BizLife Video | 1.5A   To Save or Not to Save…

We’ve talked before about putting away a few quid for small goals – headphones, clothes, runners, that kind of thing. But what about when you want something bigger?  How about a trip to Ibiza? A motorcycle? A car?  Classes in visual effects or graphic design? And somewhere down the line, a house?

There are basically two ways to come up with the money you need to pay for the bigger goals you have –  you can save for it, or you can borrow it.

So what’s the difference?  For starters, saving is money that you earn yourself or receive as a gift, and borrowing is when you accept money from a person or an institution and they expect to get it back, along with a premium of some kind.

What that really means is that the money that you save for yourself is going to be less expensive than the money you borrow elsewhere. In fact, depending on where and how you save your money, you can add to it,  just by saving it, in the form of interest – that’s money that a bank gives you for leaving your money with them. More on that in a bit.

For right now, let’s talk about a couple of the most common big ticket items that people save or borrow for – cars, and houses.

Your first car probably won’t be a brand new one – much like your first job, you may or may not like your first car very much, especially if it’s an old hand-me-down – but let’s travel to the land of unicorns and rainbows and imagine that you are going to buy a car for €20,000 and get something nice.  

If you want to save up that kind of money, it may take you a while, because presumably you’ll have a bunch of other expenses in the meantime – rent, food, utilities, whatever.  If you put the money away yourself – let’s say, around €340 a month, it would take you about five years to save up enough to buy it with cash.

But five years is a long time to wait so you decide to take out a loan.  You manage to get a five-year loan with an interest rate of 5%, so you’ll be paying €375.00 per month. By the time you get done paying for it at the end of five years, you’ll have shelled out about €22,650, or a little more than 10% above the price it was when you bought it.  That’s because you are paying ‘interest’ on the money you borrowed – it’s like renting the money for awhile, and the interest is your rent payment.

Now the bad news – car values are affected by this concept called “depreciation”.  

Depreciation is what happens to the value of an item due to wear and tear – in this case, a car.  Cars have all kinds of parts that wear out, break, burn up, go flat, tear or crack, and all of that takes away from the value over time.  So, the car that you purchased for €20,000, and paid €22,650 over time for, will be worth about €10,000 the day you pay it off.

As far as investments go, a car isn’t the best if you go just by the numbers, but it’s something that makes life a lot easier in a lot of ways, and might make a big difference to your ability to collect other resources, so your own situation is important when you decide what to do.

OK then, so what is something that almost always a good investment?  Maybe a house. Unlike cars, houses tend to appreciate in value.

You’re probably not thinking about a house right now, but it’s not a bad idea to get the basic realities of it into your head.

Let’s flash forward a few years, and you’re ready to jump into the property game.  You start looking at prices and decide that living right in the city centre is really more than you want to spend, so you look a little further outside of town.  For the sake of simplicity in numbers, we’re going to return to the land of rainbows and unicorns and say that you can get into an apartment for around €100,000.

That would take you a long, long time to save up, so again you go and get a loan.  Just like when we were talking about the car loan, we’re going to simplify the process a lot and get right down to the loan part.  For now, we’ll skip things like down payments, fixed versus variable loan rates, and how much you can actually qualify for. Right now, we’re just going to assume that you’ve already gotten all of that sorted and you’re ready to sign for your mortgage. (A mortgage, by the way,  is just the special name that banks use to specify that a loan is for property and not other things, like cars).

So if you’ve gotten a loan for €100,000 spread out over 20 years with an interest rate of 3%, you’ll be making payments around €550 per month.  Unlike your car, which loses value every year no matter how well you maintain it, let’s say your flat is going to increase in value by about 6% each year over the course of your loan.  

20 years on, your apartment is yours, free and clear, and you’ve paid around €130,000, which is about 30% in interest over the original price.  Now, here’s the fun part – the current value of your gaff, after appreciating, or increasing, in value over the course of those twenty years, (which most gaffs do) is around €220,000, which – I’ll save you the math – is a 120% increase in value.

Not bad, eh?

It’s pretty easy to see the value of borrowing when you end up with something that is worth a lot more than you paid for it, isn’t it? How about when you end up with something that goes down in value but makes a different goal possible, like buying a car so you can get to uni so you can become a doctor? Maybe the loss you take is worth it, or maybe you bike to uni and save for books instead? It’s a conundrum that you’ll face many times in your life, so understanding the basics is a good idea!

So you’re probably wondering at this point, “where am I going to borrow this money of which you speak?”

There are actually a few different options.  Banks, for a start, are probably the most common places for money transactions, whether for saving or borrowing.  There are over 60 banks in Ireland at the moment, so you’ve got more than a few choices there.

Other options include credit unions, which are community based coops that offer services to help you look after your money.  A building society is another sort of a bank with limited services for its members. Some retails shops offer financing of their own, and some offer loans for other things. Even An Post, which started out as a postal service, has options for different kinds of accounts.  All of these organizations have services for managing your money.

There are many ways to borrow and save, but the big question you need to keep in mind as you decide which is right for you and your goals, is whether the added cost of the money you borrow is offset by the value you get from being able to access your goal immediately – maybe you buy the car even though it goes down in value, because uni is too far to bike to and becoming a doctor will, in the long run, be such a good use of your resources that the cost of the loan is less important. That’s for you to decide.

It may all seem very daunting and complex, but that’s only because it sort of is.  Luckily, though, plenty of people have done it before, and whatever institution you choose can help you figure out the best way to handle your money…and maybe even help you get that hot sportscar and flashy gaff you really want.