Have you ever been in a situation of sudden need for money, and though you had enough savings, did you not have enough money on your current account? This is a perfectly normal situation, at any time you can pay an unexpected expense that exceeds your cash or bank account. It is important that you decide rationally, with conscious financial planning in such a situation, about the source of your spending.
In our article, we will help you to consider what aspects you should consider before you decide to take a rabbit or a loan.
What are the costs of getting money?
Frequent access to money held in the bank or invested in any way is often a very costly expense, and it is also worthwhile to count the loss of profit.
If you invest your money in a tool, you will most likely have to pay it back. This is often a combination of several items.
- Such costs may be a fixed fee or a procedural or transaction cost, which is the direct price of redemption / sale and may be higher than usual before time.
- In addition, the cost of not being able to freely choose the date of departure may be due to a bad market situation, a low exchange rate position, and a low sale price.
- It is also a cost if you have to tax or pay a tax due to a transaction, for example after an investment return, and you cannot enforce the tax relief or tax exemption.
- And it is also a cost that it is better to keep an investment than to get out of it, and later, when you can re-enter it – because it has a higher transaction cost on the one hand, and on the other hand falls off the intermediate yield.
It should also be mentioned that access to money takes time. This is just as important if you have to raise money quickly than the cost. You can access your liquid assets, that is, your cash or cash on your account at any time, but it may be much more difficult for money that you have invested or invested.
If you have savings in your bank deposit, breaking it can take time, but it can be done relatively quickly. However, the investment situation is different, it can take long, at least 15-30 days, but often it can take longer to use it. It may be another type of investment (such as real estate, etc.), for which it is also time to switch to cash. Often there is no time for this, or delays mean more costs.
Do you have to avoid indebtedness in all cases?
Simply put, they are usually advised to avoid borrowing, not to borrow. Perhaps more accurate is the advice that everyone should make a responsible decision before applying for a loan, to consider whether they really need it and what alternatives they have. The credit market does not work because people take credit irresponsibly, but because there are situations where borrowing is a rational and good solution.
This is the case, for example, when someone wants to buy a home but does not have enough money: as long as he or she collects the amount needed to buy a home, he or she must live somewhere. But by staying on the topic of the article, we can find an example of a loan being a rational choice, because borrowing may be easier, faster and cheaper than getting into your own investments. In such a case, however strange to say it first, it is really a rational decision to cover the unexpected expense rather than your own savings.
The financial calculation
So, if you need money quickly, you need to compare your options from the point of view of how you can raise it at a lower cost. We cannot say that loan-financed spending will always be a good solution, but we cannot exclude it because there are situations when you can get out of the investment at a higher cost.
In the case of investments, you should consider the costs and the lost profit and the loan price for the loan. If you want to consider clearly which alternative is cheaper on the basis of that, you should start with a future financial position, but remember not only to compare whether the return on your investment is better than what you have to repay because of the loan. the other costs.
That is, it is not the investment itself, but the alternatives that it has to examine. For example, if you have to repay more than 200 thousand forints on a loan in total by the end of the term, and your investment would be worth more than 175 thousand forints, then your financial position will be -25 thousand forints. At the same time, it may be easy for you to invest more than $ 25,000 (because of the costs outlined above) for your investment, so the loan would be better off.
Whatever the solution to be applied cannot be said, be careful, as you always have to consider the type and conditions of the investment!