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Lately, this is a question I've been asking myself, and I don't know which would be best, both on short term and long term.

Let's suppose I have around 20,000 to 25,000€ in my savings account (which give some interests over the year). So far I'm still a young worker, and I'm able to save something like 500 to 1,000€ per month.

Now, let's suppose I manage to find an asset I want to buy (an extremely cheap home for example), and its value is around 20,000€ (so I can definitely afford it).

If I want to buy it, I've got two choices:

  • I could meet my bank and loan some money, this way I could buy it and still have some spare in my savings, just in case. However, loans are more expensive on the long term.

  • Or I could just withdraw all my savings to buy it, this way I won't have to pay back a loan. However, I won't have anything left for the first few months, which sounds dangerous.

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I don't know your specific situation outside of what you have provided, but I want to add some things to consider:

  • there are numerous home ownership costs that you may not be aware of. Read the first couple articles from a Google search on unexpected costs of home ownership for a small sample

  • purchasing outright this would heavily deplete your savings rate. Depending on your risk tolerance, a big expense in the first few months could knock you out and put you in a situation where you might have to sell the home

  • as a younger worker: ask yourself what your exit strategy/5-10 year plan. Do you plan to live/work in the same place while you own this home? Are you living in a place where jobs are plentiful and the economy is good? If you found a higher paying job elsewhere, would you rent out or sell your home? If you want to rent it out, are you ready to be a landlord?

  • getting a loan may build your credit, even if it costs more: at least in the United States, your credit report is built upon loans that you have acquired. A mortgage that you can easily afford (with a history of on-time payments) is an excellent credit building exercise.

For a best of both worlds, you can get a loan and just make extra principal payments. There are numerous calculators online that will help you figure this out... here's the top one when I search for extra principal payment calulator from Bankrate.com.

Hopefully this helps you guide you a little bit more on what works best for you.

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  • +1. Also, I would say that Allen's 4th point (build your credit) could really be helpful (at least in US and Canada) in the future since you are young. IMO, if you don't mind paying a little bit more, I would recommand taking a loan and build your credit or even use a certain % (let says 30-40%) of your saving and contract a loan for the rest, so you would still have a back up.
    – Gainz
    Dec 19, 2018 at 22:08
  • I know this answer was posted a long time ago, but could you explain a little more in depth what "building a credit" means? Is it some way of showing that you have a good reputation of paying back your credit?
    – Clockwork
    Nov 28, 2020 at 15:38
  • "Building credit" essentially means creating a record of credit usage. Most companies will use a proprietary formulare based on a combination of the following: Payment history Credit utilization ratio Types of credit used How long you've been using credit Total balances on all debts you owe Public records like bankruptcies The number and recency of credit accounts you've applied for There are multiple guides online that can into different methods to build credit.
    – Allen
    Nov 30, 2020 at 7:53

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