Editor’s note: A version of this article of mine was first published on Enemy of Debt; and it got quite a bit of attention. We all know that January is a difficult month: most of us are spent after the Christmas holiday and some of us have already borrowed, or will need to borrow, money to make it through. Borrowing is not good. Then again, staying hungry and cold is not splendid either. So, if you need to do it, you better know the rules that will ensure that you borrow money in the most acceptable way possible. Here they are.
In an ideal world won’t have to borrow money.
In an ideal world, you’ll have cash to cover emergencies.
In an ideal world, I’ll look like Julia Roberts and be a Hollywood star.
Thing is, we don’t live in an ideal world.
Just look at me. I look like…well, like me and I’m a university professor, not a movie star.
When I was young, I often ran out of money. Heck, when I was in my mid-forties we ran out of money and found ourselves in too much debt.
What did I do about it?
When I was young and living in Sofia (Bulgaria) sometimes I’d literally have absolutely no money at all.
At times, I was so skint that there was no money for food. I was young, I was on my own and I was skinny – still, one needs to eat from time to time. My friends and I went to drink hot mineral water at a public spring so we don’t feel the hunger.
More seriously, I had no money for cigarettes. (Yeah, I used to smoke at the time.) You know how it is with addiction: you just have to feed it.
Every time I had no money at all, I did one of the following:
- Went to Stella and George’s for my meals. Stella and George were good friends and fellow addicts; so there was always food and there were always cigarettes as well.
- Asked around and eventually found a friend who had some spare cash to lend me.
- Pawned my typewriter. Yes, darlings, this was in the time of typewriters. Pawning mine was always a high risk operation of military precision: had to time it so that I didn’t need it to earn my keep.
- Once I sold a gold ring. I’ve always had jewellery and a lot of it came from my mum. I did sell a rather substantial gold ring and still regret it.
- In final desperation, I’d phone my dad and ask for money. Now, this was humiliating but the money was usually wired to me within couple of hours.
When we found ourselves in financial trouble five years ago, we had a different approach. This time we consolidated our credit cards, borrowed from our bank at lower interest and secured the loan against our house.
What a bother this one was and I’m so pleased it is over: we paid all the debt in three years and now can look at the world differently.
Here is the deal. It doesn’t matter whether you pawn your typewriter, borrow from your parents, max out your credit cards or you take out a payday loan: the rules when you borrow money are the same.
Here are the 10 rules you have to keep in mind when you borrow money.
#1. Borrowing is not a substitute for earning: Anyone can get into a situation where they have to borrow money from time to time. If this happens too often you have to look very carefully at your income: it’s a sign that it is not enough for your life. If you can’t change your income, you’ll have to change your life.
#2. Borrow money as a last resort. Never borrow money lightly. Try to find another way first. Yep, it is better to sell something. Even better to earn a bit of money on the side even if you have to do work you’d not consider normally. When we were in debt, I thought of applying to stack shelves in a supermarket – they didn’t want me because I have two PhDs. Then I started writing!
#3. Don’t borrow for rubbish. This is my way to tell you not to borrow for consumables that are not immediately necessary (like food, for instance) and items that…well, you can go without for a long time. If you are thinking to borrow money for a new pair of designer shoes, don’t do it. If you don’t have enough money to buy Christmas presents to all your family and friends – don’t do it!
#4. Borrow money for things that make money. Yes, this makes sense. Particularly if you have access to very low interest borrowing. You have to be really certain though that what you are buying will make you money (and this is the hard part, trust me).
#5. Research your lenders. Sometimes we can get a bit desperate. When we are desperate we trust because we want to do so not because we have sufficient information, have formed a reasonably reliable opinion and have made a rational judgement. Don’t do that! Research your lender and research the conditions for lending/
#6. Trust your lender. See rule #5 – trust is not a feeling when you borrow money. Trust is a result of well informed decision.
#7. Make sure your lender is regulated. It doesn’t matter whether you are in the US, Europe or on one of the other continents. In most countries, there are authorities that regulate lending. Make sure that the lender you borrow money from is regulated. Otherwise, you may find yourself in a cowboy nightmare scenario.
#8. Loans are not for Christmas. While you may decide to borrow money so that your Christmas is ‘magic’ (I’d never do this one but then again, it’s your life and you can waste it if you wish) your loan will endure. Don’t ignore it; it is there and it will need to be paid off one day. The sooner you pay it off the better.
#9. Mobilise your support network if you have it. Most personal finance will tell you not to borrow from family and friends. I think that people should use their support networks in times of crisis; and family and friends are your network. Call your parents if you are in trouble – just be straight and don’t mess about. You have to pay back the money you borrowed; you’ll have to respond in kind if and when these people need you as well.
#10. Have a repayment plan before you borrow. This is most important. It doesn’t matter who you borrow money from: if you don’t have a plan about how to repay the loan before you borrow, you’ll get in trouble.
These are the 10 rules I keep in mind when I borrow money. I believe they are all important; still I’m particularly fond of #3 and #9.