Nowadays people seem to borrow money to buy all sorts of things they can’t really afford themselves. It has become so easy; in many countries you can just send a SMS and receive the money almost immediately.
Loans are taken in order for people to go on vacations, hosting parties, buying luxuries for their homes, jewelries and a lot of other things.
These kinds of things can of course bring lot of joy for the moment and value to people but I want to focus purely on the economical side of it in this post.
When you borrow money from someone, typically a bank, you are not just borrowing from them. In a sense you are also borrowing the money from your future self. After all you have to pay the money back in the future, with interest. So if you can’t afford something today but decide to take a loan to cover the expenses you are assuming that you will be able to afford it in the future.
A TRACTOR or a TV
Let’s take an example. Imagine that you’re a farmer who is struggling. You get the opportunity to take a loan from your bank. One way to spend the money could be to go with your family on your dream vacation spending a month at a luxury hotel just relaxing and enjoying life. Or you could by a pool to your house or perhaps the newest and biggest flat screen TV you can find.
On the other hand you could also invest the money in buying a new bigger tractor. This tractor would make you more productive and enable you to grow more crops, which will increase your future income.
The first alternative is of course very nice for the moment. But when it’s over will it help you in any way to pay back the loan or make you more productive? Probably not.
The tractor on the other hand might not be equally fun but will help you to scale up your income. If the reason you are borrowing money for will make your future self richer than you are now, then it’s a good loan to take. However if it won’t make you more productive or increase your income (like starting to spend several hours each day in front of a new TV) it is a bad loan to take, from an economical point of view.
I am not saying that you shouldn’t buy anything that won’t increase your productivity, that’s not my point here. I know for my self that these things also are important to have in life and bring other values. However taking a loan for buying these things is a bad idea.
If you cannot afford the vacation or a TV you really want now, don’t fool yourself that borrowed money don’t have to be repaid. Instead start by focusing to increase your productivity and income. If a loan will help you in this go for it. And when this is in place you will probably be able to buy all the other things you want as well, without taking a loan!