We’ve looked at a couple of examples of things you might need or want to buy that require extra capital, so let’s consider whether it makes more sense to borrow or to save up for our purchases.

Saving

Saving, in general, is a slower, more economical path to a longer term goal. Every day that you save rather than spend, you make a choice to prioritize your long term goal. You sacrifice now, for a reward later. On the other hand, borrowing is a decision that gives you the immediate reward (your new motorbike, or vacation, or education), and the sacrifice comes afterwards.  You get your money right away, but it takes longer to pay it back in the end, and whatever you used it for ends up costing a lot more in the long run.

If you’re a teen, saving up for something you want is the more common choice.  It’s certainly less complicated.for you to save it up yourself than to go through the process of borrowing it, no matter where you borrow it from.

Figuring out how long it will take you to save for what you want is pretty straightforward if you know what you can expect to have in ‘income’ while you’re saving – if you have a part time job and make a hundred or so a week, you may be able to save half of that. Maybe even more, if you don’t need to pay for other things, like a mobile bill or transportation.

If your only income is the money you get for lunches and gift money, you’ll probably need longer to save up what you need, and you’ll have less flexibility in how much you save – you have to eat lunch at least some times!

There are many different types of accounts you can use to save, each with different interest rates, including current accounts, fixed term bonds, even stocks, all of which have different levels of risk and payoffs.  You can put your money into something like National Solidarity Bonds, which have as much as a 16% rate of interest, for example which is stable and safe and low risk, but in order to get that much interest, you need to put your money aside and not touch it for ten years.  Again with the waiting.

Ten years is a long time to wait.  Maybe you don’t want to bide your time for even one year. There are many reasons why waiting long enough to save up money for “a big something” can be counterproductive.  

If you’re looking into paying for a class to increase your skills in a specific area, spending now instead of later could increase your earning potential and help you get ahead in the future. Maybe, the item you want to get will have gone up in price by the time you’ve saved up enough to buy it. In fact, if you wait too long, the thing you want might not be there anymore!

BORROWING

Borrowing the money might, then, be the best answer. HOW, is the next question you have to figure out if you decide to borrow now.

It’s frequently difficult for teens to get credit, but you won’t be a teen forever, and it’s important to know how borrowing works, at least  beyond, “hey, can you loan me a few quid to pay for dinner? I’ll pay you back next week.”

Sometimes, borrowing from family is an option, and the terms can be pretty generous.  You might be able to get a loan from parents or grandparents, especially if they approve of what you would spend the money on, with little or no interest to have to pay back.  

Although borrowing from family can have its benefits in terms of low interest and not having to fill out forms, it can also be risky.  Money has the potential to cause a lot of family drama.

You can also look into borrowing from a bank, but before you ever walk into any financial institution, you do some research.  How much interest you have to pay is based on the same factors as the amount of interest you get: how much you start with (this is called the principle), how long you have to pay it back, and what the interest rate is.  Some bigger loans require something called collateral, which is something valuable you pledge as security that you’ll repay the loan.

A new car and a flat are both tangible examples–stuff you can see and touch.  What about something intangible, like education? This one is trickier. In general, a university education makes you statistically more likely to get a better paying job in the future, so on that side, it’s more valuable.  But lots of people get degrees that they don’t end up using at their job, so was that money well spent? Or is education valuable unto itself?

Most of us do lots of saving and lots of borrowing over the course of our lives; knowing when you want to choose one over the other is a valuable bit of knowledge.