Early in my life, I received the best financial advice ever. I remember it distinctly. I was watching CNBC, and a guest on the show gave the advice to never borrow for a depreciating asset. He went on to explain why and I've followed his advice to this day. It's helped me tremendously in being able to save money and retire early.
What is a depreciating asset?
A depreciating asset is anything that will lose value over time. Examples would be a car, furniture, clothes, vacation and almost anything you would purchase with a credit card. Even with the current crazy car market, any car you purchase is going to lose value over time - as much as 10% the second you drive it off the lot. And (typically) 10-15% each year after that. And while vacations are important and will create memories to cherish, there's certainly no return on that expense.
Why not borrow for these items?
When you borrow for these items, you're paying extra money for the privelege of losing money. Let's use a car for example. With the average car loan, you'll end up paying around $4,400 in interest over about 6 years. If you had invested that money instead of paying interest, you could have ADDED $4,400 to your bank account. That's a net difference of $8,800. Wouldn't you rather make yourself rich instead of your lender?
What should you borrow for?
If you really want financial freedom, you should only borrow money for things that'll make you more money in the long run. For example a business, real estate investments, possibly a home or education. If it's something that's going to pay out in the long run, then borrowing may not be a bad idea.
So next time you're tempted to satisfy that "gotta have it now" desire by getting a loan, think of how much money you're losing. Take the money that you would have used to make payments, and save it until you have enough to pay in full. Your older self will thank you for it.
So, stay out of debt so you can flourish.
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