Why I Shouldn’t Borrow to Buy Something that Depreciates

By Grace Fischer, 9th grade

“The decision to go into debt alters the course condition of your life. You no longer own it. You are owned.”

-Dave Ramsey

In this week of lessons in the Business I course, I have continued reading the book “The Richest Man in Babylon”. This book contains many important financial themes, but one of the most prominent ones has been the importance of staying out of debt and paying off what debt you do have very quickly. Though there are certain cases where going into debt will benefit you in the long run, the worst thing you can do with debt is to buy something that depreciates with it.

You should only go into debt for something if there is a very high chance that that something will give you enough extra money to pay off the loan, plus the interest you will accumulate on that loan, plus a little more. For example: I’m a baker. There’s a new muffin tin on the market that makes muffins so golden and moist that they’re like little pieces of heaven. If I want to use debt to buy this muffin tin, that muffin tin should be able to make muffins that are so good that my customers are willing to pay more for them. This extra cash I accumulate should be able to pay off the loan on the muffin tin plus the interest on the loan. But even then, I’ve just broke even; I’ve gotten the same amount of benefit I would have if I had just paid up front for the muffin tin. I have to receive some additional benefit from getting the tin earlier (not having to wait until I had enough money) rather than later to make going into debt worth it.

If you borrow to buy something that depreciates (something that diminishes in value over time), you’ll be far worse off than if you had bought it without a loan. The extra amount of time you own the item must be so valuable that it pays off the loan plus interest and gives you more benefit on top of that. When you buy something that depreciates, that extra amount of time is hurting you instead of helping you. For example: a new car will lose about sixty percent of its total value over the first five years of its life. If you buy that car new with a loan, you’re going to own it during its prime-time for losing value, and you’re going to be in debt for it. But if you save up for, say, five years and buy it with your own money, then you’re not in debt. You’re also paying a lot less for it because it’s already depreciated. Let other people who like to go into debt take care of the depreciating for you (yes, it will depreciate a little more once you buy it, but that’s beside the point) and buy that exact same car for less money with no debt!

Going into any kind of debt is treading on thin ice. Only if the amount of benefit (monetary or otherwise) you get from owning something for that extra period of time is greater than the value of the loan plus interest is it a good idea to get a loan. I’m not saying that debt is bad one hundred percent of the time, but it’s a slippery slope. Be careful out there.