As much as we all want to have a fat savings account that is available to help out with any of your needs, that just isn’t realistic for many people. Sometimes an opportunity comes along that is going to cost money to make money, and the rewards are too good to pass up. You may need to borrow money.
There is a right and a wrong time to borrow. Knowing the difference can change your financial life for the better for a long time to come. So, how do you know when to borrow, and when not to? Here are some guidelines.
Borrow for Emergencies
It happens to everyone. That emergency car repair or the time the refrigerator quit or the washer and dryer broke. You need to fix those things right away, but you don’t have the cash. Don’t worry. Borrowing for emergencies is not a bad thing and going into debt for appliances and other necessities never hurt anyone as long as you are responsible and pay things back on time.
Just be careful how you define emergencies.
Borrow to Improve Your Home
Home repairs are one thing, but home improvements are another. Improving your home will improve its resale value and increases your personal wealth at the same time. Home improvements can help if you are selling your home sure, but they also just make it a better place to live.
Also, this helps build your credit for other things. Even if you borrow against your home equity to improve your home, you are doing the right thing, and it’s a good time to borrow.
Borrow to Start a Business
A simple way to improve your life, increase your income, and just be a happier person is to start your own business. To do so will often require a large amount of cash, and you probably don’t have everything you need in savings. Well, besides your own money there are a number of ways to borrow to start your own business:
- A Personal Loan (Unsecured): You can borrow money from your bank or other lenders to help get your business going.
- A Secured Loan: You can take out a loan against your 401K, your home, or other assets your business might own to get things going or to make improvements.
- Angel Investors: You can get investors to loan you money for your business in exchange for a share in it.
You can also borrow from friends and family and even use credit cards, although neither of those options are the most desirable.
Borrow to Improve Your Credit Score
Even if you have a less than stellar credit score, you can still take out a personal loan. If you use the loan responsibly and pay it back on time, this can be a great way to build your credit. Just be sure you don’t borrow more than you can afford to pay back, make your payments on time or early, and don’t ever default on a loan.
This is a great way to show that you are financially responsible and build your credit over time.
Don’t Borrow to Invest
In order for borrowing to invest to pay off, you need to make more than the interest rate you are paying on the loan from the investment. Since historically the stock market earns an average of 7%-9% per year, and the average personal loan or credit card costs you about 13%, most of the time you will lose on this proposition.
That hot tip you got might be a gamble. You never want to borrow money to gamble (there are countless movies about the hazards of doing this) so don’t do it to invest either. It is just not a good financial practice.
Don’t Borrow for Vacations
I know, that vacation sounds like a lot of fun and it is just a little out of your reach right now. Don’t be tempted to borrow for it unless you can pay that money back right away. The money you borrow for the couple weeks you spend away could set you back for a couple of years if you put it on a credit card or get a loan to pay for it.
Be patient. Take the vacations you can afford and make the most of them, and don’t borrow for trips. It’s another dangerous practice that can get you in real debt and real trouble in the long run.
Don’t Borrow Unnecessarily
Lastly, don’t borrow unless you need to. This covers a lot of ground, but it relates to credit cards, lines of credit, and other forms of lending. Your credit score will be hurt, and if something happens that you cannot work, you could be in serious trouble rather quickly. Debt that is not for essentials is never a good thing.
This means you must define what constitutes an emergency and set up the circumstances under which you will and won’t borrow. Defining this ahead of time keeps you from impulse borrowing at the last minute, preserving your credit and borrowing history.
Knowing when and when not to borrow is vital to your financial success and making money in life. Set your own standards, but live by them, and you’ll have fewer financial decisions you regret.