What Should You Borrow Money For?

There is always a question about whether it is financially smart to borrow money for certain things.  Most people think that borrowing money for a house (taking a mortgage) is acceptable.  While even this can be bad for some people, I think taking on a mortgage is fine as long as it is done wisely.  It should be a fixed rate loan in most cases (yes, there are exceptions) and the payments should be manageable.  There are too many people who find out what they can qualify for and then find a house for that price.  But in most cases, you should be finding a house that is priced well under what you qualify for.

Cars are a tough one.  Some people say that you should always pay cash.  But unfortunately, this is not realistic for some people (probably a good majority of people).  Even a decent used car might cost $10,000 these days and most people don't have that kind of money lying around.

Having a car is a tool.  Most people need a car to drive to work, go shopping, etc.  So if you need a car and you don't have the money, then there is not much choice but to take out a loan.  Again, this should be done wisely.  You don't need all of the bells and whistles on your car.  You just need something safe that will get you from A to B.  You probably need air conditioning and heat.

The key point is that if you don't have the money to buy a car outright, then you should be limiting what you get.  If you buy new, then it should be to keep the car for a minimum of 10 years, but hopefully longer.  And it should be a reasonable price.  If you are paying $30,000 for a new car and you have to take out a loan, then I think you are not making a wise decision.  You should simply be buying a much cheaper car.

After this, there is not much that I would recommend borrowing money for.  Obviously, if there is an emergency (medical, unexpected house expense, etc.), then you have to do what you have to do.  Hopefully you are in a good situation though, where you have an emergency fund set up.

I am not against using credit cards, as long as you pay the balance off each month.  Credit cards are convenient and can be very useful if used wisely.  The key thing is that you don't pay any interest.  In fact, if you use a credit card, you should be getting some kind of cash back or rewards.

It would be an interesting study on how much the average American pays in interest every year.  If you include mortgage payments, I'm guessing the average American pays well over half a million dollars in interest during his lifetime.  While leverage can be useful if used in a smart way, it mostly makes people poorer.  If you are constantly paying interest to lenders, it is hard to get rich yourself.

You want interest to work in your favor with compounding interest.  Unfortunately, most Americans have this in reverse and are paying out the interest instead of collecting it.