12 years ago when I moved to the USA, the idea of buying a car on credit or financing a big purchase was foreign to. Where I’m from and from the experiences I lived through as a kid, people saved money and bought outright what they wanted. Granted, the banking system wasn’t as developed as it is in North America and the culture was different but rarely would you find people opting to get in debt. It was a big shock to me to learn the intricacies of the financial system of the US and the money habits of the masses. In fact, for a while I fought the idea of ever financing a car. I thought to myself I would only buy cash when I was able to. Well, a dozen years later, I do not quite think that way anymore. Needless to say things have changed. Recently, while having a conversation with my brother who was visiting, I found myself defending the idea of buying a car through credit. But before you jump to the conclusion that I favor financing everything, let me stop you there. It is not the case.
My personal experiences and my few years working in the banking industry have taught me a lot about credit and subsequently cash. So, what is the wise way to use each one of those tool?
Cash is King!
As a nation, we are in a very bad financial state, both individually and as a whole people. The average American family is almost $140k in debt. This number includes mortgages which typically constitute the highest portion of debt. Nonetheless the cost of living is increasing at a higher rate than incomes so the likelihood that overwhelming debt will be eliminated is unlikely. Simply put, we are living well above our means. My career in banking showed me that the majority of consumers not only lack financial education but they painfully lack discipline. When working with clients, it would baffle me how a household making well over $150,000 would not be able to qualify for a loan. I had clients driving Porsche’s and BMW’s who would constantly overdraw their accounts. Why? Because they spend all their cash and overtime abuse their credit as well.
Here is my approach. It is impossible to have balance in your finances without following a budget. A budget will tell you what you have but more importantly, what you can afford. Start by looking at your income and set your limits. For instance, it could be 20% savings, 10% tithing and 70% for living expenses and investments. Whatever you decide to do, you must set limits and respect them. It will take time and self control to attain. If you are not financially stable today, it did not happen overnight. So don’t expect to fix everything in a week.
So, why is cash king? Establishing a budget permits you to live within your means which means you are not overspending. By the way, stability can only be a reality when that’s the case. This indicates to a banker that you can be trusted. When you live within your means and save appropriately, emergencies are no longer such because you have the funds available. You are also free of financial stress.
Why do you need a good credit score then?
Credit must be your #1 wingman.
There is an anonymous proverb that goes something like this: ‘if you move to another country and they walk on their head, you must learn to walk on your head’. The north American financial system is designed around credit. Unless you are a millionaire and have tons of cash at your disposition, you must have credit for some purchases. Essentially, you must learn to borrow and pay on time to build and maintain a good credit score. Again, maintaining balance here is quite hard without following a certain budget.
Over the past several years, I have barely used my debit card. Most of my purchases are done with a credit card which is then paid off weekly or monthly. With so many credit card companies offering rewards these days, it is recommendable to take advantage of those. However, the catch is being disciplined and spending only what your cash budget allows…and paying the balance off immediately.
While serving a client years ago, I ran into a road block because she did not have a credit history. She had plenty of cash but because she had never had a credit card, she was declined one. I had to reach out to the credit analysts and explain her situation before she was given a credit card. You may not have access to a banker who goes that extra mile. Build your well before you’re thirsty. Even getting a cellphone or moving to a rental property requires you to have a good credit score. Otherwise you are either rejected or offered ridiculously high rates. Forget ever being able to own a home if your credit score is horrendous.
The best fighter pilot at war still needs a wing-man to watch his back and double his attacks when needed. Managing your cash and your credit works the same way. At some point in your life on your way to millionaire status, the need for a good credit score will arise. Prepare for it now.
***Why go another day struggling with your finances? Make the right decisions today!