Is Cash Still King?
When it comes to personal finances I have a confession to make, I am rather old fashioned. Now don’t get me wrong, credit cards, bank loans and borrowing money have their place but if a person can’t survive on what they earn then eventually they will end up in financial strife.
Anyone who sees their borrowings or credit card debt increase has a twofold problem. Not only are they unable to live within their means but because their debts are increasing their interest payments are increasing as are their minimum payments leaving less and less to live on. The sooner they can start resolving the debt problem the easier it will be.
Following on from the last post, most people can find $3,000 to pay someone to help them when they need to. In fact they can find more than this because the people they are paying to help them also start paying off their debts. So why can’t people find this money before they get into financial trouble?
Invariably the problem is their lifestyle, by that I mean they are just indulging themselves or buying things that they simply can’t afford. That might be a new HD television, an overseas trip or possibly a new car. These are often one off major expenses and if they were truly “one off” then maybe it wouldn’t be a problem. Unfortunately, these “one offs” might be why the money is borrowed to start with but they are not the reason they are drowning in debt.
They are drowning because they are spending more than they earn on day to day living and yes, day to day living includes interest and debt repayments. As shown above, when people need to they can find ways to save thousands of dollars. So why do people get themselves in trouble by spending so much?
Almost every guru has their own opinion. The wall Street Journal, in an article last year, put forward a number thoughts. Make of them what you will. http://www.wsj.com/articles/
The comment about rising house prices rings true. Some would say Australia is in a prolonged housing bubble. When house prices were rising at their greatest everyone felt rich and were spending their winnings. Unfortunately, they were spending their increased house equity on day to day living. Once house prices stopped rising at ridiculous rates they all had to cut their spending to survive.
To me the comments regarding willpower are most interesting. A Stanford University study divided participants into two groups: those who thought willpower was finite and those who thought it was abundant. During stressful periods, people who believed willpower was finite reported more impulsive behaviors, including overspending.
Which raises an interesting question; if someone knows that they lack willpower with regards to spending why do they walk around with an almost unlimited amount of money in their pocket? No, not cash, money. At least until they have spent so much that those cards are all but worthless.
Think about it, most Americans have 3 or 4 credit cards in their purse or wallet. They also have cards attached to their bank accounts and possibly even debit cards. On any given day those cards have access to more than enough money to buy whatever they want, whenever they want, for now.
So why do people who know they lack willpower open themselves up to such temptations?
For some people it is a necessity, I know of a friend who lives on the road going from hotel to hotel. Without such cards their life would be much more difficult. For others it is as if the money is burning a hole in their pocket. They indulge themselves through their lifestyle. Nothing too big, a coffee a day at work $1,300, take out for the family once a week $1,500 and so on.
It is a bit like the straw that breaks the camel’s back, nothing by itself is a big deal but when you add it all up you have a problem.
This is where I think cash or similar has a significant advantage. If you put $100 in your wallet/purse and after just a day all you have is change in your pocket then you have a pretty good idea how much you just spent. If all you do is swipe or wave a card then that feedback is lost.
Now I accept that cash is not for everyone. Next time we will look at the alternatives.