The Wise Investor
If you wish to borrow money from someone, then you
must pay for the privilege. The fee you pay is called interest.
For each day you have the money, you are charged a fee.
Now, imagine you go into a shop and buy some furniture.
Instead of paying cash, the salesman offers you repayments
over twelve months. What is actually occurring here?
Essentially, there are two transactions going on.
Firstly, you are borrowing money, and repaying it over
Secondly, you are using the borrowed money to purchase
the item. Because the whole thing is done at one time, you
simply sign a stack of papers and take the item home.
However, Kate, it is essential to understand what is
happening. You must separate the financing arrangements
from the purchase of the item, to properly understand what
you are doing.
Now, let us take credit cards. The same situation applies,
you are borrowing money from the credit card company and
using it to purchase goods. I know, Kate, that when you buy
something on credit it almost seems free. It is a hard feeling
to shake, I have experienced it myself. You must think about
it, however, and realise that everything bought on credit must
be paid for out of your own cash, plus any interest as well.
Items bought on credit aren't free, they actually cost more
that the same item bought with your hard-earned cash."
John paused for breath. Kate was listening intently,
hanging on every word that he said. Although there was
nothing new about what he said, there was something about
the approach that was different.
John's descriptions showed the whole issue in a different
light, and Kate felt she had a deeper understanding of the
things she had been doing.
"I have, I believe," said John, "shown the disadvantages
of borrowing and credit. You only have a certain amount of
money to spend, Kate, and there's no use in giving it away to
people for borrowing things if you can avoid it. Having said
that, do you have any forms of credit yourself?"