I’m Not Paying My Debt, but I am Saving Money

That was sort of the gist of a comment I got on a post last week, and I have commented many times about the fact that if you have debt, and are saving money, you aren’t really getting “ahead” at all.

In the dirty 90’s borrowing money to make money was all the rage, however, eventually you have to pay for what you borrowed (one way or another). Current rates of interest seems to suggest that all you need do is find something that has greater than a 5% return per annum and you are in the money (if you can get a preferred lender rate of 4.5% or so), and yes that might work (NO!!! I am not recommending it, I am simply pointing out that it might work (then again, Lenin thought Communism would work too)), however when the rate of interest on your borrowed money goes up, what happens then?

If I borrowed money at 4.5% and I bought into the Big Cajun Man Guaranteed Index Fund (BCMGIF not to be found on any market anywhere in the world) which coincidentally pays 6.75 % (on average) every year, that means I’ll make 2.25% per year doing nothing (and without using my money).  Now, if I didn’t owe any money and used my money to buy into BCMGIF I’d make 6.75% a year, wouldn’t I?

What if I borrowed that money on my Secured Line of Credit, but interest rates start to jump a little and now I am paying 7.25 % on the money? In a short period I am now losing 0.50% a year, aren’t I? Now BCMGIF might rebound too and make more money that year, or in the unlikely case that BCMGIF starts only paying 4.1% a year, I am now losing 0.4% a year .

To get back to the point if you have Debt (i.e. negative money flow, owe money, etc.,) if you are Saving money as well, you are not increasing your personal value, you are simply creating a weird bubble of Debt and Savings (and my guess is your savings bubble will burst long before your Debt bubble ever does).

 

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  • krantcents July 30, 2013, 12:24 PM

    I think you have to do both! If you are not saving and investing, you missing out on time. Invest, however small and time will help you grow your investment.

    Reply

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