Savings is the superhero of budgets. We all know the benefits of saving and strive to save as much as possible. Spending and borrowing are often treated as the budget villains – but are they really? We all need to spend money to live, and how much we spend and what we spend our money on comes down to personal needs and decisions. For some people eating out is important, so they may prioritize their meal budget over things like clothes, entertainment, or travel. Others may choose to do the opposite, making all their meals at home and spending more on clothes and travel. Spending is personal and should be focused on your priorities and fit within your budget.
Borrowing is usually the other money management villain, but there are many times that borrowing may be a better financial choice. Here are some considerations that may make borrowing a better strategy:
1. Timeline
Throwing a wedding or taking a vacation with your loved ones is an exciting time! But, expenses such as these can take years to save for – sometimes longer than you are willing or able to wait. For some, borrowing to have these larger expenses fit into their ideal timeline may be better than waiting years to save.2. Emergency Savings
Having 3 to 6 months of expenses saved is ideal, and more is even better! However, depleting savings for a financial goal may not be the best strategy. If you have $5,000 in your emergency savings and use most of the funds on a family vacation or home update, it could leave you in a tough financial situation where you may not have enough money to cover an emergency should it arise. A personal loan can give you the flexibility to borrow for your needs without depleting emergency savings. And, if you save more than you need in your emergency fund, you could always prepay your loan early!3. Financial Stress
Money can cause many of us stress, and having to put an expense on a credit card means a higher interest rate, a bill that’s due within a few weeks, and that you will have to pay a high cost for a balance carried forward. Using a personal loan allows you to have a lower rate and spread payments out over time (plus, making payments on time can help your credit score). Taking a personal loan means that you do not have to deplete your emergency fund, or put the debt on a high-interest rate credit card. It could help bring peace of mind.4. Cost
Personal loans tend to have lower interest rates than credit cards. For example, putting a $3,000 expense on a personal loan would mean a $57 monthly payment and only $396 total in interest over 5 years. A credit card expense of $3,000 at 18%, with monthly payments of $57 could take you 7.4 years to pay off and cost $2,054 in interest. Calculate the cost of your strategies, as we did in these examples, using our calculator at here.5. Monthly Cash Flow
For some people, a monthly cash flow may be tighter than they wish, but that doesn’t mean they have to delay certain experiences or expenses. For example, a family vacation with aging parents may be better off to plan now than wait a few years. Or, perhaps their home needs a renovation that can’t wait. Paying or saving for these types of expenses from a monthly cash flow in a short time period could impact their lifestyle significantly. Another option is to borrow now and pay over time, as is often the case with educational loans and mortgages (personal loans simply have more flexibility in what you can choose to spend the money on).
Final Thoughts
HUECU always encourages saving for all goals, and in some situations borrowing may give you more flexibility. A good strategy could be to calculate your monthly savings and look for a loan that will have that amount or lower as the monthly payment; that way you can simply shift your savings payments to loan repayments for a time. The key to borrowing is always to know what is affordable for your specific situation so you don’t end up spending beyond your means. If done correctly, a personal loan can help you spread out large expenses over time, positively impact your credit score, and keep you from paying large interest rates.
Although financial institutions run calculations to determine what amount a borrower could pay back, it’s always best for consumers to also do their own calculations and consider all their future life goals. Even though borrowing may be a better choice, it is primarily dependent on your budget, and needs. HUECU always suggests finding the most affordable option for you and compare all options before deciding to borrow. GreenPath Financial Wellness counselors can help you decide what may be best for your situation. You may schedule a free call with them at huecu.org/GreenPath.
