Key to Getting the Greatest Emotional Return from the Money You Earn
Have you ever ran across a simple loan calculator on a lender website that calculates how many hours you will need to work in order to repay a loan? Of course not.
That's because lenders are trying to sell you a loan. And in attempting to do so, they are going to paint all kinds of pretty mental images showing you how much better your life is going to be once you are approved for the loan.
Of course, the last thing the lender wants you to be aware of is the sacrifice, remorse, and stress you might endure throughout the loan repayment period. So, as with any other purchase decision, it is your job to find out what the lender (seller) is leaving out of their sales presentation.
Critical Questions to Ask Yourself
The key to getting the greatest emotional return out of the money you earn is to accurately forecast the net consequences of your decisions before you make them. To that end, here are a few questions you should be asking yourself before you sign a loan application:
- If I am using the borrowed money to purchase something that will wear out or become obsolete, will I still be as happy with my decision when I am making the 30th payment?
- How much over and above the loan amount will I be paying for the privilege of obtaining something before I've actually worked and saved up for it?
- If borrowing were not an option and I had an amount in savings equal to the principal and interest cost, would I take the money out of savings and make this purchase?
- How much would my savings account grow to if I skipped this purchase and made the payments to myself instead? (See the Savings Account Interest Calculator)
- How will I handle the repayment of this loan if my household income suddenly declines or disappears?
- What is the lender having to do to earn the interest income compared with what I am having to do to pay it?
- What other, less costly ways might I satisfy the primary function of this expenditure?
Those are the types of questions you should be asking yourself when you consider borrowing from your future income (plus interest).
Please don't let lenders pull the wool over your eyes. Stop to think about what you are giving up in exchange for taking out the loan.
Don't just think about how nice it will be to have what the borrowed money will buy, but also consider how many hours you will need to work in order to earn the after-tax, after-work-related-expense income to repay the loan (that is, if you're fortunate enough to still have a job when each payment comes due).