Why Save when Borrowing is Cheap?
Q: A friend of mine was giving me a hard time the other day. I wanted to delay my travel plans until I had saved up most of the money I needed, rather than use my line of credit to finance our vacation. His point was that since you can borrow money so cheaply on a line of credit, why not just use credit and pay it off when I get back. Whose strategy is right?
A: With line of credit and promotional credit card interest rates so low, many people have the same question. It always takes time to save money, whereas it’s simple to reach for a low interest line of credit and spend what you want quickly, painlessly and often cheaply. Is there any benefit to saving first, then spending?
To answer your question, consider the analogy of a frog sitting in a pot of cold water on the stove. He doesn’t realize that the water is slowly getting warmer and warmer until it’s too late and he boils to death. The same can be said of relying on credit and becoming comfortable making only minimal payments. Over time, the balance creeps up until one day you realize that it would take years to pay off. And what would happen when interest rates go back up a historically average interest rate, or lending rules change again?
History shows us that good times don’t last forever. Since no one knows for sure what the future holds, planning for the best and preparing for the worst is the wisest strategy.
Relying on credit limits your options when factors beyond your control change. You may not have enough money available to support your family or survive an emergency if your lender all of a sudden reduces the limit on your line of credit. Waiting too long to deal with debt means that your options may be determined for you, and they may be swift. If you have your own funds on hand, you don’t have to depend on the bank.
Savings is money for spending later, and truly enjoying your travel adventure! You have choices when you have your own money. You can lead by example and leave your children with a positive financial legacy and the skills to carry it on long after you’re gone.
And in case you were wondering, over the last 60 years, the average borrowing rate has been about 9%—close to double what it is now.
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