Developing and sustaining a sound, long-term personal financial strategy, in a world full of unexpected events, is difficult enough without incurring unforced errors. Hopefully, most of us recognize that a financially successful retirement plan includes maintaining a consistent approach to spending, saving and investing.
Unfortunately, too many of us succumb to unwise consumption behavior that leads to ill-advised borrowing including, but not limited to, excessive credit card debt, home equity loans, reverse mortgages and unsecured personal loans.
All of these types of borrowing have several common characteristics. They are risky, they have high costs and, in most cases, the borrower does not have a clear and viable repayment strategy. Moreover, there are generally relatively safer and lower cost alternatives.
This is not to say that all borrowing is foolish. It makes sense to take out a mortgage to purchase a primary residence as an alternative to paying rent, while building equity in a long term asset. In essence, the absence of monthly rental payments provides cash required to amortize the mortgage. Borrowing for other large ticket items, such as a vehicle, may be an appropriate alternative to leasing.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA