Have you ever wondered who you’re borrowing money from when you go into debt?

If you think you’re being given money by a bank or credit card company, think again.

In this piece I’ll explain in one sentence who is really lending you money when you borrow.

The rest of the article will explain why it costs you more than you might think to take it.

Borrow now, and have less later

Loans, mortgages and credit cards are mechanisms through which you can borrow money. They don’t give you a penny to spend.

So where does the money come from?

When you borrow money, you’re borrowing from your future self.

Loans and credit cards turn the impossible into reality, taking money you’ll have in the future and giving it to you today. It’s an almost magical process that clouds where the borrowed money comes from, and what it actually costs.

Let’s say you want to buy a new computer. You have three choices:

1. Save up to pay for it
2. Borrow the money
3. Steal the money, or the computer

Option 3 is the cheapest, but it has practical, moral, and spiritual consequences.

Option 1 requires you to live within your means, save the difference, and delay owning a PC until you can afford it. You may even buy a cheaper PC so you can own one sooner.

If you don’t like waiting and you don’t like compromise, you’ll probably go for option 2.

In some households, option 2 is the standard choice. Such people regularly borrow money to buy everything from the groceries to their summer holidays.

Borrowing might be done via:

• A credit card
• A personal loan
• Adding to the debt in your mortgage
• Using a doorstep lender
• A hire/purchase arrangement

All these options have advantages, costs, and consequences. Smarter borrowers shop around for the cheapest method. Others take the first loan that comes along. Finding the cheapest way to borrow is a subject for another article.

The key point is that all these methods have the same common structure:

1. You borrow money
2. You must repay it

Notice it’s all about you. The agreement may be with American Express or Barclays Bank or whoever, but it’s you who has to repay it.

After the advertisements have been forgotten and the repayment is just another line in your monthly statements (and the PC no longer runs Sim City 7000 or whatever we’re up to by then), you’ll still be liable for your debts.

And where will you get this money from?

From your future self.

A study in borrowing from myself

I first realized the concept of borrowing from my future self when I was quite young. My family was by no means rich, but my dad earned too much for us to qualify for the full student grants that were available back then to pay for higher education costs.

As a result, I had to take out a student loan.

The government loan was a great deal, with a very low interest rate. Better still, I didn’t have to start paying it back until my income surpassed a certain threshold.

I even managed to save some of the loan. Writing for the college magazine kept my extra-curricular costs down, as we got free tickets to all sorts of things across London. And being young, I had little need to spend money.

Fast-forward a couple of years, and I’m into my first job. After a few months, I got a pay rise.

That was the good news. The bad news was I’d hit the level where my student loan began to be repaid. I can’t remember the exact figures, but the gist was I was worse off after the pay rise, because I’d only just gone over the payment threshold!

It was not the most motivating payslip I’ve ever received. My student self had made my working self poorer by borrowing money.

Of course, university back then was a no-brainer (unlike today) and my student loan had been spent buying an education that made me more employable for years to come. My future self got a good deal.

But this isn’t the case when you’re buying stuff or paying for services or holidays using debt. All the benefit arrives in the short-term – but you pay for it over the long-term.

Borrowing from a poorer, future you

How much money are you taking from your future self when you spend his or her money today?

Unless you use the loan to invest in education, a profitable business or an appreciating asset (such as a house over 25 years), your future self will have less disposable income to spend on things because of your decision to borrow now. Your future self will go without the money you spend today.

It’s worse than the initial cost. Your purchase today via debt will incur interest. Depending on the interest rate you’re charging your future self – via your credit card or bank loan – you could spend anything from 25% to 100% more by buying the item today, instead of waiting until you can afford it.

In fact, debt is even worse than that! Imagine that instead of going into debt, you lived within your means, saved up for the things you really needed, and invested the excess instead.

Your future self isn’t just poorer due to the cost of your debt-fueled purchase and the interest on the debt – he or she has also lost the cash you’d have amassed thanks to compound interest building up your savings.

See my article on why you should stay out of debt for cash illustrations of these costs.

This isn’t some abstract person we’re talking about. If you go into debt now, the living, breathing you of tomorrow will look at their bank statements or face unexpected urgent costs, and have less money to spend.

One day you’ll retire with less money, if you borrow to buy depreciating assets today.

You’re really sticking it to your future self by borrowing. You’ll be poorer, less able to live within your means, further from financial freedom – and probably lumbered with an old PC that needs junking.

Save now, spend later

Some readers will find this post trivially obvious. If that’s you, I’m very glad to have you reading my site – please do subscribe to get all our personal finance and investing articles.

I know from experience that other readers will find it a revelation that their debts are funded by themselves and nobody else.

That’s not surprising. The entire financial service industry tries to confuse us into thinking money is cheap and to distract us from who really pays. The 2007-2008 credit crunch is testament to that.

If the concept of borrowing from your future self is new to you, I hope it’s an empowering idea. Once you grasp that you’re only making your future self poorer by going into debt now, good things will follow.

You’ll live within your means to avoid debt, see your savings grow, and compound interest will build your wealth rather than making you poorer through interest increasing your loans.

Of course if you are 99-years old and still saving, it may be time to start spending. There comes a time when your future self has to give something back. We don’t last forever.

But in your twenties, thirties, forties and even fifties, you owe it to your future self not to leave them owing you.

Good reads from around the Web.

Have you ever tried to convince somebody they should invest passively with just a few funds? You’ll discover an interesting new way to bang your head against a brick wall.

Some people get it right away. It helps to have Monevator articles – and those recent videos from Lars – to send them to.

But very often they tell you (or you can see that they think) you’re short changing them.

It can’t really be so simple. Do you believe they’re not smart enough to invest properly? Rich enough? Ambitious enough?

Worth it?

Adding to the problem with my friends is that many know I’m a market mad investing nut job.

What am I holding back?

If it’s good enough for Nevada…

Happily, reader S. pointed me to an article in the Wall Street Journal [Search result] that may become a powerful part of my passive persuasion arsenal.

Because if my friends are worried I’m suggesting their £15,240 ISA isn’t worth “proper” investing, maybe they’ll be reassured by seeing somebody invest $35 billion using passive principles.

As the chief investment officer for the Nevada Public Employees Retirement System, Steve Edmundson works in a one story building and has no co-workers. He brings homemade lunch to work in a Tupperware box – often last night’s leftovers. He keeps spare paper clips in a tin.

And – even more like a switched-on seeker of early retirement than a Master of the Universe – he invests all his $35 billion under management passively, having fired 10 external managers when he took the job in 2012.

The strategy is doing the business, of course:

Returns over one-year, three-year, five-year and 10-year periods ending June 30 bested the nation’s largest public pension, the California Public Employees’ Retirement System, or Calpers, and deeply-staffed plans of many other states.

…although it does go a bit Monty Python:

With no one else on his investment staff, Mr. Edmundson rarely uses his conference table and four extra chairs. He volunteered his office to pension-fund employees who work for accounting or benefit calculations.

Last month, a wall went up dividing the room.

“I’m not going to complain about my office,” he says. “It was too big.”

When people write articles ‘fearing’ the shrinking of the wealth management industry due to the rise of index funds, remember Mr. Edmundson – and all the expenses paid to his colleagues who mostly added little value while earning sports cars and country homes with our money.

[continue reading…]

The handful of you who know me in real life will already be aware that I’ve become a bit of a bore over the last couple of years.

No, not about index trackers, or high-yielding shares.

Instead, I’ve been boring people on the subject of another sort of investing: investing in human capital, namely myself.

That’s right. I’ve been getting an education.

Sell-by date

Now, let’s put that in context, lest you all think that you’ve been reading words penned by some unlettered ignoramus.

I actually have four degrees, including a Ph.D and MBA. But time, as they say, marches on, and as I approached 60 I was increasingly aware that a growing proportion of what I’d learned was past its sell-by date.

Which, when – like me – you earn your crust selling what you know, raises some troubling questions. In particular, I recognised that my data analytics skill set was looking very dated.

The amount I knew about open source analytics and modelling packages such as R, for instance, was zero.

Whizzy analytics techniques such as Excel’s pivot tables? Likewise.

Handy analytics and numerical analysis packages in Python, another open source language? Ditto.

Number-crunching

At which point, let me share the broader strategy with you.

I’ve always enjoyed analytics, and that Ph.D involved some fairly hefty statistics and multiple regression modelling. A not-insignificant part of what I do for a living is writing-up survey results, and carrying out secondary analysis. Clients send me Excel spreadsheets or SurveyMonkey output, and off I go.

(My rates are very reasonable, so if you’d like to discuss a project, get in touch. Note to our host, The Investor: I take it that I am allowed such gratuitous promotional plugs?)

I’d like to do more of this sort of work, and quite frankly see it as a very enjoyable – not to mention rewarding – potential retirement activity.

But as I’ve said, the world is moving on, and my analytics skill set was largely mired in 1970s and 1980s techniques and applications. Heck, back then the spreadsheet had only just been invented.

Incidentally, does anyone else remember working with VisiCalc? Or SPSS? (Now owned by IBM, and eye-wateringly expensive for individuals to buy, as is rival SAS’ equivalent package.)

Massively Open Online Courses

Hence the grand plan: Get up to speed with more modern analytics techniques and applications, and also catch up with more modern approaches to analytics.

But how? Enter the world of ‘MOOCs’, otherwise known as Massively Open Online Courses.

MOOCs come in a number of flavours. Leading American universities such as Harvard, MIT, and Stanford, for instance, provide online learning. Britain’s Open University is arguably one vast MOOC.

Any number of computing-specific MOOCs exist. My son and some of his friends, for example, are ploughing through courses at Coding Academy. The well-known Khan Academy also counts as a MOOC, although it lacks features found in some others. Ditto LinkedIn’s Lynda.

In short, MOOCs are hot, and venture capitalists (and philanthropists such as Bill and Melinda Gates) are pouring money into them.

What you get

So I’ve been taking courses at Coursera, and at edX. Both take the route of partnering with leading universities and other entities (such as Microsoft, say, for IT-specific courses) to offer a vast range of courses in all kinds of subjects.

From my experience, a typical course takes four weeks, and may be combined with others to form a specialisation.

A typical four week course costs in the range of £35-£45, which certainly meets my definition of ‘open’. Many permit learning for free, but the advantage of paying is that you get a certificate that can be posted on LinkedIn or shown to employers. Learn for free, and you don’t.

All courses have online forums where students can interact with others in their four-weekly cohort, and interaction with lecturers and teaching assistants is common.

There are lecture videos to download and watch, tests to pass, and assignments to perform. Individual approaches to deadlines vary – most will allow slippage if you pass by the end of the course. A recent Coursera innovation is to allow learners to move from one four-week course to another, if they fall behind.

Pass or fail?

My experience has been overwhelmingly positive. In just short of two years I’ve completed 12 courses, all of which feature on my LinkedIn profile. I’m almost at the end of a further one.

Courses vary in quality. The medium is new, and not every university and every instructor is yet up to speed with the limitations and advantages of MOOC-based online learning.

If you value interaction with other students (such as when you’re stuck on a particular problem) then busy courses are obviously better than quieter ones.

But, as I say, my experience has been overwhelmingly positive, and I have most definitely gained the skills that I was looking for.

Indeed, I’d go further: I can see me becoming a ‘serial offender’ – because as new courses are added, it’s oh-so-tempting to sign up.

Silver surfing studying

For the Monevator crowd – and in particular The Greybeard’s own retirement-focused readers – the merits of MOOCs are obvious.

Low-cost learning – what’s not to like? Either as a retirement hobby, to keep the grey cells ticking over, or like me to refresh old skills (or acquire new ones) in order to keep up-to-date with what is going on in the world of work.

Or, to whet your appetite even more, to acquire investing and finance skills. Yes, there are MOOCs here, too.

As I say, my own experience has been at edX* and Coursera. But let me leave you with a taster of what is on offer in the money-related domain – MOOC Tracker, a popular link, maintained by the Financial Times, of business and finance-specific MOOCs.

See you online!

Note: If not using the hyerlink URL above, please be aware that edX is to be found at www.edx.org, and not www.edx.com.