Most of us decide whether or not we borrow money for something based on whether or not we can afford to pay it off soon. Business author Seth Godin suggests a different paradigm: try to only borrow money when the thing you're buying increases in value.
Picture: Omar Bárcena/Flickr
This principle is typical in business: a company will take out a loan in the hopes that what they're able to buy will make them more money (such as when Marvel took out a $US525 million loan to make billion-dollar movies). Consumers, on the other hand, tend to buy things that go down in value. While this is unavoidable in some contexts — people need cars, and those rarely go up in price — for everything else, it's risky:
Here's a simple MBA lesson: borrow money to buy things that go up in value. Borrow money if it improves your productivity and makes you more money. Leverage multiplies the power of your business because with leverage, every dollar you make in profit is multiplied.
That's very different from the consumer version of this lesson: borrow money to buy things that go down in value. This is wrongheaded, short-term and irrational.
Credit cards, in particular, can result in serious financial problems, and they're typically used to buy things that depreciate in value. However, as we've discussed before, buying tools that can help you get a better job is a method of using credit that can help increase your income over the long term.