Day 29: Borrowing Money (30 Day Financial Wellness Challenge)

Borrow money strategically to help you achieve your goals.

When it comes to borrowing money, the key is to do so strategically.

Welcome to Day 29 of the 30-Day Financial Wellness Challenge.

Each day will comprise of financial exercises, some short and others a bit longer, to help you become financially fit. The goal is to tackle different aspects of personal finances one day at a time.

After the 30 days, you’ll have a stronger understanding of your financial health and an action plan to improve your financial wellbeing. Review Day 28: Grow Your Money

On Day 29, you’ll learn how to borrow money for less and tips to use other people’s money to grow wealth.

Sometimes it makes sense to borrow money for things that improve your overall wellbeing. There’s no doubt about it that money can solve lots of problems but it also can create them too. Borrowing money can easily get out of hand and create a great deal of stress.

Borrowing money to improve wellbeing

Credit isn’t inherently bad. It enables people to afford important things that improve the quality of life. For instance, not many of us can afford to buy a home in cash or afford college tuition without loans. And sure there’s an argument for not buying things we can’t pay for in cash. However, that sentiment usually comes from people who have, in the past, borrowed money, created wealth, paid off debt, and now advocating a credit-free lifestyle.

There is a better way to borrow money. Credit can be used as leverage to help us move up in the socio-economic ladder. But credit can be misused leading to long-term debt. Debt can add undue stress and impact your wellbeing.

The first step is to determine if borrowing money is the right choice. You’ve probably heard about “good” or “bad” debt. The truth is debt is neither good nor bad. It’s simply an obligation. The key is taking on debt that has long-term value and may gain value positively impacting your net worth.

Examples of “good” debt

Good debt is typically associated with using other people’s money aka the lenders to purchase assets.

A mortgage enabling you to purchase a house you can turn into a home. It may even grow in value and sell it for a profit.

Student loans to pay for a college education, professional certificate, or program that gives you the skills to obtain a rewarding and good-paying job.

Examples of “bad” debt

Bad debt are associated with financing impulsive purchases or goods that have no positive impact on net worth.

Using credit cards to pay for purchases and living expenses. And if you’re carrying a balance from month-to-month, you’ll end up paying more for items that may no longer have any value.

A car loan on an expensive car that loses its value once driven off the dealership lot. Cars are not assets and are instead a liability requiring maintenance, fuel, registration, and insurance payments.

Vacation loans, honeymoon loans, and any loans that are marketed to help you afford a dream but only leaves you with debt that can sour the memories.

Dos and Donts of Borrowing Money

Here are some dos and don’ts to help you borrow better:

Do have a budget

Make sure your monthly payments are reflected in your budget. New loan payments will impact your cash flow reducing your ability to reach other goals.

Do the calculation

Is borrowing money today impact your ability to finance long-term value-added purchases in the near future? Sometimes, we’ll finance a car that reduces our cash flow, increase our debt-to-income, and impacts our credit score making it challenging to get approved for a mortgage.

Do save a downpayment

A good rule of thumb is never financing 100% of the item you purchase. After choosing your mission, set financial goals that help you achieve your mission. For example, this may mean a car downpayment as a financial goal.

Do shop for the best rates

Find the best rates by doing your research. Take the extra step and learn some negotiation skills to get an even better deal. Knowing your financial numbers will help you speak with more confidence.

Don’t sign anything without understanding

Read the fine print and ask as many questions as possible to understand the terms. If the deal sounds too good to be true, seek answers to determine if it truly is a find. You never want to sign loan agreement where you’re penalized for paying off the debt sooner.

Don’t borrow when deep in debt

If you’re drowning in debt, the answer isn’t’ more debt. It’s increasing income, reducing expenses, and following a debt payoff plan.

Don’t get a cosigner

It seems like a good idea to have someone cosign a loan. But the chance is high it can strain your relationship. Relying on the kindness and credit score of someone else highlights a far greater need to fix your finances first.

Don’t borrow money from family or friends

It’s not easy asking for financial help. Sometimes it’s our only recourse, however, it can hurt the relationship if the expectations aren’t clear.

How to Borrow Money Better

There are definitely better ways to borrowing money that will ensure you’ll pay the lease amount.

Stay on top of your credit report and maintain excellent credit scores.

To get the best rates and terms you want to have an accurate credit report reflecting a positive credit history. And have an excellent credit score to meet the underwriting guidelines set by the financial institutions.

Does your credit file need work? Set the time to fix the credit issues first before applying.

And pay at least the minimum amount each month. Automate the payments so you won’t miss it either. A late payment can mean fees and penalty interest rate increases. Also, plan your payoff strategy to get rid of debt sooner than later.

Day 29 Assignment

Today’s assignment is to help you gain a better understanding of your borrowing mindset.

  1. Determine how you’ve borrowed money in the past.
When was the last time you financed a purchase? Did it grow your net worth?
What items are financed and listed in the Assets column of your net worth?
When shopping for goods are you tempted by financing offers?
Have you borrowed money to cover monthly living expenses? Are you looking to reduce expenses or increase income?
Have you ever borrowed money from family and friends? How did it make you feel?

Borrowing Money Tips

Understand your mindset when it comes to borrowing. The increased awareness will help make better decisions that support your mission.

Before borrowing money, determine its long-term value and impact. For example, a car is may be necessary to get to-and-from work. But a smaller loan for a modest car paid off in 3 years is better than an expensive car financed for 8 years.

Additional Reading

  • Credit Karma offers you two free credit scores and access to credit report cards using the information found on your TransUnion and Equifax credit reports.
  • Credible helps you find the best loans to meet your needs by having vetted lending partners compete for your business.

Next Daily Challenge: Day 30: Protect Your Money

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