Though it is easy to assume that all debt must be bad debt, there are times when taking out a loan or is a good idea. The key to healthy finances is knowing when you should borrow and when you should save. Sometime you will need quick cash to cover your costs immediately, but others, you might be better off saving up for a while before you make your purchase.
The way you choose to manage your money is entirely personal, but the most important thing is that you use financial budgeting to ensure that you have enough to live on now and you are saving up for the future. It might sound obvious, but you would be surprised how many people don’t think to start saving for their retirement while they are still young and are shocked by how much they need to save now.
When You Should Borrow
Borrowing when you need the money is a good idea as long as you have calculated how much you will have to repay each month with interest included. This will help you work out whether the loan you are taking out is affordable or not. Remember: when you are borrowing, you are essentially borrowing money from your future self too as the interest will need to be repaid as well as the amount loaned.
It is important that you also understand the difference between need and want. Borrowing for something you need such as taking out a student loan or a mortgage is a good idea because these loans will set you up for a bright future. However, borrowing money because you want new clothes is less sensible because you could save up for the clothes and not have to take out the loan.
When You Should Save
The simplest answer here is that you should always save. Ideally, you will save around 10% of your income each month to contribute towards an emergency fund that will see you through any rainy days that come your way.
You should also save up for large, foreseeable expenses such as holidays or annual insurance premiums. The best way to do this is to divide the amount that you need to save up by the number of months you have before the payment is due; this is how much you will need to save each month in order to have enough.
There are lots of different saving strategies you can employ and what you choose depends on your financial goals. So, you might decide that you are going to have an extreme savings month where you spend as little as possible in order to splurge the following month. Alternatively, you might decide to automate your savings so the same amount is saved each month without any interference from you.
Everyone will have to balance their borrowing and saving at some point and there’s no reason why, with a bit of forward planning and sensible decision-making, you can’t do both in a financially healthy way.