Thinking about getting another loan?
Thinking about borrowing another dollar?
At least after reading this post, you should be able to do so without showing off ignorance.
Once upon several years ago, Ron Blue wrote a fabulous book called Taming the Money Monster. Our society tends to have biases against older things. We always think new is better.
This book is a must read for anyone who is constantly fighting against debt. Taming the Money Monster is proof that newer is not always better. Wanna know the best part? Older books are often cheaper. For a few dollars, I’m sure you can snag a used copy online.
In the book, Ron Blue suggests four things to think about before borrowing money.
4 Borrowing Rules to Help You Make Wise Choices
Rule #1 – The Common Sense Rule
“the economic return must be greater than the economic cost. To state it another way, when money is borrowed, the thing that was borrowed to purchase should either grow in value or pay an economic return greater than the cost of borrowing.”
In other words, don’t go and borrow a bunch of money for something that is sure to go down in value. Otherwise, by the time you pay off the item, it will be worth a quarter of what you paid for it.
It makes no sense to borrow money on items that decrease in value faster than you can own it.
Rule #2 – A Guaranteed Way to Repay
Do you have a way to pay off the debt?
We all know that life doesn’t always go as planned. Is the loan one that could financially sink you? Is the worst case scenario one that you could recover from?
Integrity is definitely an issue here. When you borrow money, you are allowing your yes to be yes. You are entering into a contractual agreement.
If you borrow $150,000 for a house that is worth $250,000, then you’ll be able to repay by selling the house. However, if you borrow $250,000 for a $250,000 house, then a small downturn in the housing market could mean you’re upside down.
Think about Plan B before signing up for Plan A.
Rule #3 – Peace of Heart and Mind
I think people grossly underestimate the wisdom of this third borrowing rule that Blue suggests. This is powerful.
Personal finance is about life. Decisions should be made with the heart as much as they are made with the head. Sometimes the calculator needs to be the last financial factor – not the first one.
This rule suggests that you should only borrow money where there is so much margin that it cannot challenge your financial peace.
Rule #4 – Unity
Blue correctly suggests that, in a marriage, couples should not borrow money unless they both agree that it is a ‘good’ choice.
What if every couple applied this decision to all walks of life? I bet we would all experience more marital bliss and happily ever after. What could we possibly want to have or own so badly that we would be willing to jeopardize our relationship with our spouse?
Go for unity first, and make stuff a lesser priority.
What I love about these four rules is that they present a legitimate way to borrow while allowing individuals to safeguard against the many dangers associated with borrowing.
What do you think about these borrowing boundaries? What borrowing boundaries do you have?