It seems like a basic idea. I needs the money and I wants it. Bank says yes: go time.
But what if there was actually more to it? More to consider? Thanks to my ill spent youth, I now approach the question of borrowing money with the following two questions.
1) Do I need this money or do I just want it?
2) Can I really afford the repayments or do I just think I can?
So let’s break those two concepts down.
DO YOU NEED IT?
This shouldn’t be too complex a question, but sometimes it helps to really look at an idea from all angles. You’re in the market for some big cash because what you want costs more than what you carry around in your pants.
There are the big-ticket items, like houses and boats. And then there are the smaller things like holidays, cars, and engagement rings…
Okay, so now what? Look at what it is you’re looking to buy and decide objectively if you actually need it. If you want to buy a house with your partner, you are both gainfully employed, and you’re sick of sleeping in your mum’s walk-in-robe, then I’d say a mortgage is a pretty safe bet at this point in your life. Buy the house.
Have you been pushing your car to work for a few months now? Washing your self with a rag on a stick? Cars and plumbing fall quite nicely into the ‘need’ category.
But then there’s stuff like gold plated mouth guards, Wolverine gloves, and tiny useless retro styled caravans (shut up and take my money!). If you can truly afford it, then buy it. Heck, you only live once and no one wants to be buried in all that unspent cash right?
But perhaps you’re not currently employed and you still owe your parents 30K for the granny flat they built you. Maybe your DeLorean is just one flux capacitor away from a great weekend, and pickpocket1985 is selling it for just 9K on eBay! It’s a steal! But is it a need? Or do you think you should sleep on it? For like ten years. And maybe read some product reviews or something.
Other things are less obvious. Cosmetic household renovations and holidays aren’t necessarily vital, but they are beneficial in their own way. If your house is run down and needs some pick me up, then some renovations might improve its value. And a holiday usually offers up some good return for you from a social and mental perspective.
This grey area is where my second question comes in.
CAN YOU REALLY AFFORD IT?
It’s easy to fall into the trap of thinking you can pay for something. You might think that if the bank says yes, then surely you’ll be fine. The bank wouldn’t lend me something I couldn’t afford to pay off would they? Wouldn’t they? WOULDN’T THEY?
Banks take into account a few things when considering your viability for a loan. Things like income, credit rating, debt load, cost of living and dependents, etc. These are the obvious variables. But it’s the less obvious things that you need to look at. The stuff the banks don’t know about and don’t care about.
You might look at your weekly income and think you could easily manage another $300 week on a refinance. But what are you currently spending your extra money on? Are you into fitness and sports? Do you spend a lot of money on gym memberships, sporting teams, private training?
What about music? Films? I knew a man once (that I may or may not have married) who had to own every Van Damme film ever made. Now you might think that doesn’t amount to much but Mr Van Damme just won’t quit. And we simply don’t have the space for any more.
You might just want to borrow 5K to upgrade your entertainment system. Sadly, the bank cares not for your lifestyle or your weekend hobbies. They wont take into account that the blacksmith is charging $250 a week for your suit of armour or that your roommate is stitching your coat of arms in exchange for free Wi-Fi. But by Jove, you’ll be damned if Steven wins the ruby chalice again this year!
What you don’t know is that Steven took out a loan so he could take six months off work to whittle his own chariot from a single tree. You’re not going home with so much as a mug. The medieval faire committee wants a deposit to use their jousting sticks, and your roommate wants their life back. Could the surround sound wait a while?
So even when the bank says you can have the loan, take a closer look. Where are you spending your money? After you’ve paid all your bills you might have $500 a week left over. Seems pretty safe from a bank’s perspective. But they don’t know what you do with that $500. If you like to drop $100 on red every Sunday afternoon then what you really have is $400.
There is no wrong answer. Your money is yours to spend how you please. You want the figurines? Buy the figurines. You want devices? Games? Do it. The answer you’re looking for is just in the numbers.
And what do the numbers tell you? What is REALLY left over at the end of the week? And don’t lie and say you’re NOT going to do these things that make you happy. That you’re suddenly giving up all junk food and yoga pants so you can afford the car. Please! That new car is going to make it easier to buy junk food and yoga pants! Listen to me! I’m a car owning stretchy pants wearing Yoda!
Don’t lie to yourself, because once you’ve spent that loan money there’s no going back.
So it’s a simple. If you need it and you can afford the repayments, then go crazy.
If it’s not a need but you can afford it, then it’s just a matter of choice and priorities.
If you don’t need it and you definitely can’t pay for it? Well I just think about what my mother would say if she heard I was moonlighting as a madam to pay for my tiny retro caravan…