The next few entries look at creating a positive financial future into the next decade by employing some common sense financial wellness principals.
First let’s consider using someone else’s money for to finance our stuff.
The financial wellness rule of thumb is that borrowing money to make a purchase only makes sense if the commodity to be purchased has a realistic chance of appreciating in value.
In other words, both the lender and the borrower should profit from the transaction. The lender benefits from the interest earned and the borrower’s asset has an opportunity to grow in value beyond the cost of interest paid. While the real estate market has taken a recent short term hit, over the long haul purchasing the right property in the right area has a reasonable potential to achieve this objective.
But as we know, realistically, this mutually profitable borrowing scenario may not always possible.
For example, most of us need a car and it obviously is not an appreciating asset. If we have to finance a car or anything else, the key is to minimize the collateral financial damage.
Calculating the cost of borrowing
Edmunds.com has some useful calculators and I used this one to model buying a car. My fictitious purchase was a $30K car with a $5K down payment, financing the purchase over 60 months at a currently competitive rate of 5%. Including taxes, license and other fees, the financed amount came to just shy of $28K, making the payment $527 a month. The total finance cost over those 60 months is $31,620 or $3,620 of total interest. The monthly interest cost then calculated to about $60/month.
I also ran the numbers as if my credit score was damaged and the best interest rate offered was 9%. The payment popped up to $580 per month making the total interest paid over the 60 months a hefty $6,800, or $113 per month in interest.
The next decade advice for those whom the second example hits close to home, would be to live with the clunker, ride a bus or do whatever while working on repairing the credit problem. Put the extra $53 per month totaling nearly $3,200 in your pocket, instead of someone else’s.
