Pros and Cons of Borrowing
In this day and age of borrowing money, big purchases are never far out of reach. The Michigan Association of CPAs has some tips to help you know when should you say yes or say no to borrowing money.
Count the Costs
Debt is all about paying for the privilege of borrowing money over time. A credit union, department store or finance company will charge you interest, which you have to pay in addition to the basic loan amount. And that interest charge can add up, especially if you only pay the minimum payment each month.
Let's say you buy a $1,000 television with a credit card that charges 18% interest, and you pay only the $10 minimum payment each month. Not only will it take you 10 years, or 120 payments, to get rid of that debt — it'll also cost you $799 in interest.So basically, what you end up paying in interest could pretty much buy you another TV. But if you pay more than the minimum each month, like $75, it would only take you 15 months to pay off the debt, at an interest charge of only $124.
When you're thinking about buying something you want rather than need, like a TV, think about whether the interest charges are worth it or whether you'd be better off saving your money for a few months and buying the item with cash. More often than not, you’ll probably find that spending cash is the best answer.
Weigh the Benefits
Borrowing is a good idea when you're looking to buy something that will go up in value over time, like a home. If you plan to own a home for more than five years, there’s usually a good chance that the property will maintain or increase its value. There are usually tax advantages to owning a home, such as the ability to deduct mortgage interest charges and state and local taxes on your federal tax return. But there are also costs to owning a home including property taxes and maintenance. But you'll be able to to benefit from the appreciation in the property’s value over time. So, chances are an affordable home is probably worth borrowing for.
Look at the Big Picture
Financing your education is also a great reason for going into debt. But you'll still want to weigh the pros and cons of borrowing. For example, you may be able to get a quality education and good career prospects going to a public university, and save yourself the high price of a private school. If you’re thinking of going to graduate school, take a realistic look at how much the move will benefit your career over time before you ante up the tuition costs and lose out on potential earnings while you’re in school. Education is usually a great investment, and one worth borrowing for, but be sure you’re making the best use of your money.
Consult Your CPA
There are risks and rewards when you borrow money and your local CPA can help you to understand them. Turn to him or her with any questions you may have about important financial decisions.
You seek the expertise of CPAs at tax and audit time, of course. But CPAs also promote personal and professional financial security year round. Visit the CPA Referral Service on the MACPA website to search for a CPA in your geographical area or specific area of expertise.
This article was submitted by the Michigan Association of CPAs.
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