There is another little-known reason to always have some cash. Indeed, this asset can save and enrich you in various ways.
There have been short periods when cash, and cash equivalents such as money market accounts, have been the best performing assets. For short periods, they were better than stocks or bonds. We’ll look at this odd happening later in the book.
So having cash on hand will likely be critically important at some time in your life, even though it often seems superfluous to many Americans, who see stocks and bonds as the better place to put money because they generate greater rates of return.
But there is another factor one should consider about cash: A recent published report detailed how about half of American households carry a credit card debt that exceeds their cash reserves. This is insane. They are playing with fire. They should do their best to remedy the situation as quickly as possible because paying 20 percent interest is self-destructive.
That recklessness will compromise one’s ability to protect oneself in bad times or to take advantage of unique opportunities to improve one’s quality of life.
Starting at Zero
For instance, my wife and I were married in 1987. At that time, we had just about nothing. I think we had about $1,000 in a savings account. Not much of a savings account; not much of a protection against hard times we were about to face. I still had a used car. Almost anything happening to that clunker could have eaten up our savings.
Still, we dreamed of having our own apartment, which would be the first piece of real estate either of us would own. Renting an apartment, which we had both done previously, meant getting no tax breaks and building no equity. However, owning an apartment or house, under the American tax code, provides tax benefits and the ability to build equity as one retires the mortgage. We wanted to own a home for myriad financial and personal benefits.
In the first year and half of our marriage we rented and lived with a budget. We saved as much money as we could—about $15,000—and made sure we had no debt. When we tried to get a mortgage for our dream apartment in a better neighborhood, we started with a considerable disadvantage: Neither of us had an above average income and we had no mortgage history. We were employed but neither of us was a star in our respective professions. Broadway wasn’t calling my wife. The New York Times wasn’t requesting my services.
On the other hand, we also had one great advantage: We had no debt. This was the result of sensible spending practices—we didn’t spend money we didn’t have—combined with savings to ensure that bills were paid off every month even if one or both of us had a bad earnings period. The bank, after long consideration, gave us the mortgage. Not having any debt saved us; it compensated for our lack of big incomes. Otherwise, we would have never obtained the mortgage.
Low Incomes but You Still Get the Loan
We had barely made it because the bank was concerned about our relatively low incomes and our ability to make mortgage payments. However, we got the mortgage, in part, because we had a good credit record. We paid off debts promptly and didn’t have a lot of outstanding debt.
Finally, gracias a Dios, we owned some real estate. We owned a modest apartment in a nice neighborhood.
Don’t Worry about the Depositors; Worry about the Bank
By the way, the bank, which later went broke, got a good deal. We never missed a mortgage payment. Through pre-payments, we were able to retire our 30-year mortgage about six years early. That’s more than I can say about some of the financial institutions that handled our loan.
It’s ironic banks worry about people having trouble with their mortgages. In our case, it was the reverse. We had two banks holding our mortgage, the Dime Savings Bank and Washington Mutual, run into problems! Later we had a third bank holding our mortgage, J.P. Morgan Chase. Here the mortgage was retired. We actually owned a piece of real estate for the first time in our lives. And later, because we had some savings, we were able to buy a second apartment with cash.
Sensible spending combined with saving ensured that we achieved a goal that had eluded us for many years before our marriage: owning a home. Systematic savings over the first 18 months of our marriage was a critical factor since we just had enough for the down payment along with the costs of moving to a nicer neighborhood.
There’s still another reason for saving, which may go beyond the purely private. The reasons for saving can also be cultural and even an issue of national security. Countries with low savings rates are often borrowing the savings of other nations to pay their bills. The foreigners often buy the treasury bills of other countries, which frequently must offer a high interest rate to attract their capital.
But what if, suddenly, these foreigners didn’t want to buy your country’s treasuries? What if they took their savings elsewhere? That could trigger a national crisis, which happened in Greece several years ago. Then Greece had to offer very high interest rates on their treasuries yet few people would buy them because of the default fear. Greece had to beg money from other countries to survive.
By contrast, nations that have high rates of savings usually have adequate amounts of capital because a large group of people are saving. That generates money for investment, creating more new jobs than in countries starved for capital.
Saving for Independence
But let’s get back to you. Why should you save? Why should you always have some cash readily available? Why should you have healthy amounts of capital to shelter you and your family during hard times, which are usually times when prices advance at slow rates or, in extremely bad times, actually decline?
It is because the MoneySense culture is one of thrift. It is one in which a man or woman doesn’t want to be beholding to others. The person wants to pay his or her own way and never wonder what happens if a bank or a financial institution calls a loan or if an unexpected expense happens. The MoneySense person is ready for bad times. By contrast, there are countless stories of the millions of Americans who have nice life styles, who live in nice homes and drive cars, but they can’t even raise a thousand dollars on short notice. This is dangerous. What if your car or some vital asset breaks down? What if a loved one needs help immediately? Never let this cash poor situation happen to you. And, if it does, get out of it as soon as possible.
The MoneySense person can pay the emergency bill in cash or a credit card that he turns into a charge card. A charge card, unlike a credit card, requires that one pays off an entire balance each month by paying for the entire balance in the grace period.
This person then proceeds to re-build his or her saving. This kind of person believes in regular saving. That’s even if he or she starts with a modest amount because this person understands that the mighty oak tree grows from the little seedling.
A Little Is a Lot Better than Nothing
Even small amounts, consistently saved over long period, represent the first step on the road to independence. However, the person who consumes and consumes, with no thought of tomorrow, is on the road to poverty or a lower standard of living than if he or she had been more disciplined or more patient. This person may seem to have a bright future today, but tomorrow could actually be a disaster. That is as true as when a Victorian philosopher quoted at the head of this chapter recommended this idea over a century ago.
“Society at present suffers far more from waste of money than from want of money”, wrote Samuel Smiles. “It is easier to make money than to know how to spend it. It is not what a man gets that constitutes his wealth, but his manner of spending and economizing”, Smiles wrote.
“And when a man obtains by his labour more than enough for his personal and family wants, and can lay by a little store of savings besides, he unquestionably possesses the elements of social well- being. The savings may amount to little, but they may be sufficient to make him independent”. [See Smiles’ book “Thrift,” Chapter 2.]
The next step to financial independence, after one has sensible bill payment practices and sufficient savings to back them up, is to start investing.
But investing isn’t the same as saving. Unlike saving, investing means putting money at risk, giving oneself the chance to make, or lose, a good deal of money.
How does one go about this?
How does one get started investing?
More on this in our next chapter.
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