(L45) Loans & Depreciation

Why shouldn’t I borrow to buy something that depreciates?

I will never borrow money to pay for an item that depreciates in value because in the long-run, the item will end up costing me even more than it should have in the first place. Say, for example, that I borrowed money to buy a brand new car. Well, not only will I be paying interest on the loan that I used to buy the car with, but the car will also immediately drop in value the second that I drive it off of the lot.

In short, this means that I am going to pay more than the car is actually worth from the minute it’s mine. On top of the extra money I am paying to own the new car which will only decrease in value over time, I am paying money to the person I borrowed from. Added together, I am paying a great amount more for the car than it is physically worth. Five years down the line, the car will sell for even less money than it would have the year before. Basically it is just a great loss to me in terms of the future.

Another reason not to borrow money for something that depreciates in value is the issue of repayment to the lender. Borrowing money to invest in a business for example would be a great future oriented decision. A business would bring in more income (hopefully) than it cost me, and I would be able to repay the lender with the least amount of interest costs possible. However, borrowing money to pay for an item that loses value over time will only make it more difficult for me to repay the lender because I am losing money (value) each day. This will also result in me paying more money in interest than I would had I invested in something that has increasing value over time.

(L40) Budgeting & Saving

What would I have to give up in order to save 10% of my income?

In order to be able to save 10% of my income, I would probably have to give up eating outside of the house. I often find myself grabbing a coffee or a bite to eat while running errands; however I never stop to think about how much it all adds up. I do save a good amount of my income, but to save 10%, food would be the greatest expense I could sacrifice. There is nothing wrong with grocery shopping to have meals at home everyday, and I have mastered coupons and thrift – even when it comes to the grocery store.

My current challenge is not only to cut this spending, but also to track it when (and if) I do slip up and get a delicious pumpkin frappe. I challenge you to do the same; pinpoint your biggest category of unnecessary spending, track it, and then desert it. Best of luck to you, (and to me)!

Top 5 Investing Habits I’d Pass On To A Younger Person (L140)

Having not been taught good finance habits as a child, I grew up a somewhat inefficient adult. I knew to be thrifty, and to make new of the old; I knew how to gain resources (on a budget). However, never had I been taught how to conserve those resources. Money, being an irregular excitement, didn’t last long when in my possession. Then, when I started getting older and getting more money, I still wasn’t saving for anything! Not things I wanted, and not things I needed. This has proved to be an issue in recent years, and I have been left to my own resources to discover a better way. Personal Finance has absolutely set me on the right path to be a financially sound adult.

1. SAVE, SAVE, SAVE!
Stocks and bonds are not the only forms of investment; do not be afraid to invest in your future by not investing your money into anything else. Being prepared both for the expected and unexpected financial hits is key to being successful. Save in advance for college, or a house, or a car, and avoid debt at all costs. Sometimes it is more beneficial to conserve all your resources than to take any chances with them, no matter what the return could be.

2. DO YOUR RESEARCH
Should one decide to invest their money into a company, my biggest piece of advice would be to research! Check out estimations of the immediate and long term future of the companies. Make sure you absolutely know what you’re doing before you put your money on the line. Know the difference between risky and dangerous transactions.

3. DON’T PUT ALL YOUR EGGS IN ONE BASKET
 Hopefully, this is advice you have heard before; but if not, take heed! If you’re going to put your money on the line, you don’t want to loose it all in one fluke shot. You’re more likely to be a successful investor if you spread out your money across multiple companies; taking less of a hit should you be at a loss.

4. REIGN IN YOUR EXPECTATIONS
Be realistic with yourself and don’t build up impractical expectations. Keep in mind that greater risk can come about a greater return, but this does not mean one should make irrational decisions with their money. Again, know the difference between risky and dangerous transactions.

5. MAKE LONG TERM DECISIONS
Avoid acting on impulse, and make decisions that will benefit you in the long term. Typically this way, you will end up with a bigger pay-out, and will have made your times worth back in money.