Monday, May 20, 2024

With rates still low, should you borrow money?

Posted

Rather than write about the economy, or the still-rising stock market, or the financial policies of soon-to-be President Mike Pence, I want to talk about an important family-level financial planning topic: Debt. 

Imagine that you want to buy a slick new car, or a new house, or toy. Should you use your savings for that purchase, or borrow money from a bank? The first, most important question to consider is whether you need to buy that shiny new thing at all. Often, the biggest money mistake people make is simply buying too much stuff. However, assuming it’s a good purchase on something meaningful to your life, there’s still the question: Should you take out a loan, or use your own savings? 

I’ve found that debt is one of those things, much like paying taxes, that gets people overly emotional and irrational. So, let me give you a very logical way to think about debt. If you have to pay a 50 percent interest rate to borrow money, t will never be a good idea. On the other hand, if you can secure a loan with a zero percent rate, you should probably borrow as much as the bank will let you. So, the interest rate you’re getting charged is the first key question. 

But there’s another side to that same question. If you use the banks money for your purchase, what other opportunities do you have with your money? If your only plan is to park it in a savings account getting zero interest, then you might as well use your own money rather than paying a bank any interest rate. On the other hand, if your money is wisely invested by your amazing financial advisor, and you really believe it has a chance of growing, maybe you should keep your money invested and use the banks money for that new purchase. 

If you want to be strictly mathematical and logical about debt, that’s the way to think about it: What’s going to give you the biggest payoff in the end? However, as I mentioned before, debt isn’t an entirely logical thing. There’s a very human, very emotional side to debt as well. Many people are stressed out by the obligation to make a payment to someone else every month – and not having debt just feels good. So, you have to consider for yourself: How valuable it is to you to you personally not have debt? Are you one of those people that would sleep a lot better at night without debt?  If so, there’s value in that. Even if the logical, mathematical argument favors taking out a big loan – that might not be the best option for you. There’s a lot of value to sleeping well at night.

Brad Blackburn, CFP®, is the owner of Blackburn Financial, Registered Investment Advisor. Blackburn Financial is located at 121 Cottage Ave, Cashmere. He can be reached at 509-782-2600 or email him at brad@blackburnfinancial.net

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