5 Critically Important Questions to Ask Yourself Before Applying for that Loan

by Bruce Hokin

If you answer these questions honestly and creatively, you may be surprised at the outcomes. Ready to start? Let's go.

Question #1. Can I really afford it?

This basic question is sometimes overlooked. Some folks think that as long as there is some money left over from the pay each week or month that it's fine to put this towards another loan. Wrong! Unless you understand your true income, expenditure, savings goals and retirement goals, how will you know whether the money you have spare after each pay can really be applied to a loan?

Setting up your personal/family budget is necessary if you want to know what you can afford. These can be found by searching on the Internet.

There are certain basic laws that apply to spending whether you know them or not. Some of these are:

• If you regularly spend more than you earn you are setting yourself up for lifelong poverty.
• If you borrow to buy short-lived assets (e.g. TV, DVD, car, boat, etc) the interest and repayments can continue at the same rate long after the asset has lost its value. That makes them a very expensive item.
• If you pay for items like clothes and other household items by credit card it makes the items a lot more expensive than you think. Especially when the interest rate is around 13 - 15% per year.
• Credit card debt, while easy to acquire can be very dangerous if you only pay the minimum each month.

Question #2. Do I really need it?

Advertising today is so sophisticated that it makes you think there are so many things that you just cannot do without. However, just take a minute to ask yourself these questions:

• Do I really need the updated car? Isn't the current one good enough?
• Isn't our furniture still serviceable without resorting to an upgrade?
• Do I really need all the latest electronic wizardry?
• Are all the latest fashions a necessity? Am I really a better, more likeable person by buying them?

The purchase of these items is often made at the expense of your future financial well-being and overall happiness. Surely, the fleeting happiness of today's purchase wears pretty thin, compared to the worry and stress of over-extended credit and unpaid bills. It is best to try every avenue before resorting to a loan.

Question #3. How will this loan affect my financial future?

A loan can have an adverse effect on your financial situation through many ways. Some of them are listed below:

• If you default on a loan it can make it much harder in the future to borrow again.
• If you damage your credit rating your borrowing costs can increase.
• Borrowing for an asset whose useful life is less than the life of the loan is a sure way to pay a lot more than the worth of the asset. Money that could have paid down credit cards or been used for savings.
• Saving for things you need will put you in a better financial position and increase you borrowing potential for your mortgage.

Question #4. What else could I do with the repayment money?

If you were to decide to defer or not purchase the item on credit, imagine what you could do with the money?

• You could put it in a savings account. Save for holidays, the car upgrade, kids college fees or home renovations.
• You could start a retirement savings plan.
• You could pay off the credit cards in double quick time. If their interest rate is higher than any other of your debts, pay them off first.
• You could pay extra cash each month or fortnight off your mortgage.
• Imagine how you'd feel once all the debt was gone and you were free to purchase those things you need for cash.

Aren't these ideas better than committing yourself to more debt and worry?

Question #5. Can I still purchase this item without resorting to a loan?

If there are items that you really need and you do not have the funds to pay for them, what else can you do? Try these ideas:

• Do you have some other assets that are no longer being used? Sell them and use this money for your new purchase.
• Do you really need 2 cars? Why not sell 1 and use that money for your new purchase?
• What about increasing the 'cash-in'? You could apply for a higher paying job. You could get a second income. Maybe start a home based business on the Internet.
• Why not cut down on your weekly or monthly living expenditures? Buy generic products, only buy necessities, bargain with sellers and commit to only buying items at less than list price.

These are just a few suggestions to help you think twice or even three times BEFORE you go to apply for that loan. Your financial future is at stake here. If at all possible live within your means and save for what you need. You'll be happier and more stronger financially as a result.

About the Author:
Bruce Hokin has designed a simple budget tool called "5 Steps to Freedom Personal Budget." It's based on his extensive background as a qualified, experienced accountant, manager, consultant and financial adviser. You can download this powerful budget assistant today and be on your way to financial freedom within the hour. It is available at his website www.freedom-personal-budgets.com.

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Becoming a Little Richer

Most of us want to be in the happy state of knowing each night as we drift off to sleep that we are a little bit richer than we were when we woke up that morning. Can you relate to that desire? Of course, you can. After all, the importance of money in our interconnected world grows each day. Yet, I still believe that if you hope to live a happy, balanced life, you'll be smart enough to consider that wealth is only an instrument to be used, not a god to be worshipped.

It is not just a man's domain, women are also responsible in balancing and managing the cash flow. So, if you wish to sustain balance in your life, retain a sense of deep joy, and successfully grow richer and richer over time, focus on enhancing two personal quantities: your cash flow surplus and your net worth. Strengthening the first will automatically beef up of the second.

The way to ensure that you grow a little bit richer each day is to focus on your cash flow patterns over just one day, then over one week, later over one month, and so on. If within each time segment you always make it a point to spend less than you bring in on a net basis (after tax and other standard deductions) then you will be transforming the unutilized portion of your net earnings into a personal store of capital; and you will be acting as a capitalist in the finest sense of the word!

Possessing a growing store of capital will empower you to further load up your net worth statement with fruitful or productive assets like bank savings, money market funds, bond funds, equity funds, property funds, rental-yielding properties, dividend-yielding stocks, and the like.

In essence, you will be choosing to exercise deferred gratification by giving up a portion of your capacity to consume today for the opportunity to possess far more (and to enjoy a lot more) tomorrow.

It is important to realize that a net worth statement has two parts, as does a cash flow statement. The net worth statement's twin components are assets and liabilities. In general, it is tempting to utter clichés and say that assets are good and liabilities are bad. However, that would be an excessive generalization. Let me explain:

Assets can either be appreciating or depreciating ones. Obviously, appreciating assets like growing bank deposits, investment funds, appreciating properties, and high quality stocks are good. Depreciating assets, on the other hand, lose value over time. These may include your cars, computers and mobile phones. The wise course is not to avoid owning depreciating assets, the shopping dilemna is quite hard to settle, but rather to ensure you have much more in appreciating assets.

Liabilities also can be good or bad. Good forms of debt might include well-structured mortgages on second or third pieces of property that you earn rental from. Bad types of liabilities most certainly include all unpaid, regularly carried over credit card debt and loans.

It is a tremendous eye-opener to understand that unpaid credit card or loan balances are dreadful liabilities for regular people like you and me to have, but are wonderful assets for the banks and lending investors!

So ask yourself if your goal in life is to sacrifice your personal long-term financial health to bolster the bottomline of some faceless financial institution, or is it to manage your money wisely to ensure you grow a little richer everyday? As Confucius said: When prosperity comes, do not use all of it.


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