A Borrowed Approach to Borrowing

I’m not above stealing ideas. Especially when they’re this good.

💈💈💈

Hey, I’ll admit that I stole this idea. That’s not unusual—I steal ideas all the time. What’s unusual here is the original source. I didn’t pinch this idea from Warren Buffett. Or from Ben Franklin. Or from any other famous financial mind. Nope. I lifted it from an astute woman in Dartmouth, Nova Scotia.

She worked for the government and her husband was in manufacturing. Years ago they called me to explain their approach to saving and borrowing and of course, to get my opinion. The wife proudly announced that they use pre-authorized chequing and payroll deduction to fully fund their RRSPs. Music to my ears, obviously. The problem was they had trouble saving for things like a new TV or a trip or a hot tub.

The few hundred a month they needed to set aside constantly slipped through their fingers. They refused to use their credit card and carry a balance (hooray!) and wisely recognized that although a significant line of credit would let them finance everything they wanted, that would eventually be an even bigger problem, not a solution.

They have to pay it back. Their compromise was very clever. They set up a small line of credit of only $7,000 and made a firm promise to each other that once they borrowed, no matter what the amount, they couldn’t borrow again until their LOC balance had returned to zero. Their prudently contained debt (known in the industry as PCD—from now on anyway) served as the ultimate forced-savings program.

They had to pay off their fancy TV if they wanted to go to Mexico. Then they had to pay off the Mexico trip if they wanted new golf clubs. And so on and so on. Yes, they’re giving in to temptation without having the savings, but only one shot at a time and at an affordable level. Their LOC balance never exceeds $7,000 and, once tapped into, it begins its one-way journey back to zero.

What was most interesting was that they love paying down the debt! The saving that they couldn’t manage pre-purchase came easily post-purchase. Why? Their basic strategy had captured the power of materialism and turned it into an incentive.

They knew that they could buy something again, only when their LOC balance was eliminated. A strong desire to get back to being debt free so they could take on more debt (yes, that does sound weird) pushed them to act in a more fiscally responsible way. A unique combination of instant gratification mixed with anticipation worked wonders for them.

More importantly, it has worked equally well for other people to whom I’ve introduced this concept, but they’ve also enjoyed it. I’m guarded with credit lines, yet I like this idea a lot. It’s simple—but hey, so am I.