Archive for the ‘General’ Category
It has been a long while since I have published an article. The reason is I find it frustrating to see credit and the idea of borrowing being stretched and distorted from it’s original function and intent. Obviously the original intent was to make a profit but they was a very specific goal of how this tool was supposed to be used and I think that has been lost. The borrowing and lending of money (or the making use of other people’s money) was intended to make use of idle money for those that have and to deploy it to those that don’t have. Using other people’s money has been going on for a very long time but it was more prevalent in the business world. Now that it is alive and well in the personal side of things we see some very alarming symptoms of a system that is used in a more balanced way in the logical (usually) business world.
The idea of banking came about to fill a need. The need was simple: to give an opportunity to people with money to make a profit on their money by lending it to people would needed money. It was a central distribution of cash, instead of people with money going through the hassles and potential issues with lending to people directly the bank stepped in and balanced out the equation. By the bank acting as an intermediary between the two parties (for a “small” profit). This would standardize things and take the (or most of) emotion out of it.
The idea was simple and that was for a people without money was able to magnify or leverage the little money they did have to yield the power of a large amount. This way a poorer person could by a home, and they would pay an interest rate (or a fee) for as long as they were using that other person’s money. Of course this was more on the business side where someone wanting to expand their business could through the same process.
In the midst of confusing rates and promotional offers it really helps to remind one’s self of the true intent of borrowing money. We seem to have moved away from the good and solid principals of money management. Not using a credit card, line of credit or over-draft protection as your financial reserve. Paying yourself first (because you deserve to keep some of the money you make). Even just these to small concepts can change a persons life over the medium and long term for the better. There will be more to come on better financial choices and best practices to come.
Talking about interest rates, and really credit in general, is for most, about as fun as watching the dogs fur grow. In this instants, meaning the times we are in: interest rates, lending and credit are very relevant for everyone to be more familiar with. The longer one distracts himself from these less entertaining news items the deeper and more personal one’s life will probably be effected.
Besides people looking to renew or shop a mortgage why does it really matter, and the short answer is: it does, it really does. Following interest rates and other economic indicatores to have a general understanding of what is going on can help you become directonally right in your personal finanacial decisions and actions.
One concept is easy to understand and that is of financial cause and effect. The idea I am talking about is cheap money stimulates spending. Whiether that is people buying houses dues to rock bottom mortgage lending rates or the person who books that trip because their floating credit card rate is super low. Businesses borrow more money to fund expantion projects and this in-turn usually lends to more jobs. More jobs means more people with money to spend and so the upward spiral of our fractional reseve monitary system.
Conversely, if you have higher interest rates, people tend to spend less, and often look at paying down debt, businesses look at cutting costs (usually because less people are buying their products and services) and this can mean less jobs which means less people making money to spend. YES, this is an over-simplifcation but this is an important part of how things work.
So when the mosters of this system, the people who run the Bank of Canada and the Minister of Finance are saying that market is over heated or people should consider paying down some of their debt or any other simialier warning: you should really pay attension to what is being said. (more to come!)