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. Many people who borrow to buy any asset get addicted to the leverage and suddenly the borrowing is much too bigger than what they could handle.

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! Having said that the discipline that is required to borrow and invest is not easy. You need to worry about interest rate risk, renewability risk, call risk, and the asset under performing risk. If you have borrowed at 11% p.a. and the asset is growing at 8% p.a. ..IT MAKES NO SENSE TO HOLD the asset and the liability. Just pay off.

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 – or you learn to pick good funds. With or without an adviser.

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