The Tradeoffs of Borrowing

by Dual Income No Kids on July 23, 2008 · 0 comments

Hello All,

This posting comes to you from rural Oregon where we are spending a couple of days visiting our relatives.

The big news here is that, after a great deal of hassle and going back and forth with the bureaucracy at the University, Miel’s student loans for last semester finally came through. Since Miel had already paid the tuition bill, this meant that we had an additional $8,500 in “found” money to work with. At our meeting yesterday, we decided to allocate $5,000 of this as an emergency fund, and put the rest towards buying some real estate in Portland.

There are some trade offs to this arrangement. Mostly its a question of borrowing costs vs. fulfillment of short term goals. Specifically, because the tuition bill was paid – Miel saved up – we did not have to allocate the student loan funds to paying the U of Maryland bill. However, we chose to borrow the funds anyways. This means that we’ve got an “extra” $8,500, but we have to pay to use it. That is the downside.

On the upside, we have more flexibility by having the money. Miel’s job situation in Afghanistan is not as stable as she’d like, so having a reserve fund will be important in the event that her employment there runs into problems. Also, the additional cash gives us more choices in terms of our investing and savings options. This is important because we’d like to invest in a vacant lot for a future home in Portland. Finally, although the student loans oblige us to pay interest, that interest is tax deductible. This means the cost of borrowing the $8,500 is somewhat blunted.

Yes, we generally try to avoid borrowing, but in the end we’ve opted for having the additional flexibility of having our goals met.

James & Miel

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