November 22, 2007, 7:00 am

Become Frugal Now! Ask For A Loan!

by: The Financial Blogger    Category: Frugal
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God I love controversy! The funniest part about personal finance is that it is full of double sense techniques; you save money to spend more later, you count every penny today so you don’t have to count them when you are old (do you really know if you will get there anyway?) and you can also become frugal by contracting a loan! “Are you crazy?” Well I guess I am. Or maybe I should say that I am financially creative 😉 So here is a new trick to save money ; spend it! loan
The “pay yourself first” thinking

Everybody knows that, if you want to save money, you have to pay yourself first. However, this simple technique seems to be much harder to apply to your personal situation than telling people to do so. In fact, by contracting a loan, you have to commit yourself to make this payment every month. You have no other choice but to meet your financial obligation as your bank will quickly remind you if you ever forget. By having a loan, you will also avoid to skip a monthly saving deposit because of so and so. You will have to put money aside no matter what.

Yeah, but you are paying interest, that’s not really frugal!

It is true that you are paying interest and that this money is being wasted away. However, I did not tell you what you should do with the amount of the loan. If you do not need money, why would you get a loan for? In order to compensate for the interest paid, you are better off investing your money into an asset. If you are well aware that you have free consistent cash flow. You can easily apply for a loan and use this money to grow an assets. I am thinking of a loan to contribute to your RRSP (remember, time is flying!), an investment loan or a loan to buy a piece of property (or land). You don’t need to be risky with your new assets. The goal is not to make you take unnecessary risks, especially if you are risk averse. However, you can easily buy a piece of land with a personal loan. Chances are that your land will grow in value over the term of the loan and will greatly compensate for the interest charges.

So you are talking about leveraging, don’t you?

It is a leveraging technique in the sense that you are using other people’s money to buy an asset. However, if you are considering this definition of leveraging, do not be surprised to find out that you used leveraging strategies for to pay off your tuition fees, your property and possibly your car. In fact, your life is full of leveraging. Any leverage technique is good for an individual as long has he benefits from a consistent cash flow. The loan is used in a perspective of obligation in this case. There is no way you will postpone your savings project if you have financial obligations linked to a bank at the same time.

This technique may found strange at the beginning but it makes sense when you try it. A few years ago, my girlfriend and I didn’t have much debt, no children and no mortgage. Therefore, we had a lot of money to waste, or to invest! We took a personal loan and bought a land. It was forcing us to put $675 a month aside to pay back this loan. A year after, we decided to buy a house. We sold the land with profit and recuperate our savings. In fact, considering the amount invested (the monthly payment including interest over a year), we made 43% profit on the sale of the land. During that year, we increased our net worth, built a strong credit history and created sufficient cash down so we could buy the house we wanted. We did all that from a personal loan, not bad huh?

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