We want freedom and prosperity. Let’s talk about how saving versus borrowing can gain us freedom and prosperity. We’ve already discussed that debt is a form of bondage in another article. Borrowing gives us debt, even if only for a short time. Is short-term bondage really that bad? What is the value in saving for a purchase, especially in our recent economy of low interest rates? Is financial freedom as simple as delaying a purchase until we have saved the money for it?
Let’s try an example. Suppose you want to buy a dining room set to replace the folding chairs and card table you’ve had since college. You do some comparison shopping, find something you like and go home to think about it.
Having recently looked at your budget, you have calculated that you have an extra $60/month that could go toward this dining room set. The cost of the set is $600 + tax, say $50. When we divide the cost ($650) by what we can pay each month ($60), we come up with eleven months to save. Do we really want to wait that long?
Let’s look at another alternative. Let’s assume you have a credit card available with which to make this purchase and that it has an interest rate of 10.25%. With the promise of just twelve easy payments of $60, you can take the dining set home today!
So what’s the comparison? I ran the numbers in a spreadsheet below to compare saving $60 each month in a savings account that earns a mere 0.10% interest to using a credit card with an interest rate of 10.25% to pay for our $600 dining set ($650 with tax). You can see that you are paying for borrowing an extra month over saving.
Maybe an extra 2 months doesn’t seem like that much, after all, it’s only about 10% more on the cost. Why worry about debt?
Shakespeare is famous for teaching us about principles. A character of his from Hamlet said, “Neither a borrower nor a lender be.” This was counsel from a wealthy man to his son. What’s the principle? Avoid debt. We can see the wisdom in this counsel when we look at people who have lost their home due to changes in employment or have had a car or other items (a dining set?) repossessed for similar reasons. Through no fault of their own, their financial situations changed overnight, and they were no longer able to meet their financial obligations.
If you have saved the money, it’s yours, and what you buy with it becomes yours. That’s freedom and prosperity. If you’ve borrowed the money for a purchase (the car, the house, dining room set,) you are merely borrowing what you purchase until the final payment is made. That doesn’t sound like freedom or prosperity.
If the old adage, “The one constant is change” is true, it is especially true in the economic and financial world. From the time I started working after college at 22 years to the time I was 36, I had been laid off from work two separate times and just missed two other layoffs. I was fortunate that we had no debt other than our home each time, because I was the sole bread winner in our family through the first layoff. Because things in this world are inconstant, it is a safety net for us to save instead of borrow when considering a purchase.
Saving also gives us time to consider the value of the purchase. The dining set we have discussed is very useful in a home, but if a car accident gives us costly repair bills or even medical bills, we could probably make due with the card table and chairs for a while longer. Think back to our budgeting exercise. When you plan to save, you plan what you are saving for. You are telling your money what to do. When you make a purchase on credit, your purchase is telling you what to do, how many hours to work over how many months. Your past purchases even tell you, “No!” to future purchases as you use up available credit.
To recap, is short-term bondage really that bad? You pay on the dining set an extra couple of months, but couldn’t you start saving for something else you need or want sooner if you haven’t borrowed? While it may be inexpensive to borrow right now, it’s even cheaper to save your money! Lastly, the peace of mind that comes from wholly owning what you have purchased, of not having the threat of debt hanging over your head, is something that can’t be borrowed from a credit card company or the bank. When comparing saving versus debt, saving is the choice that brings us prosperity and freedom.
Take the Challenge… Is there a loan or credit card that looks appealing to you right now? Run some numbers with a calculator or spread sheet to compare the cost of the loan with simply saving the money. While the debt will bring the purchase to you now, it will take even longer than saving for it to actually own the item. Resolve now to save for your next purchase.
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