It’s not really well know where the term “Cash is King” came from. If you Google it most of the references you will find will be in relation to running a business or investing. From my own personal finance experiences I have found the cash is king concept an important perspective when obtaining personal finance success.
I guess I have always liked the term cash, which is why I use it often at FTP.
For clarification when I say cash I mean saving money. Building up your savings account with cash to create opportunities as you progress down the road to financial independence.
To me cash is just a more powerful way of saying you’re saving money, it invokes an attitude, a level of respect, an acknowledgment that you’re in control of the situation.
For example: if you buy lunch for one of your friends you can say, “I got it, I have cash” or you could say, “I got it, I’ve been saving money” the latter is just not quite the same, it’s rather…blah.
Regardless of how you want to say it (I’ll stick with cash), saving money or saving cash – having money in your savings account is an important aspect of successful money management.
So how does cash create opportunities as you travel down the road to financial independence? Why is cash, king?
As I have discuss often in my eBooks, the road to financial stability and success is a step-by-step process. Depending on where you are with your own personal finance story, cash can have a significant impact on how successful you will be.
Here is how saving cash can impact your ability to be successful and create opportunities for yourself.
If You’re Stuck in the Debt Trap Trying to Fight Your Way Out
Having cash is critical to the success of being able to pay off debt and progress to a debt-free environment. Why?
One of the paramount factors to getting out of debt is the ability to stop the process of taking on more debt. Unanticipated emergencies are one of the most common circumstances that keep people in debt as they are working hard to get out.
It can be one of the most emotionally defeating aspects about the process of paying off debt. You start making progress paying off your debt only to have an emergency come up that forces you to replace the debt that you just got done paying off.
Emergencies like the car breaking down, the water heater going on the frits, or maybe it’s an unexpected job loss. Not having an emergency fund, not having cash will keep you in debt and force you to repeat the same debt cycle over and over again.
The best advice is that as you work your way out of debt by budgeting and using a debt pay off strategy like the Snowball Method, is to also systematically build up an emergency fund. I personally recommend an initial emergency fund of $1,500, the sooner you can save this amount the faster you minimize your chances of an unexpected emergency putting you back in debt.
- Break the Debt Cycle, Establish an Emergency Fund – FTP Cash Ladder Concept
- Why You Need an Emergency Fund
Remember, no cash stay in debt, start saving cash manage your way out of debt.
If You have an Emergency Fund and are Progressively Paying Off Debt
Once you reach the point where you are successfully managing your way out of debt and consistently saving cash, then the next step is to save even more.
This is the stuff most personal finance books and blogs don’t talk about. It’s not catchy or colorful, but it is an important part of continuing to create financial stability and independence.
When you reach the point where you’re methodically paying off debt and saving cash, when you have exceeded the money you need for your emergency fund, there are a whole bunch of money-saving opportunities that start to present themselves. Opportunities to save more money.
Saving on Insurance – when you have cash in the bank you have the opportunity to increase your deductible on your home or auto insurance – or both. Increasing your deductible because you have the cash to cover emergency situations allows you to lower your insurance premium.
Recent studies have shown you could save as much as $150 per year on both your home and auto insurance simply by raising your deductible.
Buying a Car with Cash – When you’re in debt you probably never thought about buying a car with cash, but as you save cash you start to realize that this opportunity might not be as far off as you once thought.
Most will have 6-7 vehicles in their lifetime. If you’re taking out a loan each time you need a car you’re going to be spending a lot of extra money.
Buying a car with cash saves you money on interest payments, and provides an opportunity for you to lower your insurance premiums. In addition, if you can buy used you will potentially save thousands of dollars on depreciation costs in the first five years.
Consider this, the average car payment in the U.S. is $450, who wants to make that car payment the rest of their life?
Recognizing New Opportunities – When you have cash in the bank your ability to recognize other money saving opportunities increases. Getting a great deal on your kid’s school clothing before the school shopping season even starts, buying food items in bulk, purchasing a much-needed refrigerator heavily discounted at Sears – these are all money-saving opportunities when you have cash in the bank.
Like I said, these aren’t flashy or commonly discussed money saving topics, but they are real. And guess what? You will only be able to take advantage of these opportunities if you can save cash.
You’re Out of Debt, Now What?
If you reach this stage where you’re almost out of debt or out of debt and have saved cash, then more opportunities start to present themselves. All that cash in the bank will allow you to start thinking long term.
On a paycheck by paycheck basis, you can now start to consider saving for retirement through an IRA or 401(k) plan. You have reached this stage because now that you have cash in the bank, you’re less concerned about your paycheck on a weekly basis.
You get creative and your ability to tolerate risk increases, because guess what, you have cash in the bank. So investing, to make more money with the money you already have is now a possibility.
Kids’ education, a new place to live, starting your own business to make more money… the list goes on and on and the opportunities are endless. All because you have cash in the bank.
- A Simple Way to Start Investing – The Bucket Strategy
- 3 Reasons You Should Contribute to Your Employer’s 401(k)
- What is an IRA
- How to Simplify Your Personal Finances for Success
So is Cash King?
I would argue that regardless of where you are in regards to your own personal finances, the ability to save cash is a cornerstone of success.
Some may challenge the benefits of saving cash. They may argue from a more technical perspective that credit card interest rates are higher than savings account interest rates to pay down debt first. Or they may recommend investing any extra cash you have in the stock market to make more money.
There is some truth to these arguments, but in my experience, successful money management has always been about saving cash. Cash provides stability and a foundation for creating more opportunity.
Regardless of where you are on your journey to financial independence consider cash king, and the next time you go out to lunch with your friends say “I got it, I have cash”.
- FTP Simple Investing eBook
- Lifestyle of Opportunities (video)
- Kevin Recommends – Book Reviews and Money-Saving Products
Do you think saving cash is an important part of creating financial success? Comment below.