If you’re like most folks you’ve likely borrowed money to finance homes, cars and other major events in your life. There’s nothing wrong with the responsible use of credit, in fact could you imagine life without any source of credit? That would be a stretch in today’s culture, how would you get around without a dependable car or how old would you be before you could buy your own home?
In recent decades, most of us have witnessed large scale irresponsible use of borrowing, in government, businesses, and households. For example, in 1983 the bottom 95% of Americans had 62 cents of debt for every dollar they earned, but by 2007, the ratio had soared to $1.48 of debt for every $1 in earnings (CNNMoney- Debt inequality is the new income inequality- May 2, 2012 money.cnn.com).
So how should a family borrow in order to preserve and protect it’s long term financial security? First, you should understand some common truths in regards to borrowing money. We’ve all heard it, but it’s still arguably the best advice on borrowing “the borrower is servant (slave) to the lender.” If you’ve ever known someone or possibly experienced firsthand what this means, misuse of debt can have extreme negative impact on relationships and marriages, it’s no surprise it’s a leading cause of divorce. Although we often don’t know it, we all filter the world based on our life experiences and money and borrowing are no exception. Many times, you see two different extremes, the spouse that covets money and is overly controlling and in some cases too cautious with regard to borrowing and even the spending of money in general. Of course, just as common is the spouse who has a lack of control, and near reckless disregard for the long term consequences of the family’s monetary decisions and borrowing. Usually, these sometimes unrecognizable “filters” were developed early on in life.
For these reasons, borrowing must be approached with the understanding of the bondage and negative impacts it can cause at both ends of the spectrum. So, back to the question- How much should I really borrow?
Here are 5 qualities that promote responsible borrowing:
(1) Strong communication between spouses (2) borrowing with the end result in mind (3)The ability to recognize the reality of your income (4) anticipating economic changes (5) creating healthy habits.
Responsible borrowers are spouses that practice strong communication and also understand and respect each other. Notice, I didn’t say, they always agree, but they understand and respect each other and they don’t take ever take action without mutual agreement. Much like a strong sports team they usually have a chemistry for working together, and the prevailing quality is honesty followed by never pressuring or forcing the other person to do something they aren’t both in agreement with. Also note, that it takes “practice” to create this communication, ask anyone that’s been married 40 or 50 years that you know is free of financial bondage- I’ll bet they have some tough stories they can share.
Responsible borrowers always borrow with the end result in mind. They are able to integrate all aspects of the borrowing decision. They understand that while a monthly payment is important, the overall goal is to borrow the minimal amount possible and pay it back as quickly as possible, thus the interest rate and term are just as important as the being able to afford the monthly payment. Folks that borrow with the end result in mind avoid making impulsive decisions and have learned to plan out borrowing decisions. Some of these borrowers have learned lessons the tough way while others have had the wisdom to gain the advice of an expert or trusted friend or family member before making tough mistakes. Which brings up an important part of borrowing that is very true in other aspects of life, be careful who’s advice you take. Are you getting advice from someone that has been successful in their personal financial management? Do they give you honest feedback and encourage you to consult your spouse, or do they tell you what you want to hear and encourage you to “keep up with the Joneses?” Look at it this way, you wouldn’t go to a mechanic if you needed an important medical treatment- no way, you’d find the best qualified doctor that you could trust to diagnose and treat the issue. Here is another question- do you trust your banker like you would your doctor? You wouldn’t want a doctor to conceal bad news and give you just what you want to hear, you shouldn’t want your trusted financial advisor to do so either. Borrowing with the end result in mind means utilizing debt to work for you and not against you, it means how quickly can I be free of this debt, vs. can I afford this payment every month for who cares how long.
It’s estimated that 43 percent of families in the U.S. spend more than they make each year. The reality is that responsible borrowers view their income from a certain perspective that allows them to stay out of this percentile. This allows them to avoid certain debt traps. Determining what you can borrow and repay back in the shortest amount of time is dictated by looking at the real payment you can afford, not the one that you are approved for by the finance company. In recent years, finance companies including some credit unions and banks undertake a practice called upselling the loan. Although this can be done in a responsible manner (protecting a borrower), in some cases it went beyond that. The mortgage crisis revealed an abundance of cases involving borrowers failing to recognize the reality of what they could afford and mortgage financiers irresponsibly upselling consumers into unrealistic loan payments and terms. Another area this often occurs is when consumers borrow money from the auto dealership from major automaker’s finance divisions. Responsible borrowers recognize these debt traps and they also understand that while the world of credit functions based on gross income ( before taxes, medical, and retirement deductions), they must make affordability decisions based on net incomes (after taxes, etc.) One of the most often underestimated areas of the family budget is the monthly grocery and dining out expense. Track these for one month and prepare to be amazed as any parent knows all too well, growing teenagers like to eat- a lot.
Two words, global economy. Two more, excessive debt. Today’s complicated world is growing more complicated and indebted as we speak. I’d try to explain, but it might be easier if you just check out this website, showing the United States and World growing debt http://www.usdebtclock.org/index.html In short, what does this mean for you and your family? It means that while we are blessed to have what we have, Bob Dylan put it best- times they are a changing. Responsible borrowers understand that the jobs they have today, might not be there tomorrow. Ask anyone who has ever been involved in a company merger or buyout how the economic changes impacted their lives, retirement plans, etc. Responsible borrowers plan for unanticipated changes in the future. This doesn’t mean we sit around worrying about the future and never carryout our plans. It means that there is less worry when you borrow wisely, and keep the bondage of debt to a minimal level.
Responsible borrowers keep paying themselves into an account when they payoff their car loan, then they have enough to pay cash along with the trade when the paid for car has run it’s course. A responsible borrower has a habit of paying loans quickly, then applying the same practice to paying themselves. This creates financial freedom, remember the opening “borrower is servant to the lender” right? If so, then the opposite must be true as well. This truth was written by King Solomon, and if you want to learn more about wisdom in finances a great place to start is by reading his proverbs.
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