Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
When someone mentions wealth, your mind goes to luxury brands like Mercedes Benz or Rolex. Perhaps your mind’s eye wanders to exotic vacations in Europe or Hawaii. Maybe you fantasize a Learjet jaunt to visit a distant friend.
Those are all good and worthy of mention. But none of them matches choice – more options – as the finest luxury of all. When an advisor helps a client, the door to better options and choices opens wide. It is not so much that they will buy a Mercedes Benz, but they can if they want! Or a Cadillac, BMW, or Porsche for that matter.
Lack of choice is the opposite extreme
I note the vehicles around me as I drive to work each day. There are nice cars, but the ones that make me smile are the junkers. I am not laughing at them; I’m smiling in recollection of earlier days on my own journey. Junk cars were not ever my goal, but they were the reality in the days before choice.
In fact, the highways offer some great financial lessons. Almost everyone needs a car. Car choices are endless – but they are limited for everyone. On the socioeconomic ladder, choices expand with each rung to the top. Those junkers? Mostly driven by people with little money, poor jobs, and bad credit. Their options are mostly limited to cash or “no credit check” dealers charging ridiculous prices.
As we step up a rung, more choices open. We might buy a good used car or an inexpensive new one. Now the car dealer will help with financing and so will your banker. We will be able to choose from a larger palette of automobiles, and compare interest rates and payment terms (three-year, four-year, or longer). Don’t like the price or terms from one dealer? Cross the street to find another.
Cars illustrate powerful lessons about credit and borrowing:
- Some things are best bought with cash or checks. Groceries, rents, utilities, and entertainment items all into this category. The need for ready cash limits some choices.
- Credit cards are helpful for convenience, and sometimes even for very short-term loans. Maybe the washing machine dies, or we need a new suit for a job interview. Use the card and pay it off quickly. Even credit cards offer better terms and rates as you grow.
- As finances improve, so does the ability to borrow. But the ability to borrow does not guarantee quality decisions. Maybe the circumstances allow a $20,000 loan… is it better to buy a used Chevy or a new Kia?
Good borrowing is a choice, too
Share this brief explanation. In business school, they teach that borrowed money can often be used to make more money. It is called leverage, and some things we buy hold future value better than others. Borrowing to buy something that holds value is always better than borrowing for something that does not.
Also, buying decent cars and houses provides collateral to the lender. Because of this, interest rates are lower than other loans:
- This informs an answer about that used Chevy or new Kia. Which one holds more value after the loan is paid off?
- This also explains why mortgages can be wealth builders. Houses tend to rise in value, so a loan to buy one often produces long-term positive results.
Borrow to take a step up
One last concept. Education is a safe choice to move up the rungs. It may not be a sure thing, but it works better and faster than other options. Unfortunately, education costs money and a lack of money is one thing you are trying to help clients fix. Borrowing for school can help (and is probably worth it), but here are some helpful ideas to enhance success:
- Suggest a field and degree that pays well. It is dumb to borrow a lot of money and earn a degree without commercial value. Use required electives to study the fun stuff.
- Seek a respected community or state college and enroll there. I promise it will be meaningful and it will cost a fraction of the prestige schools.
- Encourage internships, practicums, and experiential learning. Potential employers love people with experience, no matter how small. And many full-time staffers started as interns.
Smart borrowing can be a solid financial tool
Experience teaches that success comes from making good decisions, and that’s why advisors exist. Borrowing is unique among financial tools. In a way, it is different from budgeting or coupon clipping or suggesting an austere lifestyle.
Better buying and borrowing choices become available with each step up the ladder. And the fruits of all those good choices? Yes, you guessed it. The finest luxury of all. More choices.
Dan Danford, CFP® is an NAPFA member in Kansas City, Missouri. He learned early ideas about money from his late father Thad Danford who charged rent on the family lawn mower while Dan cut neighborhood lawns. Danford is a practicing investment advisor at Family Investment Center and author of Happy To Be Different: Personal and Money Success Through Better Thinking.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
