Almost all financial goals can be achieved in two ways: either on credit or through savings. Even for an increase in your pension, you can not save – it is enough to conclude a life annuity agreement (in fact, a reverse mortgage), the essence of which is that after death your property is transferred to those who will pay you the established maintenance.
The supporters of the anti-accumulation position have plenty of arguments: instability of exchange rates, periodic crises that burn out most of the capital, unscrupulous companies in the financial markets, lack of guaranteed profitability, and so on.
On the other hand, repaying loans for all financial purposes requires an uninterrupted source of income, and in order to qualify for the most attractive terms, you need an ideal credit history. Plus, if deflation starts in the country, it will be more and more difficult to repay the loan every year. And if you take a loan not yet in the currency of your income, then there is a risk of overpaying and, as a result, ending up in a debt trap.
So, in what cases is it preferable not to save for a purpose, but to take out a loan? Let’s figure it out.
When is it more profitable to take out a loan?
In the case of high inflation, hyperinflation, which is still combined with stagnation in the economy (stagflation), prices rise at a colossal rate. However, with stagnation, the country’s economy stalls, there is no growth in the stock market, therefore, clients are not able to access tools in which to save up, overtaking inflation. And the longer the goal is postponed, the faster it becomes more expensive. In such a situation, it is more profitable not to save, but to spend – take a loan in the maximum amount possible for its comfortable repayment, in order to fix the value of the goal, and pay a set amount that will no longer grow. But it is worth considering that during a period of stagflation, the interest rate often rises to a maximum, so loans become extremely expensive. In this case, the ideal option is to take out a loan at the beginning of the incipient stagflation, before rates increase. When stagflation is broken or is running out, it is more expedient to start saving – the economy is expected to grow, which means that income should exceed inflation.
IMPORTANT: there is a risk of taking a loan at the maximum rate, and then ending up without income due to a reduction or problems in business. Therefore, during periods of such crises, it is important to use a credit strategy during the inception of a recession, and not at the time of the recession itself at the highest rates, and only if you are confident in the stability of income and the ability to repay the loan on time, even with a significant decrease.
In the case of depreciation of the national currency in which you receive the main income, relative to the currencies of other countries, especially if it is the currency of a country that produces little on its own, imports automatically become more expensive. This means that there is an explosive rise in prices for almost all products and services, since they are also made from imported components. In such a situation, the time to save is running out – it is time to spend, since the rise in prices due to the growth of the currency can be so significant that no investment instruments with reasonable risk can cover it (especially if the process is fast). It is also ineffective to acquire foreign currency as savings appear – due to the rise in the exchange rate, each purchase will be more expensive than the previous one.
IMPORTANT: there is a risk of taking out a loan not at the beginning of devaluation, but at its very peak, when the main rise in prices has already occurred. In this case, the expected effect will not be. In addition, there is a risk of taking too long-term credit, which may end later than the national currency recovers after devaluation. And then the overpayment on the loan will exceed the effect of the devaluation.
If the accumulation for the goal exceeds the period that is comfortable for its implementation, and there is no significant difference between the loan payment and the lease / lease of this goal. Everyone knows the story of real estate savings. Many would have had to save up for decades to buy their own homes, and they would only be able to buy an apartment by retirement. In such cases, an accumulation equal to 100% of the purchase amount is not entirely reasonable. The rent payment is very often comparable to the mortgage payment, but at the end of the mortgage term, you receive an asset that you can transfer to your children, rent it out, sell it. When you rent a house, you get nothing. Of course, you can compare for a long time how much you can earn on savings if rent is still cheaper than a mortgage. But judge for yourself: sooner or later the rental price will rise, and the difference will be compensated.
IMPORTANT: here we mean really meaningful goals, and not cases when the purchase is expensive, but not vital – for example, a fur coat or a vacation on credit. It is also worth considering that the total payment on all loans should not exceed 40% of income, so that if it decreases, you can still pay on loans.
A little about savings
We have listed three situations in which a loan with subsequent repayment can be more profitable than savings. However, you should not take them as unambiguous recommendations.
There must be a contingency fund. The size of the fund is equal to the family’s budget for 3-6 months, including loan payments. Having such a reserve, in the event of a disruption in income, you will not have to take out an extra loan or delay payments on existing ones.
Are you taking out a loan for a large purchase for which you cannot save up? Try to keep the down payment you make above the minimum. As a rule, due to this, the interest rate on the loan can be reduced.
If the economic situation recovers, you need to stop spending and start saving. Especially if you already have a loan, savings or investments will be able to outbid inflation and even the loan rate. Thus, you will be able to pay off the debt faster.
Remember about diversification: crises / devaluation / hyperinflation do not always occur in the world, so it is wrong to rely only on them, spend hard and not save money. It is just that during the indicated periods you can increase the use of borrowed funds and reduce investments, if it will bring more benefits.