Let’s say there’s something you want.  A big something. A trip to Ibiza. A motorbike. A huge flat screen TV. A class in visual effects so you can work in movies.  A house (maybe not now, but someday).

In other words, a ‘something’ that costs more money than you currently have.  What do you do? In order to get enough money to buy a big ticket item, you have essentially two choices.  You can save for it or borrow for it. And as with everything else we’ve been talking about, both alternatives have advantages and drawbacks.

The reality of saving vs. borrowing comes down to this: Money that you save is less expensive to use than money that you borrow, so the value to you and your ability to reach your goals is an important factor is whether saving or borrowing is the better choice for you.

One important factor in deciding if you should save up to get something later, or borrow to get something now, is the value of the item itself, and how that value will change.

Let’s take 2 examples and see what happens with each.

Chances are good that someday you’re going to want to buy a car.  You decide that a new car is the way to go, and find a nice one for €20,000.  You get a five-year loan, with an interest rate of 5%. That comes to about €375 per month.  You drive home, happy with your new ride. Unfortunately, by the time you get home, the value of the car has depreciated by about 5%, and it’s now worth only €19,000.  But you don’t want to sell it right now, so who cares?

Five years pass, and you’ve paid off your car.  All told, you’ve paid about €22,650. So you’ve paid approximately 10% more than the car was originally worth, just in interest.  And what is the car worth now? Probably about €10,000. That’s a 50% loss–not the best investment you could make.

Now let’s look at a happier scenario:  something that will appreciate in value.  You’re ready to buy a house. You look at prices, and decide that an apartment really makes more sense right now.  You look in the city centre of Dublin, sigh heavily, and calculate that downtown living isn’t for you. You find an apartment outside the city centre  for €100,000.

You get a 20 year mortgage at 3% interest. Your payments are about €550 per month.  Your lovely flat increases in value by an average of 6% per year. Twenty years later, you own your home free and clear.  You’ve paid a total of just over €133,000. That’s a good 30% in interest over the original price of the home. That might feel like a lot, but then you look at its current value.  If you wanted to sell now, you’d be able to ask for €220,000. That’s a 120% increase, which is very nice indeed.

Note:  buying a house is a lot more complicated than this. Down payments, fixed versus variable loan rates and how much you can actually qualify to borrow are all factored into a sale, but for now, we’re keeping it simple. We’ll talk in more detail about home buying in another lesson.

Finally, what about something smaller but more immediate – like a class in coding or visual effects? You might want to take a class in coding so you can create an app you have an idea for, and waiting till you can save up the €5000 it will cost means you might lose your window to get the app completed and online while it is still a good fit for the market? You might be able to use a credit card to pay for the class – that’s also borrowing, but the term is a lot shorter, and the rate is a lot higher. What do you think you should look at to make the best decision about taking that step right away rather than save for it?