When Should I Choose Credit vs Savings? [VIDEO]

Rogelio Valdes

Jan 19, 2021

See the Finance Course at robinacademy.com/finanzas

Is it better to save money or borrow it? To answer that, we first need to understand what credit actually is. Sergio already made a video explaining that very clearly. Once you understand that borrowing usually means paying back more than what you received, the next concept becomes clear: that extra amount is called interest, and it is the reason banks and lenders are willing to lend money. Remember, they are not lending you money just out of kindness.

At first, taking a loan can sound like a bad idea. Many people tell us from the beginning that borrowing is wrong and that we should avoid it. At the same time, everyone tells us to save, but almost no one explains when borrowing might actually make more sense than waiting. So in what situations is it better to borrow rather than save? Let’s think it through.

Imagine you want to go on vacation and you need $100 for a trip to Disneyland. Let’s say you can only set aside $1 per day for that trip. Obviously a real vacation costs much more than that, but let’s keep the example simple.

Saving

If you save, it will take you 100 days to collect the full $100. So after a little more than three months, you can finally go on the trip.

Borrowing

If you borrow the money, maybe the lender charges you $50 in interest for giving you the $100 right away. That means in total you will end up paying back $150, at a pace of $1 per day. But you get to go on vacation immediately.

In that situation, I would personally choose to save. I do not need to go on vacation today. It is something I can wait for. And if I wait, the trip costs me $100 instead of $150. That extra $50 could later go toward another trip or something else I care about.

But what happens when something is urgent?

Now imagine that a family member needs surgery, and the hospital charges the same $100. You can still only put aside $1 per day, but you cannot wait 100 days for the surgery. They need treatment soon. In that case, if you do not already have the money, borrowing may absolutely make sense. I would do it. I would not care about paying the extra $50 if it meant helping a loved one receive the operation they need. The good news is that even then, you may still be able to repay it little by little, $1 per day.

Now the loan sounds like a very good idea. So what changed? The difference was the need and the urgency of what the money was for. A vacation is not a need, and it is not urgent, so I would wait. A surgery is both necessary and urgent, so I would borrow.

Of course, many real-life cases are less obvious. You could say, for example, that you need a computer for work, but that it is not urgent because you still have an old one that works. At the same time, maybe a new one would help you work faster and do your job better. Only you can decide what you really need in that moment. That is why, every time you are about to buy something, it is worth asking yourself whether it is something you truly need or just something you want.

That question will help you decide whether saving or borrowing makes more sense. Neither option is bad by itself. Loans are simply a tool, and if we use them well, they can help us in many situations.

See the Finance Course at robinacademy.com/finanzas