In our world of commerce, CASH is KING! And those who have plenty of it, know this to be true. Though millions of us conduct business daily on credit, in the end, it takes cash to reconcile our accounts.
Yet these days, most Americans are expressing more pride in their FICO score than the cash in their bank accounts. Why?
One reason is because most of us don’t have the level of cash reserve that promotes financial confidence. According to the 2016 Survey of Consumer Finances that is routinely conducted by the Federal Reserve, Americans hold a median of $7,000 in savings. Many of us (29%) don’t have any savings at all.
The other reason has to do with the credit industry. Financial lending institutions have taken advantage of every opportunity to convince consumers that they “need” credit to buy the latest-and-greatest “thing” on the market.
The multi-decade commercial slogan that says “No cash? No problem!” has done its job well. Whether it has to do with a large purchase, like a car, or something minute, like a candy bar, Americans have been made to believe that they can painlessly obtain anything they want through financing.
And so, as a culture, we have come to rely on consumer credit to create the illusive lifestyle we call the “American Dream.” And since the system allows us to temporarily fulfill our desires without cash, any FICO score above average gives us a reason to celebrate.
But a FICO score is not cash. It is a number ranging between 300 to 850 that gives a quick summary of your credit status. And depending on where you fall between these numbers, your potential creditor determines if you can be trusted with credit.
For example, a FICO score of 750 or higher is considered excellent. With this score or something close, you can keep shopping on credit even when you have little or no money in savings.
But is there a Backlash for Credit Dependency?
Of course, there is. There are significant financial and emotional downsides to relying on credit. When you use credit, you’re spending money you haven’t earned, and your dependency on the system keeps you trapped in a cycle of debt bondage.
This is good for creditors who continually seek to harness as many debtors as possible for asset-building, but bad for those who owe. For instance, while creditors profit heavily on your monthly payments, your bank account remains empty because of diminished financial resources. Over time, your financial position gets weaker while theirs get stronger.
Each year, a fresh batch of Americans file bankruptcy as a result of too much debt. And although the numbers have dropped to 750,489 in 2019, compared to 1.5 million in 2010, one bankruptcy is too many for the person who has to undergo the ordeal.
On the other hand, I can’t suggest living without the means of obtaining credit. Having at least one credit card is essential for transacting business such as car rentals, hotel reservation, occasional purchases, and more. Some companies won’t even conduct business with you without a valid credit card.
Furthermore, if you must have credit, it makes sense to maintain a high FICO score. That way, you’ll pay less interest on the purchases you make.
But as appealing as a good FICO score may be, it is nothing more than a validation of your credit worthiness—the approval to borrow other people’s money that must be repaid. And you will ultimately have to disburse valuable cash to settle the account.
Placing More Emphasis on Cash than Credit Will Do You Good
If you’ve been convinced that having cash is less important than credit, you should reconsider the idea. Notice that the same people who promote the notion can’t wait to get your cash through monthly payments, so they can increase their bank balances.
The other consideration is the less cash you have, the more you’ll end up relying on credit, which is what your creditors are hoping will happen.
The truth is everybody wants cash, and those who have some want more of it. Why?
There’s nothing that will boost your self-confidence and give your life more meaning than having cash in savings. With it, you can…
- Use less credit
- Pay off all debt if necessary
- Become a lender
- Handle any emergency
- Give to charity
- Build wealth
- Have your cash make more cash
- Become less dependent on the job
- Gain financial independence
In short, you’ll get to a position where you have more control over your finances, become less dependent on credit, and worry less about money.
But until you build a solid cash reserve, you’ll never get to experience this freedom. Instead, your continuous use of credit will keep you financially oppressed and frequently longing for an end to the ordeal.
The good news is that you can change this self-imposed, unprofitable financial behavior … forever, starting with the following two steps:
Starting today, decide to limit your credit usage and start building a solid cash reserve.
This may require some changes in prior habits, meaning putting off buying things that you think will bring you happiness. Remember the last “thing” you had to have because without it, your life wouldn’t be unfulfilled? Well…? Where is it now? Are you still paying on the debt?
You will have many more of those in the future. Don’t let them derail your financial progress. Put an end to the mad spending before it takes control and ruins your economic life.
The point is, you cannot put off saving money because you must spend (cash or credit) to buy something that will bring you momentary pleasure. If you’re older than 20, I’m sure you’ve come to realized that…
- You don’t have to have everything you see
- You must give up something to gain something
- Everything is not good for you
- Your money can only stretch so far
- If you don’t save…you’ll stay broke forever
Create a plan to put away 15-20 percent of your income each month. If this amount is too high now because of current financial obligations, start with 5 percent of your income. If this is still too much, begin with 1 percent and increase the amount gradually.
The most important thing is to begin the process right now. Building the habit of putting some money into savings each month, regardless of how little, is crucial for your success.
The goal is to build a 6- to 24-month cash reserve for emergencies. While doing so, you’ll get further guidance from me about how to secure your finances for growth.
Caution: Do not make the mistake of attempting to pay off your debt and then start saving money. This approach to wealth-building hasn’t been successful for those who’ve tried it. They simply never arrived at the point where the debt ends, and the savings begin.
The successful method is to do both simultaneously. Save some money each month while paying down your debt. While doing these, avoid creating more debt that will further exacerbate your attempt to succeed.
If you follow these recommendations, you will begin to take pride in your effort to save money. As you do a little, you’ll want to do more. You’ll also begin to see the oppressive nature of credit, which will give you the motivation to back away from the system. And although you may end up using credit occasionally, you will have some financial flexibility to control the system to your advantage.
The point is to get to a position where you feel good about yourself because you have a solid cash reserve. Your mere effort to get there will begin to raise the value of cash in your mind while diminishing your dependency on credit or a FICO score.
In time, you’ll have a big reason to brag more about CASH than a FICO score that could potentially lead you into financial trouble again and again.
To learn more about the burdensome nature of credit, building a cash reserve, and overall financial management, consider reading my new book: Pennies to Power: How to Use Your 20s to Gain Financial Independence for Life.
Thanks for reading.
What Are Your Thoughts?
Do you think frequent credit card use is worth the risk? Would you rather finance purchases so you can look apart or have a hefty savings account that will keep you smiling confidently? Does financing daily purchases make sense to you?