When Is It Okay to Borrow?

February 9, 2008

When Is It Okay to Borrow? Here are four ground rules everyone should consider first when deciding to borrow money: (1) For that once in a lifetime event No financial author can tell you to hold off the honeymoon so you can save up and pay cash for that special event. In times like these it's okay to borrow, even if it's at an obscene rate (perhaps from a credit card). The reason is clear. By definition, a once in a lifetime event happens, well, once. So make it special, even if that means borrowing. Remember you'll only have one honeymoon, right? (2)To purchase a sound investment you could otherwise not afford This one is tricky because I have to disqualify some investments from this rule. DO NOT borrow money to buy publicly traded securities (buying on margin). This includes, but is not limited to, stocks and commodities. But, it is okay to borrow money to buy investments like homes, college educations, real estate, and perhaps even your own

business. Tread very carefully with rule number two, since the amount you are borrowing will most likely be considerable. (3)To purchase something you must have for survival Two- wheeler (Motor- Cycles or Scooters or Moped) comes to mind here. Sure, we could all live without our two-wheeler, but reasonably, to get to work and other necessary places, we need them. And most of us need to borrow to buy them. So long as you need it, but can't afford it, it's okay to borrow. (4) If your investments are paying out a higher interest rate than that of the loans you take out The most common use of this rule is with credit cards. Credit cards allow you to borrow money interest-free for about 20 days. Savvy shoppers who charge now and pay later are getting an interest-free loan each month from the credit card companies. Keep in mind this is a strategy only for those with iron discipline, for if you miss that 20-day window, the interest rates get brutally high.

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