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The really obvious thing we all forget when borrowing money

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.

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{ 33 comments… add one }
  • 1 Emily January 4, 2009, 8:31 pm

    I never thought of borrowing in this way – “When you borrow money, you’re borrowing from your future self.” It makes a lot of sense. Great post! Thanks!

  • 2 Pete January 30, 2011, 4:06 pm

    That is pretty clever. The only problem with this is that in an inflationary economy savers are punished and debtors are rewarded by having their debt inflated away. With that being said your thinking is still valid.

  • 3 Dan February 28, 2012, 10:13 pm

    Fantastic post.
    Great followup comment Pete. – “Inflationary economy savers are punished and debtors are rewarded by having their debt inflated away”

    This is surely worth a post on its own?

  • 4 Ben February 29, 2012, 9:40 am

    its a fair point – if RPI is running at ~5% and you’ve got an enormous tracker mortgage costing ~0% (I know mates who have dropped lucky and actually are in this situation) it puts a different spin on things altogether.

  • 5 The Investor February 29, 2012, 10:15 am

    Indeed — see method (7) in my ‘10 ways to fight inflation‘ post, which is basically to get a socking big mortgage.

    That said, inflation seems to be coming back down. Also, it doesn’t change *who* you’re borrowing money from, it just makes the terms more attractive. 🙂

  • 6 Ben February 29, 2012, 1:34 pm

    I guess its a ‘debt for leveraged investment’ vs ‘debt for jam today’ argument – they’re two different beasts

  • 7 Georgina September 19, 2013, 6:28 am

    This is the most insightful article I have ever read. It is one which I will keep reading until it becomes part of my being. Thank you very much. I wish I had read about borrowing before I started earning but I do have to wonder if I would have paid the best attention to it. As the saying goes: when the learner is ready, the teacher will come. God bless you.

  • 8 The Investor September 19, 2013, 8:16 am

    @Georgina — Very pleased, thanks for the feedback! Good luck with your financial journey from here.

  • 9 Craig September 28, 2015, 9:14 pm

    Thanks for writing this. I’ve been trying to explain this to my other half on a few occasions, but never quite got my point across. This article explains exactly what I have been driving at for a long time, and puts it over so much better than I could.

    Thank You

  • 10 Tim April 29, 2016, 10:29 pm

    I’d take this one step further:
    You’re not poorer just because you borrowed. You’re poorer because you purchased the item.
    If you save for a year to buy the item, then your future self has less disposable income during that year of saving.
    Granted compound interest makes borrowing worse than saving for it – and much worse if borrowing over the longer term or with a credit card – but your future self has less money simply because you made the purchase.

    *All* purchases have this opportunity cost that your future self is “paying for”- even ones we may consider aren’t discretionary such as food – because you are denying your future self the money used to make the purchase.

    @craig: I have tried this argument on my other half, trying to prevent “unnecessary” (in my opinion!) purchases – without success.

  • 11 Garrett Krahn September 17, 2016, 11:03 pm

    Pete: ” The only problem with this is that in an inflationary economy savers are punished and debtors are rewarded by having their debt inflated away.”

    You missed 2 people in this equation. 2 people where the benefits of the first far outweigh the second: Business Owners and Investors. Both benefit when coming from a Saver. Having extra $ to build a side business which can throw off massive cash… that’s a Saver advantage. Having extra $ to invest consistently, over time, compounds into massive wealth.

    So Saver is only the beginning. It’s not the end.

  • 12 The Investor October 25, 2016, 10:57 am

    This is one of the oldest articles on the site that’s not time/event specific and it’s one of my favourites, so I decided to give it a spruce up and repost. It hails from a time when Monevator was a bit more motivational (/Monevational!)

    Such articles were/are pretty popular, but they rub some of the uber-sophisticated sorts we get around here up the wrong way. Tricky balance!

    Obviously I’d imagine few regular readers are loaded up with consumer debts, but perhaps you could forward to a friend or family member who is? 🙂

  • 13 Tony October 25, 2016, 11:41 am

    Great post, think I read it the first time round but it’s good to be reminded.
    Quick question, where do you stand on 0% financing?
    You know the deal, you’re buying something (couch’washing machine etc) and instead of buying it now outright and leaving a hole in your savings; you take the monthly instalments at 0% interest. In the end you still spent the same amount, but you got to keep the majority (or all) at the start and ideally had it invested to get that compounding effect.
    It’s pain seeing it on your monthly statement each month, especially when the thing is no longer shiny and new, but its not exactly costing you extra – just it’s taking you longer to pay for it.

  • 14 RetireJapan October 25, 2016, 12:52 pm

    Here’s an exception for you: in Japan at the moment, mortgages are 0.5%. We had the cash to buy our flat, but borrowing at 0.5% and leaving the rest in the stock market seemed too good to pass up on…

  • 15 The Investor October 25, 2016, 1:12 pm

    @RetireJapan — That’s not an exception. You’re borrowing to buy an appreciating asset, albeit a volatile one. 🙂

    @Tony — I don’t have a problem with it, but I know other personal finance bloggers do and often hear it decried. Essentially the retailer is giving you a small discount (based on the time value of money). I think the downsides are largely behaviorial — such as running up more of a burden that you can afford or being vulnerable to upselling or penalties if you fail to meet the repayments. That’s not to dismiss them; most people’s problems are behaviorial at heart! And probably the sort of people who use these deals routinely are not the sort of people who have the option of paying with cash, anyway?

  • 16 RetireJapan October 25, 2016, 1:15 pm

    Sadly in Japan houses depreciate like cars. The land may keep it’s value, but the buildings depreciate to zero over 25 years :O

    It’s all a bit like Derek Sivers’ excellent TED talk: https://www.ted.com/talks/derek_sivers_weird_or_just_different?language=en

  • 17 Mroptimistic October 25, 2016, 2:18 pm

    I keep hearing that consumer spending us the largest contributor to go growth. If everyone followed this advice I wonder what would happen. I would guess that increasing consumer debt gives a bit of growth, declining debt would presumably be the opposite and, when it settled at zero change, the overall economy would be smaller. Less tax, less pension etc ?

  • 18 Charlie October 25, 2016, 2:21 pm

    Mortgage excluded, I just took out the first loan of my life. To buy a car of all things. I don’t need the loan, but by setting up the parameters of the PCP loan “just so” then I will see total interest paid only reach about half of the dealer’s deposit contribution (their incentive to get you to take out the finance). And that’s assuming I don’t settle the PCP early… Funny times we live in.

  • 19 Mroptimistic October 25, 2016, 2:38 pm

    I don’t find this subject easy to grasp. Say you had a low paying job but there were higher paid jobs a few miles away and you need a car. In the time taken to save the money you would be worse off, so the purchase is partly an investment with a return. Admittedly not the case if you bought scented candles on a credit card and didn’t clear the balance.

    Risk has also to be priced in in some way. You bought the car but lost the job. You took out the mortgage but interest rates rose or a future government increased council taxes,put capital gains tax on house transactions, introduced rent controls. This sort of thing is especially a deterrent to pensions saving versus immediate consumption owing to the time horizon if the investment and the risks of rule changes.

  • 20 FI Warrior October 25, 2016, 5:06 pm

    Most people can’t be bothered to go through the cost/benefit analysis exercise for important financial events in their lives, due to the tedium or whatever, but you owe it to yourself and sometimes the results can surprise.

    A colleague I know went for a more modest job out of a selection he was eligible for and since he isn’t unambitious I asked why. He explained that he’d looked at the options and the job he ended up taking was much closer to his then home, so even though it paid less he saved on transport costs as well as non-financial benefits (what price sanity?/physical health) like time for his kids. The tipping point was that the better-titled job’s higher pay put him in a higher tax bracket which ironically would have made him poorer overall.

    The ‘winner’ candidate for that higher-status job was under pressure to show they were developing their career on schedule and had a demanding partner who was pushing. On the other hand, my buddy’s new little girl knows who he is, because he can spend time with her at the end of the day getting to know her personality and making sure she can recognise him; he’s certainly happier for that.

  • 21 ermine October 25, 2016, 8:06 pm

    I like the pumped up version of this. Even better than the old one. The old adage to only borrow if you expect it to make you more than your borrow is still good. Your university – check. Mroptimistic’s car – check – it’s a tool of his trade.

    Tony’s 0% finance – well, that’s okay. I am borrowing money from Barclaycard at 0% on a free purchases deal while the Nationwide is giving me 5% to save the principal. As long as I don’t go nuts and buy things I wouldn’t have bought otherwise it’s a modest win for very little effort.

  • 22 The Investor October 26, 2016, 10:27 am

    @RetireInJapan — Really? That’s harsh. Is it because they’re made of wood (serious question) or is that an old stereotype now? I really need to visit Japan, I have friends there. (By the way, I’m also troubled that I wrote “no, that’s not an exception” when on reflection I think you were indeed describing an exception to the main thread of the article. Ho hum. Apologies if I was confusing! 🙂 )

    @Mroptimisitic — Yes, I believe the economy would be smaller, for good or ill. Currently looks like a rather academic question though! In theory some utilization of debt is good for smoothing your expenditure over your lifetime. In practice, not so much IMHO, mortgages aside. Agree with you about risk, too. The best case for spending more today is the metaphorical bus that might hit you tomorrow… Unfortunately, we don’t know our odds.

    @FI — Interesting anecdote. Similarly, when I was about 15 I met a friend of my fathers’ at work who was clearly really clever. He was junior to my dad, and didn’t seem at all ambitious. My father explained afterwards in somewhat awed tones that this fellow had decided he couldn’t afford to get promoted and sucked higher up the work chain because it would get in the way of making money (or something like that, I may be conflating my memory with various books read over the years). He did “things” before and after work, which in retrospect I’m pretty sure was active investing, although we didn’t have the language and knowledge to know or discuss it in my family. Anyway, the memory resurfaced in my mid-20s, and it has been an influence.

    @ermine — Thank you! You have been kind in linking to this page over the years, relieved it still passes muster!

  • 23 RetireJapan October 26, 2016, 1:20 pm

    No worries, we have a pretty unique housing market over here. To be honest, I’m not sure why houses depreciate. I think it’s mainly cultural expectations, a mixture of ‘bad juju’ as in old things are undesirable, ever-improving technology making newer houses safer in earthquakes, and tax write-offs for new builds.

    Much like cars, if you buy a decently-built house that has done most of its depreciating, you can get some great deals (our flat is 25 years old and was about 1/3 of the price of a new one).

    Definitely visit Japan: everyone who has come out to see me has enjoyed visiting, and it’s nowhere near as expensive as it seems. If you make it to Sendai I would be delighted to take you to dinner 🙂

  • 24 Dale October 26, 2016, 6:47 pm

    You don’t borrow from your future self. You take from your future self (and pay a fee for the privilege). Borrowing suggests your future self is repaid, you are not.

    Great article though!

  • 25 SurreyBoy October 26, 2016, 11:05 pm

    This is a good article – really illustrating an important principle of financial wellbeing i.e. think long and hard before taking on debt. There are smart reasons to take debt – investing in yourself, a business, or a property etc etc, but so much debt that is out there is just wrong to take.

    When does credit equal debt or equal investment? The 0% finance offers often just have a finance cost built in and so are not bargains at all. The pressure on people is often intense, especially when it comes to xmas gifts or holidays and getting that nice home for the family or the dream car. How do we look at the kids and tell them they can’t have the item they so want?

    I think sometimes the pressure is more from ourselves – saying we are not successful if we don’t buy tat, or we are selfish for wanting to remain free of endless direct debits. Then as investors we know the economy runs on debt, including many of the companies we invest in – so we would be hypocrites to reject debt right?

    No we would not. Debt is like alcohol – used appropriately its fine, but it’s so easy to use it wrong. It would be a sad world if we looked at the cost of every item of expenditure today and computed its growth adjusted value in 30 years’ time, but at the same time we have to avoid the self-inflicted shackles of unnecessary debts.

    Keep the articles coming.

  • 26 Anon October 27, 2016, 12:36 am

    Know an accountant who remortgaged himself to the hilt ~2000 and bet it all on the markets (don’t know more specific details than that). Discovered this by accident while visiting his office ~2002 in the depths of the dotcom crash and couldn’t help but notice some related paperwork on his desk. I don’t think his wife (who left all money matters entirely to him) ever knew anything about it. Not something I’d have the guts to do myself; seems a bit like someone offering you a coin toss on whether you can FIRE say 7 years earlier or 7 years later, and using a coin where past performance may not be a guide to its future performance too.

  • 27 Nebilon October 27, 2016, 6:53 pm

    The thing about the 0% finance deals is that although as Surreyboy says there is a finance cost built in, because most people will take the finance option, the retailers aren’t interested in doing a different deal. You can’t get a discount for a payment in full in cash (I have tried…). So if you have the cash you might as well take the 0% deal and get some interest however pathetic on the principal. Of course this just perpetuates the situation

  • 28 FrugalFox October 28, 2016, 3:45 pm

    If for instance you borrowed money to set up a business. The business does well then you have borrowed money from yourself but made yourself richer.
    If you did the same thing but the business fails then you have compounding failure… Scary

    Another (stupid) idea: Borrow money at 3% and then utilise the 14% offered by Rate setter to lend that money out. Who are the loanees borrowing from then?! My head hurts.

  • 29 Lee October 29, 2016, 10:37 am

    Been debt free since university, but then suddenly this summer I found myself buying watches. Suddenly this strange urge came over me.
    Now paying off the CC and I can see how debts can soon add up and are difficult to pay off – and I’m a keen saver, for those less inclined it must be jolly difficult.
    Will restrain myself more in the future.

  • 30 Rob J October 29, 2016, 11:23 am

    @Charlie – I had something similar happen to me last month when buying a 1.5 year old car. The dealer wanted my wife and I to pay a portion of the price on HP, explaining that the free services they would throw in would more than outweigh the interest cost. He said, “most people” do it as it was a “no brainer”, and that, “you’d be stupid not to”. I asked him if we’d own the car, and he confirmed not for a couple of years till the finance was paid off, and then (to his frustration) did the rough maths on an envelope in front of him. The net saving was about £60! He went on to say that, “times had changed”, and that, “whereas borrowing in the post war period was a dirty concept, it was normal these days”, adding that “if you didn’t borrow you’d never own anything”. I know he was motivated by wanting to sell us the HP, but I couldn’t help feeling sorry that he might believe even a little of what he was telling me. Needlesss to say we ended up doing the “stupid” thing and paid cash.

    This experience also reinforced for me how un-mainstream the way I think and much of the thinking on this blog is – there was me struggling to justify spending a not immaterial, yet relatively small amount in the context of my and my wife’s investment portfolio, when other people would have found the decision easier even if they needed the HP to make the purchase. Thank you @TI for this virtual refuge!

    Happy weekend all!

  • 31 Financial Samurai November 20, 2016, 4:57 am

    It baffles me that people are willing to borrow from their credit card and pay 15% interest rates are higher.

    I’m very thankful that banks have been able to lend money out at under 3% rate to buy property though. There’s no way I could’ve come up with $580,000 when I was 26 years old, or $1.5 million when I was 28 years old to buy property for 100% cash.

    The banks win by making money off of me and the spread. I win by living in a nice place and watching the asset grow with inflation over the past 11 to 14 years. It’s just annoying when people Welch on their debt and hurt the rest of us who have been responsible payers.


  • 32 Mikey B December 2, 2016, 3:05 pm

    Generally im trying to cut down my spends. I often buy tools etc just almost on a whim. Also i find if i save for the item, i often change my mind later and move onto something else where as CC or overdraft would have a been bought and basically goes little used. Great articles here.

  • 33 Daniel Croft February 20, 2020, 9:22 am

    Interestingly, with my student debt I used the maintenance loan and grants as the start of my investing journey. The interest on my savings since then has far surpassed the total cost of going to university as well as the interest. So effectively I managed to use the student loan to pay for its self, in an ISA I might add making it tax free.

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