Sometimes you have no choice but to borrow money, such as when you are buying a house. Few people are able to do that in cash. But, with rising house prices in SA, buying a house is actually an investment in the long run.
And many South Africans are affected by unemployment and rising living costs, forcing many to borrow money for essentials. But that’s not the full story.
If, however, you are borrowing money to pay for maintaining your current comfortable lifestyle, red lights should be flashing. A rule you should consider is never to pay for anything non-essential on borrowed money: if you can’t pay cash for the designer jeans, don’t buy them.
Once you have dealt with life’s essentials, you are into the territory of nice-to-haves. Point is, if you have to consider going into debt to pay for it, it’s something you should be doing without. Life does not owe you a certain standard of living – your standard of living is what you can afford to pay for.
Here are several reasons why it is so much better for you to use your savings for purchases than it is to borrow the money to buy something.
1. Interest payments. Interest payments on a large loan can swallow you alive. Once you are in arrears, you start paying interest on interest – a ghastly situation in which to find yourself. And once you max out the credit card, if you have a job, chances are that instead of helping you to pay off the debt, the bank will offer you more credit. Just don’t go there.
And before you buy anything on hire-purchase, do check what the total final payment amount will be. You could be paying R7 000 for a R4 000 washing machine.
Over the age of 40, you should be earning interest, not paying it. It’s dead money and you have nothing to show for it. Also, it’s no fun still owing thousands on something months after the novelty has worn off.
2. Stealing from your own future. Debts you make now have to be settled from your future earnings. So you are spending money you haven’t worked for yet. But with savings, the work is done – the money is yours and you have already earned it fair and square.
You can enjoy spending it on something that gives you pleasure. Or you can watch it accumulate interest in your savings/emergency fund. Watching your money grow is a true antidote to financial stress – and it costs you nothing, except a bit of self-discipline.
3. Debt is stressful. There are few things more stressful than being knee-deep in debt and spending sleepless nights trying to figure out how you can juggle payments to keep everything going in your life. This kind of stress eats at your energy levels and zest for life, and it seeps into everything you do. You can never escape it. Nothing you have bought can give you enough joy ever to justify the stress of living on the financial edge.
However, if you have saved for something, and paid for it in full, you can enjoy it guilt-free.
4. What about my credit record? Having a good credit record is essential if you want to do something like buying a house. But you only need one or two small accounts (cellphone contract, pharmacy account) that you service regularly to build up a good credit record.
You do not need three credit card accounts and an overdraft. And falling into arrears on any of these will damage your credit record.
It is odd that credit records are not determined on the amount of money one manages to save, but on the amount of money you manage to borrow. Says a lot about our banking systems that you have to owe money before they will lend you more. But real winners choose not to play this game.
5. Savings for consumption, debt for investment. Making debt to buy a house or to pay for your education are both investments that are likely to pay off in the future. Buying a fancy new car, however, is not. Neither is funding a lifestyle you cannot afford.
Savings/current earnings should be used to pay for ongoing expenses, such as groceries, entertainment, kids’ school fees and municipal bills. Once you are using debt to pay for these things, you are entering dangerous territory.
If you are not currently managing to pay for your lifestyle on what you earn, you either have to find a way to earn more, or you have to lower your expectations, painful as that might be.