(5) Saving and Borrowing

People often borrow money to buy something that they do *** not *** need immediately, because there are too impatient to wait. That makes buying unnecessarily expensive. Such people have to pay for the goods and they have to pay interest on the money they have borrowed. If it is borrowed on a credit card it can be terribly expensive.

For example, your parents want to buy a car for £10,000. They borrow the money from the credit card and pay 20% interest. they repay the money after two years. Each year they pay £2000 in interest, i.e. a total of £4000 in two years. Therefore that car will have cost them £14,000.

While repaying the loan, there would have had to squeeze themselves, go without other luxuries, in order to find the £417 (without interest) they had to repay every month. So they would have had a hard time, and could not even look forward to the great pleasure of getting the car at the end of it. By the time they have paid off the loan, the car may already have scratches and dents.

If they absolutely can not do without the car, e.g. it is impossible to get to work on public transport, etc, then they may not have a choice. They must borrow the money as they did, i.e. first borrow and then save to pay off the loan.

But when the purchase is not absolutely necessary, when it would be possible to wait (and that is usually the case with something a child wants to buy), then it is much better to save the money first, earn interest on the money while saving it, and then make the purchase, e.g. of the new car. Then the new car is your great reward for the hardship of saving, and all the time while you are saving you can look forward to the joy of getting the car at the end of it. Saving is much more pleasant than paying off a debt.

Saving first and buying later also makes you much richer. Take the example of the car, which will cost £10,000. Save £420 every month for two years. The bank will give you, say, 6% interest for what you have saved. So, very very roughly speaking, at the end of the first year, you will receive £300 in interest; at the end of the second year, you will receive £600 in interest. So, all together, you will have earned £900 in interest, rather than paying £4000 in interest. Therefore by following this advice you will be £4900 better off. For ease of comparison say that you are £5,000 better off.

Therefore the car instead of costing you £14,000 (as in the case of borrowing the money) will have cost you only £9,100, a saving of almost £5,000.

Your parents may not have a choice when deciding whether to borrow money or to save first (e.g. If they have five children and the washing machine has broken down, they may have to replace it immediately. They cannot wait until they have saved the money for it.) But you, i.e. a child or young person or still single, usually can afford to wait. If you do wait and invest the money which you have saved well, and learn and study hard on top of that, and therefore get a good job, you can become very rich.

 

 

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(28 Jan 2008)

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