When Not To Borrow Money
Don Mize
© 2006, Don Mize

PR Newswire carried a 20 March 2006 news release entitled
"LendingTree Declares 2006 the Year of
Smarter Borrowing."
The article pointed out that December 2005 marked the eighth
consecutive month that Americans spent more than they earned; in
addition, 2005 marked the first year
since the Great Depression
that the nation's personal savings rate was negative.

To put the problem in perspective, consider a Reuters article
entitled "Consumer credit rose $10.27 billion in June" that
appeared on 7 August 2006.  The article declared that in June of
2006 consumer credit grew to $10.27 billion on a "
surge in credit
card debt.
"  Analysts were expecting a $4 billion rise but not the
skyrocketing credit card debt.  Rather than showing a mere
spending spree, these figures may show that
people desperately
need money.

Understand Operating Expenses

Borrowing money is a mistake when we borrow to pay operating
expenses.  A
business borrowing for new equipment in order to
increase profits is embracing a calculated risk.  However, a
business borrowing to meet payroll, pay the electricity bill, or pay
for office supplies has sprung a leak.  When a business borrows to
cover operating expenses, management is bailing water on a
sinking ship with a paper cup.

Like a business,
a family must meet operating expenses without
borrowing to stay afloat.  While borrowing to buy a house is an
investment that meets the basic need for shelter, builds equity
(cash value), appreciates (becomes worth more) over time, and
provides a tax break, the investor is still assuming debt.  The family
is substituting the
operating expense of monthly rent for the
investment operating expense of a mortgage payment.  Other
family operating expenses include such basics as food, utilities,
and transportation.

Any additional debt payments are also a part of operating
expenses.  The instant a person cannot meet operating expenses,
alarm bells should erupt.  Cutting expenses should precede
feeding the insatiable monster called Greed with additional income.

If we have carelessly added small expenses gradually, a pruning
may not be too painful.  However, if borrowing has triggered a
cancerous growth of debt, major surgery may be required.  As
someone put it, we may have "spent money we didn’t have to buy
things we didn’t need to impress people we didn’t like."  A
reconstruction of attitude and lifestyle may be imperative to
eliminate such unrealistic borrowing.

Face Reality

While it is a mistake to borrow to finance operating expenses,
many Americans appear to be doing just that.  Paul Krugman wrote
an article for the 14 February 2006 article in the
Herald Tribune
entitled "Deep in debt, and denying it."  Krugman
declared that people who own homes are treating them like
as they convert equity into spending money.

Avoid Easy Debt

However, the problem goes beyond converting home equity into
spending money.  Throughout our society, many are falling into the
trap of easy debt.  People who make money by loaning money
thrown out time-tested borrowing rules.  Nowhere is this
seen more clearly than in mortgage lending.  
The Washington
published in the 8 February 2006 edition an article by
Patrice Hill entitled "American dream putting homeowners in deep
debt…."  The article details how creative financing seduces people
expensive houses they cannot afford and into lifestyles they
cannot sustain.

The cancer of easy debt is everywhere as people borrow to survive
until the
next paycheck.  An article in Soldiers Magazine entitled
"Payday loans = costly gash" appeared in the 1 November 2005
issue.  The article deals with loan-shark lending companies and
warns soldiers to avoid the spiraling debt.

Such loans, the article points out,
are often called cash-advance
loans, postdated check loans, or deferred-deposit loans.  The loan
may cost $17 for every $100 ($85 for every $500).  A person, trying
to cover bills to make it to the next paycheck usually rolls over the
loan several times, becoming
ensnared in a web of debt.

Your local bank may not have loan shark interest rates, but payday
solve nothing.  Whenever you need a loan to make it until
the next payday, you are borrowing to cover operating expenses.  
minor surgery now or major surgery later is required to
prevent financial disaster.

Education, race, family background, or income does not exempt
one from the dangers of
easy debt.  Consider the sad case of
Dennis L. Montgomery as told in the 6 January 1996 edition of
Virginian Pilot
.  Susie Stoughton reports on the sentencing in an
article entitled "Ex-lawyer
sentenced to jail for embezzling
$100,000 from clients…."  The reason Montgomery gave for
stealing the money was "to pay bills."  He owed the Internal
Revenue Service and local creditors and could not borrow any
more because of his
bad credit rating.  Thus, he lost his
profession and his freedom.

Understand the Problem

However, one does not have to be dishonest or stupid to be
caught in the financial trap of easy debt.  
The Christian Science
of 11 January 2006 published an article by Marilyn
Gardner that mentions the story of Tamara Draut and Stuart Fink.  
After eight years of marriage, the couple found themselves with
less than a dollar and three days until the next paycheck.  They
sat on their living room floor, sorted through compact discs, and
chose which ones to sell for food money.  At age 30, they never
thought they would be scrounging for food.

To summarize points from the article, sixty percent between
and 24
are struggling for financial independence.  Many in their
thirties are still trying to get
a foothold on the American Dream.  
Moreover, part of the problem is not individual mismanagement:  
Whereas 30 years ago
increased productivity in the economy
meant increased wages
, today’s wages lag behind rising
healthcare and housing costs.

The article also points out that today education means going
deeply into debt for many as they attempt to earn a bachelor’s
today's equivalent of a high school diploma.  
Moreover, the United States is alone among developed countries
in not providing either paid family leave
for parents of a new child
or affordable child care for
working parents.

The article maintains that the
whole social context encourages
 Commercials fill twenty minutes of every TV hour, creating
fantasy needs of luxury, excess, and consumption.  TV, movies,
and other mass media distort reality; i.e., the fancy lofts and
apartments of sitcom characters do not reflect real life in New
York.  No wonder many activate a
pre-approved credit card that
arrives unsolicited in the mail.

Take Control

In summary, don't borrow money for operating expenses.  
Either cut expenses or increase income.
 Increasing income is
the answer to bad spending habits, impulsiveness, and a
fantasy lifestyle.  Cutting expenses may be painful and may mean
ewer expensive toys, no expensive friends, and less
expensive food,
but borrowing to meet operating expenses
results in financial disaster.
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