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Strategy 1: Immediately start setting aside a portion of their current income each month to build up a fund to cover their expenses during the furlough. However, they find it difficult to reduce their current spending and end up saving nothing.
Strategy 2: Apply for a small personal loan or a line

It is important to distinguish between the inability to save and the inability to borrow. Being unable to borrow is typically an external constraint imposed by others, such as a bank denying a loan. In contrast, the failure to save is often an internal issue, such as a lack of willpower, since saving is a form of self-insurance that does not require the participation of another party.

Distinction Between Saving and Borrowing Constraints

An office worker learns they will be furloughed without pay for one month, six months from now. They consider two potential strategies to manage this expected temporary drop in income:

1.  **Strategy 1:** Immediately start setting aside a portion of their current income each month to build up a fund to cover their expenses during the furlough. However, they find it difficult to reduce their current spending and end up saving nothing.
2.  **Strategy 2:** Apply for a small personal loan or a line

Analyze the following individual's financial situation. Identify the two different financial constraints they encountered and explain the fundamental difference between them based on their source.

Analyzing Financial Constraints

Match each scenario with the type of financial constraint it best represents.

An individual knows they will need to pay a $500 car insurance premium in three months. Despite having enough monthly income to set aside the necessary funds, they consistently spend their entire paycheck on immediate wants and find themselves with no money saved when the bill is due. Is this situation better described as a saving constraint or a borrowing constraint? Justify your answer by explaining the key difference between the two.

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