortgage loan, what you buy provides the security for the lender. Rate, term and amortizatization period are the same concept. The deal is you get a vehicle today and commit to pay payments for a time in the future.

Cars are easy to over-borrow. A Mercedes might be nice, but you are buying two things. 1) Transportation and 2) comfort and prestige. Be sure the comfort and prestige is worth its price.

Credit cards and lines of credit

While not quite the same thing, the idea of management is similar. Each provides you with a way to deal with an expense or purchase that is abnormal. Vacation, unexpected expense, moving expenses. Credit cards seem like you are not spending money. Anytime someone creates a situation where you seem to get something for nothing, you should pause and reflect.

Nothing is for nothing. Credit cards are very expensive if you carry a balance forward and lines of credit tie up your equity or your ability to borrow for some other purpose.

Use them for convenience but pay them off quickly. They’re good to have for some purposes, but if you use them and run them up, your future will be greatly diminished.

Debt is part of organizing your life

The idea is to organize your life so the future will unfold easily. Debt works against you there.

Think about the future the way you understand physical perspective. There is a common decision flaw called “Distant elephants” An elephant 2 miles away is pretty benign. An elephant 30 yards away is not. It is the same with debt. The big win by borrowing feels good and the debt seems to be no problem because it is far away, but the payments will start, and feel not good, and last a long time.

If you could not save the payment each month now without affecting your lifestyle, you cannot make the payments without affecting it either.

The moral of the borrowing story is simple.

You can only spend a dollar once. If you spend a borrowed dollar you must give it back some other day. If you save a dollar now, you can spend it some other day.

Using a credit card seems like you get to spend without having the money and you do. But if you cannot afford the purchase without the credit card, it is unlikely you can afford it with the credit card. Use credit cards for convenience only.

I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. 705-927-4770

One Comment on “Borrowing is Like Using a Time Machine

  1. A tangible , pragmatic
    and unmistakably clear explanation of the
    phenomenon of borrowing. If one who borrows does not embrace this explanation then they
    expose themselves to a world of financial uncertainty and worry
    Well done Don,

    Regards, jp bell, Dec.07/19

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