Never Borrow To Buy A Depreciating Asset

The late 20th century may have seen one of the greatest economic booms of all time, but that did not stop a lot of people from borrowing themselves into personal bankcruptcy. In fact, over the last 2 years of the century, 1/40 families in the US declared personal bankcruptcy. While many think that most bankcruptcies flow from unemployment or disability, the most common cause is borrowing for the wrong reasons. So let the following be your guide: Never borrow to buy a depreciating asset. In other words, don't borrow for something that is not going to provide you with ever-increasing benefits in later years. That pretty much leaves out most of things that people borrow money for. Most people borrow money to finance either current spending or to buy something that loses value over the years, like, dare I say, a car. I can think of only 3 things that qualify as appreciating assets and are tehrefore worth going into hock for: (1) a home, (2) sensible home improvements, and (3) a college education. Incidentally, I did not mention borrowing to buy stock, although a lot of people seem to think that makes a lot of sense. But borrowing to invest only makes sense if you can be sure that your investments will appreciate in value. And no one can be sure of that. So don't do it. Simple. So next time your investment adviser or broker recommends that you either borrow on margin againts your current investments, or worse, take out home equity loan to invest the money, don't do it. For example, they will try to convince you by saying that investment will earn a profit margin of 15%, and interest rate for borrowing is 8%, and you will gain 7% profit after all. This is too dangerous, same like you are gambling.