Thursday, March 20, 2008

Economic Security or Temptation Toward Problems?

I heard a financial advisor on television say that the first thing you should do to guard against financial problems is to set up a line of credit against the equity you have in your home. She said that you don't have to borrow against your home equity unless you have to, but that this step would give you instant access to capital when you needed it. Frankly, this advice made me feel very uneasy. If you are in a position where it is at all likely that you will need capital, this approach will keep dangling the temptation in front of you to borrow and maintain a rich lifestyle. If you want to plan ahead against possible financial adversity, you are better off to learn how to trim your lifestyle so that it doesn't take as much capital to sustain it. If you start borrowing even a little against the equity you have in your home, especially in an economy that is tending to reduce the value of that home, then you are going to be tempted to do it again the next time you need a little cash. The commentator said that borrowing against your home equity line of credit is as easy as using a credit card. That is exactly the problem. The banks and mortgage holders make it easy because they want you to borrow. It tends to be a one-way street of borrowing more and more and not paying anything back beyond the interest, of which there will be plenty. Has anyone else noticed that the Fed has been reducing interest rates while the credit card companies have either left them the same or found more reasons to increase interest rates whenever you get into a technically incorrect position? Now is the time to learn how to reduce your spending in step with the reductions in the economy. Now is not the time to set yourself up to be tempted to borrow more and more.

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