Saturday, October 14, 2006

Personal Finance 101 - Are You a Saver or Borrower?

Are you a saver or borrower and what will you do about it? Knowing which you are can help you develop a good personal finance strategy. Here are my working definitions of savers and borrowers:

Savers defer gratification today in return for future gratification. Savers choose to have a lower standard of living than they currently can afford.

Borrowers use debt to enable higher levels of immediate gratification. They choose to have a higher standard of living that they can afford currently with cash. Debt enables them to achieve that goal.

We all are savers and borrowers in different situations. For our home, I am a borrower since I have a mortgage and, therefore, have used debt for the purchase. We chose earlier gratification for our house. For cars, vacations, furnishings, everyday living, and home improvements, I am a saver. I pay for each of these with cash from prior savings.

Here’s a quick test of whether you are a saver or borrower. Choose whether you are a saver or borrower for the following list of items:

1. Home
2. Education
3. Car
4. Home Furnishings
5. Vacation
6. Entertainment (Eating out, Movies, etc.)
7. Gifts (Christmas, Birthday, Special Occasion)
8. Everyday Livings Expenses (Clothes, Groceries, Gasoline)

Add up the number of times you answered “saver” to get your Wealth Builder Saver/Borrower assessment.

8 = Extreme Saver. You are debt free, not even a mortgage on your house. You use a credit card only for convenience and pay off the balance every month. You have an excellent credit rating. You are likely saving a significant portion of your income each month.

6-7 = Saver. You likely have two out of the three major debts – mortgage, auto loan, or education loan. You are reducing debt in all areas and are increasing your savings every month. You are also saving some for retirement.

4-5 = At crossroads. You are at a critical junction of potentially falling into a downward debt spiral or choosing a path towards becoming debt free. Currently, you depend partly on debt to maintain your lifestyle. A significant portion of your income is used to pay for debt. You have some savings but not as much you need.

2-3 = Borrower. You are highly dependent on debt and borrow using credit cards or HELOCs to purchase many things. You carry a high debt load which is likely increasing. You are able to cover debt payments by working extra hours or extra jobs. However, changes are needed since you cannot continue this situation for a long period.

0-1= Extreme Borrower. More than your income is already committed to “must pay” items – mortgage/rent, car loans, student loans, credit card payments, utilities. You may be in this situation temporarily, due to job loss, or this may be your lifestyle. Either way, you must make some significant changes since this situation is not sustainable.

Knowing your saver or borrower assessment can help you develop a better plan to address your situation. For example, extreme savers should continue their plan, while extreme borrowers need to seek advice and do something different. If you are a saver, some additional guidance will likely help you to make progress. If you are a borrower, your actions will depend on how long you have been in this situation. If you are at crossroads, you will have an important decision to make that will significantly impact your future - which direction to go?

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

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