I've always believed that it's best to save up for what you want.
It never made sense to me to borrow money, and then have to suffer usury, when I could just be patient put it in a bank account and benefit from compounded interest.
Problem is I didn't factor in other people.
Some people believe it's better to buy stuff you can't afford, borrow and then figure it out later or pay an undetermined amount of usury.
Now what happens is that while I was saving they were spending, and this causes the lenders to create more money and with more money things cost more, so you have to save longer.
Take property. I like everybody else wanted a house of my own with a double garage so I could build my kit car on the weekends. When I started saving one could get a nice house for ~$150k.
But the biggest part of most economies is inventing money, and lending it out these properties started rising in value exponentially.
So is it better to just borrow?
Say I wanted to buy an average Oz property, they now cost $600k. If I saved up it would cost me $600k - (~%5 compounded interest). If I had to borrow say $500k it would cost me $726k (@7%) + fees left right and centre.
So I'd be paying ~$126k to a completely parasitic element of society.
I think if I needed a loan to get a business up and going, borrowing may be beneficial, ie borrowing to make money.
Am I being idealistic here and we should all just pay a middleman for the things we want?
Should I go a buy a SLS AMG?... I've got $56k credit on my Visa, plus I'm sure I could get the rest on a loan.
Why didn't they teach basic financial acumen at school?
Is the lack of education on purpose?
My basic rule i was always taught is that its ok to borrow if what you buy is going to appreciate in value but best to save for something that depreciates.
But you only live once right so i dont see a problem with borrowing if you can genuinely afford to pay it back or its got some emotional value to it.
But things only appreciate in value bcos people borrow... borrowing is the basis for inflation. If people didn't borrow then there would be no new money in circulation and things would cost the same or even depreciate.
How many people here have borrowed money for buying, say, platinum?
With housing at least most people have to pay one way or another for a roof over their head. So unless we all kill out parents to inherit their house and then split it up with our siblings, or perhaps kill them too, then we are going to pay for our own place to live. The other option is to live with your parents as an adult. Not a bad idea in some ways but not possible for everyone.
So where are you going to live while you are saving up your money? If its like most people then you are going to have to rent. To me rent is the best way of valuing a property. If you are paying $100 a week on a place that was last sold at $700,000 then you are doing pretty good and you may as well keep renting. However the house is probably overvalued. If on the other hand you are paying $500 a week rent on a place worth $400,000 then it might be better to go out and buy a place with a mortgage.
Of course its better to pay cash for everything and to save. Thrift is a value which helped build up western civilization. Again of course the value of thrift is not what it used to be and we are encouraged to go out and borrow money to buy stuff like TVs and cars all of which will be worth bugger all in a decade or two.
Wow... some super short-sighted thinking there...
It'd be awesome to re-visit some of these ideas every seven years and see how it all pans out...
The US had a huge housing bubble that wiped out a decade or more of appreciation in housing prices for most people. The bubble was largely caused by loose lending and speculation.
It's my understanding that Australia has not suffered from this deflated bubble, yet.
Warning signs; people buying multiple houses with little income, tv shows trumping the wonderful joys of home ownership, seemingly everyone becoming a realtor, homes for sale getting bid up in price, people complaining about being outbid, a few financial talking heads warning of a bubble.
Prices are now slowly coming back, some areas more than others.
If you buy a home for $600K with a mortgage and you have $600K in cash and invest it in long term Gov't bonds or bank certificates guarantied by the Gov't, over time you will be able to refinance the loan when rates are very low and reinvest the money when rates are high so you make a higher rate on your cash than the rate you pay on the mortgage. This arbitrage is safe guaranteed no brainer money in the bank, this is how rich people get richer.
It's all timing, don't buy into a bubble, buy when things cannot get any worse and sellers capitulate like the end of the world is near, sell when the market is red hot, prices are rising thru the roof and people are scrambling to buy a home.
Beaglebuddy: Yeah, I heard about US lenders giving loans to people in jail. Is that correct ?
Flysurfer: The government doesn't think so. There is no tax on debt. If they thought that saving up was cool, they would tax debt, and remove the tax on interest.
Crank up the credit cards and buy what you want.
$40 000 up on the cards,,,,who cares,,,at least you have had a fun life with all the toys you want,,and when you die the bank takes them back , but your dead so you dont care.
Or,,work 7 days a week to own your toys out right ,but have no time to play with them because your already working 60 hour weeks to upgrade your latest toy for a newer model,,,even though you have only used the new toy 3 times because you work too much.
All the toys you want for free on credit and you only pay them back when your dead.
Oh the sarcasim.
Or ,,,maybe,,,,,now I think about it,,,,,,,,,new kite here I come.
Borrowed $75K for a $145K house in 1990
Almost payed it off by 1995 by going without virtually everything, but needed to renovate, over $100K, redraw. Bought my own tools and done most of the work myself.
Made my own surfboards. Done my own car services.
Then couldn't restrict life any longer, needed to show the kids some life. Took them skiing for 1 week per year for 10 years. $35K redraw.
Redraw for a car. you get the picture.
Total borrowing was about $250K
Finished paying it of in 2012.
Total cost- $ $800K.
I'm now 60 years old, with some super, but I won't finish work until the grandkids come.
Off to Europe to see my daughter this year. :D
you're right about 'mortgage' cisco- it translates literally as 'dead pledge'
real estate has a different meaning though. in medieval english courts, the only thing ('real' was the ancient term for thing) you could bring a recovery action for was an estate in land. estate doesn't mean 'declared area' in this sense. estate is another word for ownership rights or interest in something. you have estate in personal property too.
so real estate is land- because it was the only 'thing' of yours you could recover the 'estate' in. anything else you only got damages
there is no way in hell the medieval brits would have adopted a spanish word into law
someones read their blacks law dictionary...
I got a store card when I moved out of home @ 18, bought a tele and a stereo, pots and pans and other stuff I can't even remember twenty years on...
what I do remember is, paying the minimum on apprentice wages thinking life was sweet...
then still paying for it years later even though the latest and greatest I was paying interest on was now the crap you found at the salvos and at moving sales...
seriously, the tele died more than ten years ago, the stereo died to the point where only the radio worked and I left it in the shed of my rental.
but, the fridge that fell off the back of a truck that I paid cash for.. hasn't missed a beat in twenty years....
I think there's something in there for all of us...
ive been in debt most of my working life doing something i enjoy. in a few years i wont be working anymore but still in debt with the debt serviced by people who dont want to borrow.
i say borrow but wisely.
I'll let you in on a little secret.
I know a few people in high places in the Perth Building Industry.
For some reason, and I don't know why the past 12 weeks has gone mental. Demand for housing construction has increased by 300 percent.
I'll be interested to see what government statics come out over the next 6 months.
Speaking of numbers, we have over 1000 people a month moving to Perth. That's over 300 families.
Will we see $600 average rent in perth next year?
If we get another boom, I'll sell and move to north Brisbane. Cheaper housing, less traffic and better lifestyle.
