The Wise Investor
If you want to borrow someone's flat for a year,
then you pay rent. Rent is simply a charge for
borrowing someone else's building for a while.
If you wish to borrow a car from a car rental
company, then you will pay for each day that you
have it. Money is no different.
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 twelve months.
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