Borrow or Sell?

For many people, being short of cash is chronic. But we assume here that an investor is usually able to keep his expenses within bounds. And yet, no matter how carefully he plans, sometimes he finds himself needing to spend consider ably more money than his current income provides. Only a reckless person assumes he will never have to face this situa tion.

A man lacking financial assets has only one way to raise extra cash: he must borrow, probably paying a high interest or service charge. But a man with savings has more choice, for he can sell or redeem some of his investments. However, if he owns nothing that he can surrender without considera ble sacrifice, then borrowing may be the best way for him to raise cash. By putting up an investment as collateral at a commercial bank, he can borrow at less expense than the man without savings.

Suppose a man has put all of his savings into a life-insurance policy with a cash surrender value. If he surrenders that policy, then when he is ready to replace it he will have to pay the company’s heavy sales load all over again, and maybe he will be penalized further in his physical examina tion. So it is better for him to borrow on his old policy. Or suppose he owns nothing but common stock, and when he wants cash, the price level is so low he hates to sell; instead, he uses his stock as collateral for a bank loan. But with a well-balanced investment program, he would avoid get ting into this fix by the simple expedient of having part of his capital in a fixed-dollar investment, cashable without loss. Certified Financial Planner - Read More.