Saving Habits 101
30 Day Writing Challenge
More countries around the world are embracing the concept of borrowing money, especially as national economies become intertwined with one another. For example, it used to be well off families sent their children abroad to get degrees, but now you do not need to have the money upfront because there are international private loan companies that will loan you the money to go to university in a different country.
I can only imagine how many doors this has opened for modest families from countries such as India or China* who dream of sending their children to better universities in the US, as an example. This has even opened doors for American students who want to pursue degrees in more affordable countries, such as the UK or Canada but do not have the money up front.
While loans and loan programs have closed gaps in education, the housing market and other big ticket items worldwide, “borrower’s culture” is causing us to lose all sense of how much money we actually have. As a result, we are constantly spending money we don’t have.
The Financing Brand found an interesting study by Filene on borrower types. The study is geared toward credit unions and offers meaningful insights on the mindset and decision making process of borrowers. According to the study, Convenience is king.
Convenience is king. Consumers will choose the path of least resistance when obtaining loans, even if the deal isn’t as good. For instance, a desire for instant gratification explains why people will jump on dealer financing when buying a new car. It’s critical to make the lending process easy and streamlined.-The Culture of Borrowing and Debt by Filene
Essentially, this is telling us that people like to borrow money when it is convenient and offers instant gratification. Why wait till payday when you can buy those nice shoes today with your credit card?
Convenience Cash is King
If you want financial freedom, the first thing you have to do is kill the mindset of Convenience is King. That is what credit card companies and loan companies sell to you so that you borrow more. To achieve financial freedom, on the other hand, you have to engrave into your mind that Cash is King.
Cash is King* is a way of life. It is the principle that you do not live above your means and you do not spend money you don’t already have. If you live by this principle, you will save yourself from the constant cycle of buying on credit, paying it slowing, accumulating debt, buying on credit, paying it slowing, accumulating debt. Consider this scenario— it’s Thursday and Sara and Caroline both are broke but they get paid tomorrow. The women have differing financial habits;
Convenience Is King
After work, Sara goes to Happy Hour with friends, she doesn’t have any cash so she buys a drink with her credit card for $12.
Afterwards, Sara goes to the mall and sees some curtains on sale for $49.99, since it’s such a good deal, she buys them with her credit card.
When Sara gets home she sees she has uncooked chicken in the fridge and decides she’s too tired to cook so orders in using her credit card ($30).
Cash Is King
Caroline is invited to Happy Hour but declines because she doesn’t have any money and suggests they go to brunch this weekend.
Instead, Caroline walks around the mall and sees some curtains on sale for $49.99. She doesn’t have any money so decides to come back on Saturday after payday.
When Caroline gets home, she finds some uncooked chicken in the fridge and throws it in the oven to make with some rice.
At the end of the day, Sara racks up close to $100 in credit card charges for things she didn’t really need or could have waited to purchase. The next day she can either pay the full $100 balance that she spend the day before, or she can pay the minimum due and risk accumulating interest, either way, she is out of $100 or more.
Meanwhile, Caroline didn’t spend any money, she got paid on Friday and decide she didn’t really need curtains (because the lure of instant gratification was gone) and was able to pay cash for brunch with her friends on Sunday. In the end, she didn’t owe anything on her credit cards.
The Bottom Line
The moral of the story is pretty clear cut, yet, in the world we live in, it is easier said than done. Changing one or two habits can make a world of difference. 1. If you don’t have the cash, don’t spend it. HARD STOP. 2. Only borrow if it is a true necessity and if you can comfortable pay it back without straining your budget. To the latter point, the Filene study also outlined several different borrower types. I think the best type by far is the Balanced—those who do not borrow often and never more than they can afford, but if they do borrow, it is for good reason.
*China and India send the largest amount of international students to the US.
*For the purposed of this post, cash refers to paper money and money in your checking account.