Borrowing to buy an asset?: Simple rule – Don’t!

When it comes to buying any asset – I am using it loosely there is a tendency to borrow. Borrowing actually helps you immediately by allowing you to buy beyond your means. The problem with most things we buy is that once we buy it, it ceases to hold any attraction for us. That is psychological.

My simple philosophy is not to borrow – AT ALL. In case you wish to buy a MP3 disc, you do not borrow. In case you need to buy a simple TV or washing machine you may not borrow. However if you wish to buy a Rs. 3L television set, you might be tempted to borrow and pay in installments.  Clearly, the real rich do not borrow for consumption. They borrow for investing. That you may!

However, if you do borrow for say buying a house – most people do – do not be in a hurry to repay the loan. Take a loan at a young age and keep it on for the whole period. You are repaying cheaper money – inflation ensures that. However the money “saved” by not pre paying should be invested in a low cost, zero-load, index fund with a minimum tracking error.

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One Response to “Borrowing to buy an asset?: Simple rule – Don’t!”

  1. Ravinder Makhaik on March 28th, 2008 at 12:08 pm

    The allurements of consumer markets is so much that many get entrapped into unnecessary debt.

    The simple rule listed out here should be adopted as a lifelong principle

    Some desires are better left unfulfilled.

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