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.
