Basics     Money Myths

“Save up for expensive items instead of taking out a loan.”


The myth

For most people, expensive items such as a trip abroad, car, or even house aren’t easy to get. That’s because you’ll need a large amount of money just to pay for or acquire them, and so some planning (and a little bit of adjusting) is required on your part.


Of the two popular options, saving up means you won’t incur debt for the purchase, even if you won’t be able to get the item right away. That’s why many people believe that this is the better way.


The reality

While not having to wait to get something you want (especially if it’s something expensive) is appealing, is it worth going into debt for? In most cases, the answer is no.


While having a capacity for debt isn’t a bad thing, it should be reserved for the opportunities that improve your finances. These include putting up a business, expanding an existing business, diversifying into other forms of businesses, or perhaps buying a house to increase your assets and eliminate paying rent.


If the expenditure isn’t of this type, you’ll be taking on debt unnecessarily while also reducing the amount of money that you can borrow in case you find something that could make your finances better.


Choosing to save up, on the other hand, gives quite a few advantages. For one, you won’t need to take on debt. Second, it gives you time that you can spend on looking for better alternatives to your purchase.


Additionally, it doesn’t get in the way of your current money plans, including any investment strategies you’re doing. And lastly, you get to build patience and discipline along the way. The process allows you to better understand that great things do take time.


If there’s any drawback to saving up, it would be that you won’t get the item right away. If it’s something that could increase your income (like a van to help you deliver orders or a new oven to help you bake more cookies to sell), you’ll miss out on the extra money if you save up instead of borrowing.


The verdict: It depends (but mostly true).

The first thing you should do is find out if you really need the purchase in the first place, or if it should be put off indefinitely in favor of more important things.


If it’s truly that important, in most cases you’d be better off saving up instead of taking out a loan. The exception would be if the purchase would somehow improve your finances, and you would be missing out on some potential profit if you did it later rather than sooner.


There’s nothing wrong if you tap the debt market, but always make sure you know what you are getting yourself into, you have a plan of action when it comes to the proceeds of the loan and that you know for certain that you have the capacity (and liquidity) to pay for the monthly amortization of the loan.


Remember though that you can still make the most of your savings by investing it for potentially faster growth. Plus, regularly adding to this investment would increase the chances of quicker growth even more.

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