Delay, Save, Buy, Repeat
Finweek English|8 October 2021
Take a journey to see how delaying big purchases can impact a person’s financial wellbeing.
Andrew Davison

The problem with debt, and the reason so many people struggle with debt for a lifetime, is that its impact on one’s financial situation is insidious. It’s not obvious how damaging it is just by looking at any single loan in isolation or the rate of interest on that loan or even the affordability of the monthly repayment. The financial slide backwards is gradual but incremental. To gain a clear appreciation for the stealthy but substantial impact of debt on a person’s overall financial wellbeing, it’s necessary to consider an extended period.

To illustrate the point, consider two friends. To intuitively identify who is who, we’ll call them Borrow and Save. Borrow and Save are identical in almost all respects – they earn the same salary, they get the same salary increases, they desire the same things in life, they therefore spend the same amount on the same things, they do everything exactly the same – except for one important difference, their attitude towards borrowing and saving.

Borrow gets a credit card before she even receives her first pay cheque and she splashes out on a new outfit and a small car to get to work (this is before Covid-19 struck). Save is envious but she has a plan. She wants the same things as Borrow but she delays buying them for just 12 months. Crucially, she works out what she would have paid in loan repayments each month and she saves this amount in her savings account instead of spending it on other things.

So, Borrow and Save spend the same amount each month with the only difference being that Borrow is paying off loans while Save is adding to savings. After 12 months, Save gets herself the same outfit (but the latest fashion) and the same car. To ensure a fair comparison, I’ve allowed for the fact that she will pay a little more because of inflation. Save can’t, however, buy everything for cash just yet so she takes out loans for the outfit and the car.

This continues, with Borrow spending more as soon as her situation allows her to access more debt. At 28 she decides to buy her first property and because she doesn’t have any savings, she gets a home loan for 100% of the purchase price. She can afford it thanks to her promotion. She also buys a few essentials for the new house using the budget facility on her credit card.

Save is also excited about her promotion and wants to buy a house too. She does her homework, though, and implements her plan. She uses an online calculator to calculate the amount she would pay for the house she wants and she injects that into her savings every month for the 12 month wait. Once the 12 months is up, Save buys her house of the same value as Borrow’s house (plus a year’s worth of inflation). Her frugality is already starting to pay off as she can use her savings to put down a deposit and buy the same essentials for the house.

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