In the last blog, we discussed the differences between assets and liabilities, and how that knowledge can help you transform your life. This time, we look at borrowing versus saving for investment. Middle class people tend to hold the believe that, the best way to create wealth is through saving and investing. As a matter of fact, its the same concept that many learnt in school.
However, this notion is misguided, driven by a false sense of security that's derived from having money in the bank. What many people have never realized is that, time is the biggest asset you have. For example, take a look at your current income, and determine the amount of time it would take you to save a million dollars. I do not know your income level, but am sure its years.
On the same note, how long would it take you to borrow a million dollars? If my guess is right, the range is between a few minutes to a few days, depending on the bureaucracies of your country. The difference between risky borrowing and safe borrowing, is largely determined by what you do with the money.
To support this argument, I will use an example of investor X and investor Y. Both of them have the same business idea, that is yet to hit the market. X writes up a clear and well researched business proposal, and takes it to a financial institution or approaches a venture capitalist for financing. Y on the other hand, saves for 10 years and starts the same business.
The major difference between these two is that, X will implement his idea now, grow with it slowly, taking note, and responding to challenges of the operating environment business. By year 5, he will most likely break even and fully repay his loan. By the end of 10 years, X commands a significant market share, and a well recognized brand. On the other hand, Y will start his business when X is already established, and the entry level capital will be higher, due to industry growth. Most probably, Y will find it hard to compete and fold his bags along the way.
This scenario is meant to bring out the fact that, what matters is not your ability to save money, rather its your creativity in borrowing it that counts. There is an old addage that, wealthy people use people's money to make money, while the poor risk their own money.
Learn the principles of wise borrowing, and pass the same to your children, and you will realize changes in your financial circumstances. Do not give yourself a false sense of security in having money in the bank. By saving, you lose to inflation, hence defeating the purpose in the first place.