(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.

My Monthly Budget (L35)

As I have been taught well about internet and financial privacy, I do not feel comfortable including my actual spreadsheet for this month. Although the month is obviously not over, I have been using an excel spreadsheet (through Google Docs) to track my finances for the past week. So far what I have found is that although I have no debt, I also, unfortunately, have no savings. This is going to set me back in the future, and to try and counteract this I have been offering my services to neighbors and friends as well as turning in job applications around my town. I discovered that I personally tend to budget “safely” so that there is a rare chance I will end up with debt or not be able to purchase everything I need. I like to have a big enough cash cushion in my budget to catch any small slip-up. This is a good habit, but sometimes leaves me with unaccounted for money that then ends up being wasted on petty items.