Seth Godin: Only Borrow Money for Things That Increase in Value

Filed in archive General on June 9, 2008

Always thought-provoking writer Seth Godin steps away from his usual marketing-focused posts today to offer a simple personal finance lesson:

Only borrow money to pay for things that increase in value.

It's a short list: your business, your house and your education, mostly. Stocks if you're smarter than me. That's pretty much it.

For the most part, I agree with this advice, although I think there are a few exceptions. Sometimes you have to buy things that won't increase in value, but are necessary to get things that will. If that makes no sense, here are some examples:

* In many cities, it is difficult to survive without a car. Public transportation is great in some cities, but in most places public transit is not sufficient to get to jobs and do other errands. So, buying a car with borrowed money is not a bad thing - borrowing money to buy a brand new car that is beyond your means is bad, borrowing money to get a fuel-efficient used car is a good financial move (especially if you already have a job that gives you confidence you'll be able to pay your loan each month)

* Borrowing money to buy a professional wardrobe for a new job or job interviews is a good financial move. If you are interviewing for jobs, or if you get a new job and your current wardrobe is not up to par, you need to buy some new stuff now, and pay it off when your (hopefully) larger paychecks start rolling in. You can't wear that black dress you bought for your friend's wedding three years ago every other day to work until the money starts rolling in. Or that suit from your high school graduation 10 years ago.

Of course I am discussing financial moves that you are making with the promise of those moves eventually paying off - the car gets you to work on time and lets you get more done in less time, the new clothes help you get (or keep) a new job - so this is not disputing the spirit of Godin's rule, just saying there are exceptions.

Godin also suggests you treat credit card debt as an emergency:

My suggestion: Go to defcon 4, and do it immediately. Shift gears to live well below your means. That means:
No restaurants
No clothes shopping
No cable TV bill
No Starbucks

It means:
Take in a tenant in your spare bedroom
Carpool to work
Skip vacation this year
Eat brown rice and beans every night for dinner. Act like you have virtually no income.

This is easier said than done for many people, but it's true. Sometimes you have to cramp your lifestyle if you're ever going to get on a firm financial footing. Doing so may stop you from literally worrying yourself sick.