Over the past months, I’ve been sharing an overview of my basic money rules. There are seven of them and today we look at the last one. Rule 7 insures you have a safety net when borrowing money.
It is unrealistic to flat-out ban borrowing money from our lives. I am grateful for a home mortgage. Without it, my husband and I would not have had a prayer of owning our home. And I don’t believe that financing an automobile is evil or that all student debt is toxic.
Borrowing money and the debt that creates should be taken on rarely, and then dealt with swiftly. Debt should be a means to an end. Borrowing money is a financial tool that improves your life if dealt with intelligently, not emotionally.
The rule is to borrow only what you know you can repay. When I use the word “know,” I do not mean with-absolute-certainty-beyond-a-reasonable-doubt know. I mean to know as in having a reasonable certainty based on credible information.
Another way to put it would be “borrow only what you have a reasonable certainty based upon credible information that you can repay,” which seems awkward. So let’s stick with “know” in this rule, knowing that we know what it means.
The following guidelines apply to all forms of borrowing—all forms of debt.
1. Borrow the least you can get by with to achieve your intended result, not the most that the lender will approve. Never let a lender determine how much you should borrow. Mortgage lenders will try to nudge you into the “most house you can qualify for,” not the house you can afford.
2. Repay debt quickly, rather than stretching it out as far as possible. Opt for the largest payment you can handle not the smallest the lender will approve.
3. Have an escape plan. You need to have a plan in mind to pay off the debt early in the event life takes an unexpected turn, either by selling the collateral or paying the debt with other resources or assets.
Borrowing money is not wrong, but it should be done advisedly and with tremendous caution. Debt of any kind should be seen as a short-term situation that always has an accompanying aggressive payment plan.
Debt should never be seen as ideal, but rather as a reasonable means to an end. Being debt-free is ideal, and the goal for which you should be reaching with all the determination and strength you have.