Are you in one-step forward & two steps back scenario?
You must have heard many times that you should dip into your savings to meet any unexpected expenditure. Financial experts suggest building an emergency cushion and that must be worth six-month of your living cost.
The idea behind this recommendation is to keep you from debt. Of course, as long as you have savings, you should dip into them to meet your expenses, but it is crucial to determine if you really need to use it, and if so, is it really a better option than borrowing money?
It is essential to decide if it is ideal to dip into your savings or you should borrow money. Some of you can think that you should use savings as long as you have some funds set aside, and some of you think that borrowing would be a better option. The youth struggles a lot to fit all expenses into their income, and as a result, you fall in debt.
It is hard to know when it will be an ideal situation to meet your expenses through savings and when you should borrow money from direct lenders. This blog explains both the scenarios when you should use savings and when you should borrow money.
#Situation 1: When assets are crucial but of very high value
House purchase is the best asset to understand this scenario. It is paramount to invest in your house, but it is so expensive that it is beyond your imagination to pay for it outright unless you have got money into your inheritance. Even if you earn a decent amount of money, it would be all but impossible to have enough money to meet the cost of the house straightaway.
The prices of property keep rising, so you cannot keep up with the rising cost. Home is a big investment. However, you will need to put down a proportion of the home price as a deposit size. If you have a deposit size and meets the whole criteria, you can apply for a mortgage.
#Situation 2: You are buying a vehicle, a depreciating asset
There are many people who put forth the similar segment while buying a vehicle. A vehicle is a depreciating asset. Its value drops by 25% immediately as you leave the showroom. If you fund a car with a loan, it will add up the cost of the vehicle over the time.
If you buy a house, you are creating an asset. Since the value of your house will go up, you can keep up with the cost of your debt, but this scenario does not fit when you buy a car. It is not creating an asset. It is plainly adding up expenses month after month.
Remember that every loan is expenditure. Whenever you are borrowing money, you are adding up your expenses. When you borrow, you spend tomorrow’s income today, and hence you need to be very careful while taking out a loan. You fall into a debt spiral when the link between what you earn and what you should normally spend is broken.
You are highly likely to fall into a debt spiral if you continue borrowing money out of habit. The best way to avoid being in a debt trap is to borrow money when you literally need it and when you are certain that you can pay it off on time. Loan repayments include the interest on top of the principal and therefore make sure that you have scope to settle all your dues without struggle.
#Situation3: When you are saving nothing
If you are taking out small loans in Ireland, you will get funds based on the given income. In addition to the amount you can be offered given your income, you should also estimate how much your income will be used to pay off the debt. If you hardly save any amount after paying off your debt, it does not make sense to borrow money.
Making a decision whether you should use your savings or borrow money is not that easy. The bottom line is you will have to get an insight into your financial condition. As long as you are left with some money to either save or invest, you can borrow money.