Borrowing has powerful emotional content. Offers of credit can cause your ego to soar. Many borrowers believe that now that they have credit they are somebody in the eyes of the financial world. Borrowing can trigger greed. Why put 30 percent down on a three-unit apartment when the same money can buy a 20-unit apartment with 5 percent down? Why be a little property owner when you can be big shot landlord?
Letting your ego and your greed run your investments works out emotionally for a few investors. Some investors are only happy with more investments, even though there are liens against them. Other investors are not happy with leverage.
Borrowing often causes investments and speculations to invade savings. For example, assume you have $100,000 in a money market fund as your savings and $100,000 in stocks as your investments. Your stockbroker offers to let you buy another $100,000 of stock with a margin loan. Suddenly you find several bargain stocks and decide to invest the $100,000. In theory, you have now borrowed against your investments. In practice, you have put your savings at risk. If your bargain stocks become better bargains or turn out to be no bargain but bankrupt, you must pay off the $100,000 loan quickly when you get a margin call. You must either preserve the remainder of your investments and deplete your savings or preserve your savings and deplete your investments. The saver side of your personality will be in trauma.
Because most savings values are stable, borrowers often use savings as collateral for investments and speculations. Second mortgages on the family home are common. Bank lines of credit secured by CDs and other bank products are widespread. Credit card debt, though unsecured, must ultimately be paid out of savings if investments and speculations fail. Before you borrow against your savings, consider how you would feel if your savings were suddenly stolen. Then consider how you would feel if the thief was you? Savers feel the powerful emotions of having their savings taken away but they do not always realize the cause is their own borrowing.
