Borrowing It
Using money you haven’t got yet: what it costs, and why the same idea that grows savings works against you here.
Hatchlings · Ages 5–6
Borrowing means using something now and giving it back later.
You already know how this works. Borrow a book from the library and you take it back. Borrow a friend's pen and you hand it over at the end.
Money works the same way. Grown-ups can borrow money for something big, like a car or a home, then pay it back a bit at a time.
There's one difference. When you give money back, you usually give back a little bit more than you borrowed. That extra is what borrowing costs.
Try this: Borrow something small from a grown-up, like a pencil or a cushion. Give it back later with something extra, like a drawing you've done. That extra bit is the whole idea.
Fledglings · Ages 7–8
Borrowing lets you have something now and pay later, and that convenience has a price.
When someone lends you money, they want something in return for waiting. That something is interest, and it means you always pay back more than you borrowed.
That's the deal, not a punishment: you get the thing sooner, and it costs a bit more than if you'd saved up.
Sometimes borrowing makes complete sense. Almost nobody could buy a house by saving first. Sometimes it doesn't. Borrowing for something small you'd have forgotten about in a fortnight is an expensive way to be impatient.
Lots of families borrow money, and that's completely normal. What helps is knowing what borrowing costs, rather than being frightened of it.
Try this: Imagine borrowing £10 and paying back £11. Now imagine doing that ten times over. How much extra have you paid altogether? That's the price of not waiting.
High Flyers · Ages 9–10
Borrowing is Growing It in reverse: the same maths, pointed the other way.
When you save, interest works for you: your money earns money. When you borrow, interest works against you: what you owe grows by itself until it's cleared.
That single idea explains almost everything about debt. Imagine borrowing £100 at 20% a year. Pay nothing back and you owe £120. Leave it, and the next year's interest is charged on £120, not £100. The same snowball that grows savings grows debt — it doesn't care which side you're standing on.
Two things follow. The rate matters enormously: borrowing at 3% and at 30% are not the same activity. And time works against you, which is the exact opposite of saving.
None of which makes borrowing bad. Most people who own a home borrowed to buy it, and paying rent for thirty years instead isn't obviously wiser. Borrowing for something lasting, at a sensible rate, is ordinary. Borrowing repeatedly for small things at a high rate is where people come unstuck.
Try this: Take £100 at 20% and work out what's owed after five years with nothing repaid. Now do the same sum as savings earning 20%. The two answers are identical, which is precisely the point.
What's next
The next zone in Money World is Prices Go Up: why the same money buys less than it used to.