4 ms·

The benefits of saving vs. borrowing really depends on the situation, and it's possible that borrowing is actually more beneficial. Let's say I want to save mo

by jljljl 12y ago

The benefits of saving vs. borrowing really depends on the situation, and it's possible that borrowing is actually more beneficial. Let's say I want to save money to buy a house, and I want to pay in cash (i.e., no mortgage). I estimate it will take me about 20 years to afford the house, so I start putting away money from my pay check. However, since I don't have a mortgage and thus no house to live in, I also have to pay rent somewhere. This means I am paying 1/20 the cost of a house + the cost of rent in my city. Additionally, since I won't be buying a house for 20 years, there's a risk that the value of housing could change drastically in that time period, meaning the amount I've saved might not amount to enough to cover the price of housing when I'm finally ready to buy. Obviously the risk of this happening varies by how I invest my savings, and the particularities of the housing market I live in. So the benefit to saving vs. borrowing comes down to something like: (Cost of Housing in 20Years) + (Cost of Rent for 20 Years) - (Gains from Investments) vs. (Cost of Housing Today) + (Interest on Mortgage for 20 years) Obviously there's a lot of other things to take into account, but it's not as simple as Savings Good Debt Bad.

anon4 12y ago
Well to be fair, borrowing with interest works really well only in the presence of endless growth.
- gizmo686 12y ago
  Not necessarily. Borrowing with interest also works in the presence of endless inflation; it does not necessarily need real growth.
  - toomuchtodo 12y ago
    But does it work with near-zero inflation or deflation?
raverbashing 12y ago
I agree with your calculation, of course you don't need to save for 20yrs, just save for a good down payment Too bad a lot of people go buy a house on the wrong side of that equation However, owning vs. renting has an interesting hidden cost: you can move "anytime you want" with rent. Renting usually tracks the market affordability/cost more closely, while your mortgage doesn't change while the price go up or down, BUT if the price goes down this might be a problem.

by jljljl 12y ago

anon4 12y ago

Well to be fair, borrowing with interest works really well only in the presence of endless growth.

gizmo686 12y ago
Not necessarily. Borrowing with interest also works in the presence of endless inflation; it does not necessarily need real growth.
- toomuchtodo 12y ago
  But does it work with near-zero inflation or deflation?

raverbashing 12y ago

I agree with your calculation, of course you don't need to save for 20yrs, just save for a good down payment Too bad a lot of people go buy a house on the wrong side of that equation However, owning vs. renting has an interesting hidden cost: you can move "anytime you want" with rent. Renting usually tracks the market affordability/cost more closely, while your mortgage doesn't change while the price go up or down, BUT if the price goes down this might be a problem.