There Are Only Two Good Reasons To Borrow Money

The people normally using 4thWay's research are all very lucky. I mean, I presume you have money to spare if you're lending it. There are an awful lot of people who can't say the same.

Yet I think it's worth looking at the other side from time to time, as most people need to borrow at some point in their lives. And it's through borrowing that some people never become so lucky or their luck runs out.

Maybe you know someone who you think is going – or might head – down the wrong path of borrowing too much. So I hope you don't mind me taking a detour into that territory today. This might give you some inspiration in how to try to get through to them.

I have two threads of thought that I want to share with you:

If you borrow for pleasure now, you'll have less very soon and you'll be poorer for the rest of your life

If you want some clothes now on credit that you can't afford or you take out a loan to pay for that holiday you can't afford, as soon as you pay any interest, you'll be able to buy less things you like in future – and for the rest of your life.

The same goes if you take out a loan just generally for fun, going out and buying things. Borrow, say, £5,000 over five years, and you'll certainly be able to buy more right now. But in just three or four years you'll already have paid back £5,000, yet you'll still be paying for quite a while longer, because of all the interest.

What's more, from this point onwards you'll have less of the things that you like to buy forever more.

Assuming you pay £1,400 in interest over the life of that loan, it means you'll be able to buy £1,400 less “stuff” that you would have liked in that time.

And this will never correct itself. No matter how much more you earn in future, you'll never get that £1,400 back, so you'll never be able to afford all that you could have done in your life if you had instead forced yourself to live within your means and be patient for just a few years. You'll always be behind.

The only way to “beat it” is to borrow more – but all that does is kick the can down the road and make it worse. You'll pay even more interest, thus having even less nice things for the rest of your life – and always buying whatever you can afford later than you would otherwise have done.

So, in your rush to have things now, you managed it for a few years and then permanently put yourself in a position whereby you'll always have what you wanted later than you could have done, rather than earlier.

(If it's your self-image that concerns you, you'll get a lot more respect from people if you say “Look, I'm having a few sensible years of building up savings and then we can treat ourselves afterwards.”)

The two good reasons to borrow

So what's a good reason to borrow? There are two rational reasons.

One is for emergencies. If you don't have sufficient savings and you suddenly need to meet a cost or expense, clearly now's the time to borrow.

The other good reason is to invest – with important caveats!

The best investment is in yourself. It can make a lot of sense to borrow to pay for education or training that leads to a higher-paid or more future-proof job, or to borrow to buy a better car if you're required to have it for that better job.

Another fantastic investment to borrow for is in buying your own home. That's provided you do it when both your financial and personal circumstances are stable, and you have built in enough leeway in your budget for maintenance costs and changes to interest rates.

Some consider buying their own home not to be an investment, but when it means you pay off the home in 25 years, and then have no mortgage costs or rising rents for the rest of your life, the savings to you are remarkably high. That is a big investment in your future.

You can't borrow for any old investments. Borrowing to invest in the stock market or other volatile investments is ludicrously, insanely risky.

But you might certainly borrow if you're a property developer or landlord, or if you're growing your own business faster by means of an injection of borrowed cash.

In other words, while you'll pay interest on your loans, the borrowing itself is strongly expected to lead to more wealth – more “stuff”, if you like – rather than less.

Further reading

I Don't Know How Many Times We Have To Tell Lenders This!