The financial lessons we received from our parents are problematic for many reasons.
For one thing, they’re often out of date, as the economic atmosphere of the 1970s and 1980s is a far cry from what we’ve experienced in a post-2008 world. We’re long past the quaint advice to pay for college by “getting a summer job” and to start a career by “walking into a business and asking for a job in the mailroom.” Heckin precious.
But there’s also the way an assumption of background knowledge can lead to further confusion. For if you don’t understand basic financial principles, the sweet knowledge nuggets your beloved Boomer dad drops on you might go down like lead balloons. Just as you can’t understand where Beyoncé came from without Destiny’s Child, you can’t talk about getting loans until you understand how interest works!
This week we’re dealing with just this issue. Petey is one of my oldest and strangest friends. I made him walk down the aisle with Kitty at my wedding in the hopes that those two weirdos would have a vulgar joke-off (alas, they conducted themselves with the decorum expected of a bridesmaid and a groomsman and saved the nasty shit for the dance floor).
Petey has his head all in a tizzy over his dad’s vague and incomplete financial advice. So we decided to set the poor boy straight!
This week’s question
Today’s letter comes to us from Piggy’s friend Petey. He asks:
How do you know when it’s the right decision to get a loan rather than paying for something with cash on hand? My dad always tells me to “compare the interest rates against the rate of inflation and stock market dividends” which like… what?– Piggy’s IRL pal Petey
For more on loans, down payments, and inflation, check out these articles:
- When Money in the Bank Is a Bad Thing: Understanding Inflation and Depreciation
- Dafuq Is a Down Payment? And Why Do You Need One to Buy Stuff?
- Dafuq Is Interest and How Does It Work for the Forces of Darkness?
- Investing Deathmatch: Paying off Debt vs. Investing in the Stock Market
- The Real Story of How I Paid Off My Mortgage in 4 Years
Our patrons are the reason for the season. Without their generous support and positive affirmations, we would be like Tinkerbell, dying for lack of applause! Which is why we bestow all kinds of exclusive Bitches Get Riches content upon our patrons. You can join their ranks over on our Patreon!
Episode transcript (click to reveal)
Thanks, as always, to our Patreon donors. This time we’d like to thank Antonia, Catherine, Kathleen, and Skylar. And an extra special thanks to Chia and Kiersten, both of whom are the kind of generous, kind hearted people who forgive you when you mispronounce their name.
(fake sobbing) It’s beautiful. So kind. Thank you so much. She got this name, we hope, in fact…
…is chia not chee-a or chee. Who knows?
And what if it’s Kirsten? Who knows, who knows?
It could be Kirsten, it could be Kiersten. I don’t know. It could be (an…Icelandic accent?) Thorsten Tourston.
Let’s go with Thorsten.
So I have a unibrow, no joke. I have like a Frida Kahlo brow. And I pluck the middle of it, so it’s two separate giant caterpillars rather than one crawling across my face. And I mentioned this fact to a male friend of mine, and he was like, “You don’t have a unibrow.”
I’m like, “No.” He’s like, “I can’t see it. There’s nothing there at all.” And I’m like, “Yeah, cuz I plucked the middle.”
Obviously, I don’t have one right in this moment.
I could see the cosmic universe inside of his brain where he thought that like the way women look is how they look when they roll out of bed. I could see that explode in his brain.
Oh, I love … “I really prefer women without makeup.” cause like… (Piggy, quietly: Do you? Do you, bro?)
You’ve never seen a woman without makeup. Now my old boss who, as you know, was quite a dumbass. I was talking to the girls about makeup. He’s like, “I’ve never seen you wear makeup.” And I looked at him and was like, “I’m wearing make up right now.”
That is just a level of special obliviousness that almost should be commended.
It almost should be.
I’m so proud of you for getting through — you must love going to magic shows. I can’t believe that tiger. He magically made a second tiger appear. It would never occur to you that there was a mirror that flew up and away while they were like twirling some scarves around or whatever magicians do.
The only explanation is that the number of tigers magically was altered.
Magic is real, and also to circle back to my point…
The only reason you have a unibrow is because you keep putting that negative unibrow energy out into the universe.
I need to start a vision board where it’s all women without unibrows, like women who have an unusually wide gap between their brows.
I would subscribe to that Pinterest board.
I manifest that into the universe
Could you please start manifesting?
How do you think this blog got started? I manifested. I was like, one day, I want you to come to me and be like, “You know what we should do?” And then we did, and it worked. And I used up a lot of my secret level magic.
We used up the juice.
I used it up.
Yeah, so that was a waste of the juice. You could’ve won the lottery.
What was I thinking?
But instead, we’re toiling away like working 40 hour weeks on this blog.
Uh, I’m Piggy.
That’s good. I’m Kitty.
No, you’re not. You’re a liar.
Is that funny to you? Am I a joke to you?
Yes. Die mad about it.
The next block is yours. Why are you pausing?
We’re the bitches in Bitches Get Riches.
We are the nerdy awkward kids everyone made fun of in elementary school.
And we’re here for our revenge.
Our time on this planet is limited.
So let’s get started. Today’s letter comes to us from Piggy’s friend PD. PD asks, “How do you know when it’s the right decision to get a loan, rather than paying for something with cash on hand? My dad always tells me to compare the interest rates against the rate of inflation and stock market dividends, which like … what?”
I really appreciate that question a lot, but particularly the phrasing: “My dad has told me that I should look at the sprockets.”
My dad told me to make sure it scales…
Does it scale!?
Does it scale? Consult the cards. My dad asked me to look into the synergy of it all. Yeah, I seriously get this question on a lot of levels, and one of those levels is as a person who has a father.
Oh yeah. Listen, there’s a lot of very valuable, fatherly advice as I get older. I think I accumulate more and more dadly wisdom, which is a very special and unique kind of wisdom. It deserves respect.
But not like too much respect.
Dadly wisdom is very much grounded in the experience that a dad lives, whereas I think mom wisdom is universal. Do you feel me on that?
I absolutely feel you on that.
Dadly wisdom, he will tell you how often you need to rotate your tires, but only for, like, a 1971 Buick. Whereas like mom energy is more like: “It doesn’t matter what other people think of you.” It’s just like, oh, yeah that’s evergreen content.
Your mother and my mother are very different people,
Slow down. I was not quoting my mother. I was quoting mom energy, which can and should be harnessed by people of all genders and all parental statuses.
Such as us. Okay. So our question which we read 1,000 years ago back in the age of the Victorian era.
Sorry, can I workshop that?
Yes, please do.
I think it’s gotta be more fantasy sounding like …
In the Third Age?
No, I’m thinking of those book titles that’s Something of Something and Something. The Age of Something and Something, so you pick the first something and I’ll pick the second something. Ready, all right? So it’s the age of Budgets and…
Brimstone. Okay, the Age of Budgets and Brimstone. Great.
I like it. All right, I’ll get that URL. Go on.
So our question, which we asked a million years ago in the Age of Budgets and Brimstone. (in an exaggerated, aged voice) Remember, it’s been 84 years.
We got to figure out how to get a .gif on the podcast. It’s really necessary to my style. All right, so how do you know when it’s the right decision to get a loan, rather than paying for something with cash on hand? Yes, and I want to give a little bit of context to our listeners, our young, beautiful listeners who maybe have not been indoctrinated into the cult of Dave Ramsey yet.
I know. I went there. There is a certain subset of personal finance advice that says you should never have debt. Never get a loan for anything. Save up for fucking everything. You never need to get a loan. You should always should pay cash. And that’s like forever and ever.
I fundamentally disagree with that advice.
You know what, I’ve also seen the opposite where people are like, “You should always follow this mathematical formula. You know, if it’s a something something percent interest rate, and the market is at something something percent, then you’re a fool. Just take out the loan and invest the money instead because the rate of return on the stock market is like totally fucking predictable.”
No, you’re absolutely right. When I paid off the last five grand on my car loan in one fell swoop, I bragged about it on Twitter because that’s what money nerds do. And some finance bro came out of the woodwork to be like, “Yeah, but if you invested that in the stock market instead you could’ve made X, Y and Z.”
(to the bro) Shut up! Shut up!
Go take your head and firmly stick it between your asscheeks because I don’t want to hear it.
Basically, you’re gonna hear a range of opinions on this, and it means that there’s not, strictly speaking, one formula. In general, what yo daddy is talking about is: if I go out and invest $100 in the stock market. Let’s say I just buy a bunch of random Fortune 500-type of companies. Over time, I can count on that money to grow. The rate at which it grows changes every single day. If you average all of those days together, you can kind of guess a ballpark of what your returns are going to be. And the general rate of return is…
We should say what we think the number is together. Are you ready?
1, 2, 3…
Piggy & Kitty 8:55
(Kitty) 6% (Piggy) 7%
Ooo, closer than I expected.
I prefer to calculate very conservatively. But I see a lot of people say 8 as well, so I think 7 is quite right.
I know somebody who says 12, not to name names.
We’ll have words on that topic later.
But so, meaning if you put $100 into the stock market, it it’s a totally average, predictable time, you will probably have $107 at the end of that investment period. Yeah, what your dad’s saying is, if you know you can put in $100 and turn it into $107 in one year, and if you’re taking out a loan for $100 and the interest that they’re charging you is, let’s say instead of 7% rate of return on the market, let’s say it’s 10%. They’re charging you a 10% interest rate.
You will pay them $110 in that same amount of time, meaning that you kind of lost like a small amount of money. Usually, I think it has bigger ramifications based on the type of loan, the main reason why you might see very, very different interest rates. There are some payday type loans that are very predatory that have an interest rate of very steep 20%, 30% or more. I forget what the hell they ended up capping it at, but it didn’t make a lick of difference from my perspective.
Yeah, this is the math that PD’s dad is talking about. And there are a lot of people who make their decisions solely based on that math. Could I save / make more money in the long term by either getting a loan and therefore investing the money I would have spent in the stock market, or by paying cash?
And that’s a fine way to make the decision. You could totally make a decision based on that.
But personal finance is personal. I don’t think that there is a one size fits all answer for this, and also let’s be real. (A) Not everyone is credit worthy enough to get a loan, and (B) not everyone has the cash on hand to pay for things like an education.
Credit exists for a reason. Credit exists for great reason, even if you’re paying more in the long term with an interest rate, sometimes even it’s a kind of high interest rate, it can still really be worth it. Because this is the era after the Age of Budgets and Brimstone.
Oh yeah, it’s Spreadsheets and Sage.
Yes, in the era of Spreadsheet … Spreadsheets and Sage. Woof, That’s a tongue twister.
Which is to say about 100 years ago. Before there was widespread availability of credit to the everyday person, there was very, very, very little class mobility because people weren’t able to save up for a house. Either they inherited one from their parents, or they had to rent their whole lives. That was kind of a closer version of realities. Like credit is a wonderful thing. Credit’s a beautiful thing.
I have actually a pretty good real life example. I am creeping closer and closer to being debt free. I am probably about to take out a $20,000 loan, and I will tell you why. And I think it’s a great idea. I have not told you about this.
So, I live in New England, which is like the only part of the country where oil-based heat is still popular. And sure enough, the house that I live in has a gigantic oil tank, which I have to fill up every year at a cost of about $400 to $500
It’s very painful.
Fuck. That. Shit.
And no matter how many cost saving and energy saving measures we try to act on, it kind of doesn’t matter because we still need to take showers and use hot water in our cooking and things. So, we’re interested in a gas conversion. It’s probably going to be about $20,000.
The thing is that my state has a great program where they say, “Okay, if you are borrowing money to do something that’s going to make your house way, way greener, which certainly switching to natural gas is a huge step up. We will give you an interest-free loan.” Meaning they’re lending me money for absolutely free.
So that is a super obvious one where I do have the cash on hand, but why would I if the state is gonna let me pay for it in small increments over time? That means if something catastrophic were to happen — say my partner and I both lose our jobs at the same time — instead of being cash poor because we put all of our money into this conversion, we just have a $100 bill every month for 10 years. That is much, much more manageable.
Absolutely. The other part of that equation is because you’re not dropping 20 grand all at once, you can invest the 20 grand you have, or put in a high yield savings account or certificate of deposit. You can use that money to make money in the interim. So not only are you not putting 20 grand down all at once, but you’re actually making money by borrowing that interest free loan from your state.
So, shit, that’s a great example of a no brainer to get that loan instead of paying upfront.
Exactly. I think oftentimes the availability of a loan and the rate that you get it at depends on what you are using it for. The interest rate on, let’s say a higher education loan, is probably going to be a lot better than a personal loan. If you just go to your bank, and you say I want $20,000, and they say what for, and you’re like uhhhh, I really want three and a half ATVs. They’re like okay, fine, high interest rate.
But you could be looking at a difference of … one might be 5%, and one might be 15%, You really have to work to internalize what does the whole percent thing really mean. Because it sounds so meaningless. Oh, 3% or 4% is really good, but 6% is awful? Like it sounds so miniscule, but compound interest is the devil.
I want to reinforce that because when we were shopping for a house many, many years ago, back in the era of Twigs and Sticks
(that are slightly larger than the aforementioned twigs).
So back in the era of Sticks and Twigs that are…
We were shopping for a house, and we were really set on exactly how much we could afford. And the bank had pre-approved us for a loan, and because of when it was and what our credit score was, we knew that we were going to get between 4% and 5% interest on the house.
And real estate agents, spoiler alert: realtors make more money if you buy a more expensive house. (Real estate agents) kept being like, “Oh, well, this house is just a little bit about your budget by, you know, 10 to 20 grand. So over the life of a loan, it’s really just like a pizza and a six pack of beer every week.”
And we’re like, “Motherfucker, we are already sacrificing that six pack and pizza a week. But also, we can do math.” It’s not a six pack and a pizza a week. It’s $50,000 over the life of the loan or whatever. Yeah, so it can be really scary if you don’t quite understand interest rates and how that works. To be like, “Oh I don’t think there’s a huge difference between 3% and 6%.”
But there is, and you should do that math to make sure that you’re comfortable with whatever and how long you’re doing that.
And I think this is a start slow thing. Otentimes the first loan that people end up taking out, if they live in America, might be for their student loans if they end up going to college or university. And the amounts of that loan are oftentimes really upsettingly large. They may be as large. or even larger, than buying your first home, which used to be like the biggest lifetime expense that most people would make.
And a lot of people are making this at the age of 17, which is so upsetting. I think if that’s your first experience of getting a loan, it can lead to a kind of blindness about what’s a good rate versus a bad rate. The numbers get so big and so difficult to wrap your brain around that it’s almost like they’re meaningless.
But, honestly, using your credit card every month is its own kind of loan that you are taking. It has an interest rate. The cool thing about credit cards is that they don’t give a shit what you’re buying. You can go out and buy 45 butt plugs. One for every anus. Like nobody cares. Because that’s basically a…
Revolving line of credit, basically.
So thinking about it in smaller chunks might be helpful instead of using student loans as your only frame of reference because those are fucked and they should never have been your first point of reference anyway.
Yeah, I think that’s a really good point. Sort of the last piece of advice too, in a roundabout way answer this question, is to talk about personal goals and priorities, which is something that we talked about a lot on the blog and on the podcast.
You know we’re getting down: Should I spend the cash I have on this or save up for it or get a loan? It’s really what your personal priority is. What your short term and long term goals are, what else you could be doing with that money, and what will be the more emotionally gratifying thing for you.
If I say emotionally gratifying. like we’re ‘Murricans, so that automatically has connotations of, “Oh, I gotta get my shit right now. I’m A’murrican, I gotta get my shit right now.”
What I mean by that is, for some people, it’s worth it to wait for something, and it’s worth it to have the sense of accomplishment of saving up for something. Whereas for other people, they might know like, “I need to get this business loan or I need to get this student loan now, because I know that I have a goal in the future that involves having the education or the business experience that this will give me.”
So there is really no one size fits all solution for this. It’s something that you need to decide for yourself, and you need to look at your total financial picture and career picture and life picture really, which sounds very scary and intimidating, but it’s really not if you get to know yourself. And I know myself very well.
And if you don’t know yourself very well, as some people are apt to brag about, one thing you can always turn to as a second opinion is: what’s the rate you’re being given?
Banks are not perfect judges of creditworthiness. But they’re pretty good. They have a system. They don’t want to lose money on this. There’s a reason that some institutions might assess your creditworthiness and assess what you’re going to use the money for and say, “All right, we’ll loan you the money with a 5% interest rate,” and others might say, “Uh, okay, we’ll loan you the money at a 20% interest rate.”
That is an expression on their part, that they’re saying either we think you’re so risky that we have to charge a really high amount to justify taking the risk, or we are quite certain that you’re not going to find anyone who’s going to give you a better rate, because the thing that you say you want money for is so dumb. So, that’s another opinion. It doesn’t have to be the final deciding opinion, but it’s more information for you.
Yeah, absolutely. I want to round up the advice we’re given. Because like this is a lot. This is a lot, and I think poor PV here is looking to simplify the decision for himself. And what we’re saying is like, it’s not a simple decision.
So, if I can summarize, we need to look at the potential savings and earnings of a cash payment versus a loan payment as well as personal priorities. And then the exact terms of whatever loan versus investment you could be making as far as the money goes. Does that kind of wrap it all up?
Yeah, and I would say even like, if you are not ready to be investing, “The answer is probably, pay for it in cash.”
Because there’s there’s no upside to being in debt if you’re not using the money that you save to invest and make more money. Full stop.
Or if you just don’t have enough.
If you don’t have enough money like, “You can get a loan to get a fucking college education so that you can then make money, which is such a fucking catch-22 and pisses me off.
Stop, you’re bumming everyone out.
I know. Okay. Fine. Are you good with that?
I… Did you just trick me into saying that I’m okay with our educational system? Damn it, I am good with that.
Listeners, if there’s a question you’d like for us to answer go to bitchesgetriches.com and click Ask the Bitches where I probably won’t trick you into agreeing to something you don’t agree with.
Thank you, I appreciate that. I’m glad you finally had a moral awakening, only after you tricked me.
In the last 3.5 seconds, I came to a more ethical standpoint.
We’re growing, we’re learning every day.
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Hey, is there anything else they should know?
Yes, we are now entering the Age of Wind and Leaves.
Oh, I gotta go buy that book right now. Thank you, that is good to know.
Piggy & Kitty 23:00
Oh my God, I love it when we actually do it together.
(sighs) Listen, I always edit it so that we do it together.
I know, but it just feels good to do it organically.