How to spend less and have more!

Do borrowers or savers accrue the most lifetime possessions? And will borrowing to buy really help you buy stuff sooner? The answers will surprise you.

If you want to know the real cost of borrowing money, it's no good looking at your interest rate. Instead, you need an example that shows that the more you borrow, the more you'll spend, but the less possessions you'll have!

Therefore, I think the best way to grasp this concept is to see how much stuff you could buy if you never used a credit card or personal loan, versus if you did. I'll give you an example.

Two close friends, Stefan and Brigitte, are 20, and they're virtually carbon copies of each other. They have the same salaries, the same household bills and expenses, and enjoy the same entertainments. Zey even haf ze same accents.

But! They have one difference. Brigitte is debt-free, whereas Stefan has built up credit card debts of £5,000 by buying things he wants now. Their incomes go up at the same rate and all other household expenses remain identical for their whole lives, except Stefan continues to rack up more debts by buying more things he can't wait for. By the time the pair of them are 25, he has £9,000 of debts.

Stefan then finds lovemoney.com and reads this article. He gets freaked out by the true cost of borrowing. He gets more freaked out that I've written an article about his borrowing habits before it's even happened. He recovers from the shock and learns the error of his ways. He becomes disciplined: he switches his debt to a cheap, fixed-rate, unsecured loan, and pays it off by his 30th birthday.

At 30, how much stuff have they got? My table below shows their luxury possessions and the holidays they've taken.

Luxury goods owned at 30, plus holidays-to-date

On top of the above, Brigitte also has a modest savings pot of £500 (in 'today's prices', which means it'll be more in ten years to adjust for inflation). Stefan has no savings. 

All Stefan's loans went towards purchases in this table, which means he got many items years before Brigitte did.

However, by Stefan's 25th birthday, he has paid £5,600 on debt interest alone: more than his original borrowing of £5,000. As Brigitte didn't spend £5,600 on debt interest, she used it to fund more purchases.

By the time they reach 26-and-a-half, Stefan has paid more than £9,000 in both interest and debt repayments, but still has more than £6,000 of debt. Furthermore, Brigitte has by now bought everything that Stefan has bought, and a little bit more. She will now outpace him on purchases, buying stuff before he does. Plus:

Brigitte will continue to have more stuff than Stefan for the rest of their lives.

They reach 30 and Stefan has finally cleared his remaining debt, paying yet more interest along the way. He has spent a total of £7,500 on debt interest over the past ten years. On the plus side, he spent £5,000 on holidays, has £9,000-worth of luxury goods, and has spent £4,500 on other luxuries, such as goods that have expired, and presents.

Brigitte has spent £7,800 on holidays, she has £14,500-worth of luxury goods, and has spent the same as Stefan on presents and expired goods: £4,500. She also has £500 in savings.

How they compare financially at age 30

*Brigitte's total is a little higher because she has earned savings interest for being in credit the whole time. The important figures to compare are Holidays and Luxury Goods they own.

Conclusions and tips

Hopefully, this has made the true cost of borrowing clearer. The biggest moral here is that the more you borrow, the less stuff you'll be able to buy over your lifetime.

The second moral is that, yes, if you borrow you might be able to get what you want sooner, but non-borrowers will catch up later on. From that point, they'll be able to buy what they want faster than you.

But borrowing can be necessary. It may be you need a car now, for example, perhaps for work reasons. If you can't afford a suitable one from your savings, borrowing to buy a decent second-hand car could reward your career or lead to a higher income.

One or two debts can even be a good thing, provided you don't over stretch yourself. Borrowing to buy a house will mean you could eventually own your home and never have to worry about rent or mortgage payments again. Also, borrowing to improve your home could be profitable when you sell, and borrowing to start a business could lead to more money in the long run.

It's borrowing to buy 'stuff' that is not so smart.

A few helpful hints 

• If you already have debts, it's not too late to learn from this article. Clear them as soon as possible. The sooner they're cleared, the less debt interest you'll pay, and the more you'll be able to buy over the course of your life. 
• If you're looking to borrow, consider whether it'll really make you any happier in the long run. Please try to be patient!
• If you borrow at no cost using a 0%-on-purchases credit card, it's a different story. As you're not paying any extra, it means you can buy goods earlier but still end up with the same amount of stuff as someone who didn't borrow. This is provided you pay off the debt before the 0% deal expires.

In the long run, by borrowing less you will be able to buy more things sooner. And you'll simply be able to buy more things!

This is a classic lovemoney article that has been updated

More on budgeting:

How to plan a budget
Looking at your spending
Setting your goals