Jun 12, 2013

Principle 4: Cash is King

A lot of personal finance authors do a great job encouraging their readers to follow the "big 3."

1. Build up an emergency fund of 6-8 months of expenses in a liquid savings account
2. Fund retirement accounts (employee match in 401k first, followed by ROTH IRAs)
3. Focus on increasing savings rate into these retirement vehicles over time

Having said that, I feel there is a need to not lose sight of the power of having an even larger pile of cash available in money markets or checking accounts than 6-8 months of expenses.

My wife and I are currently in the market to buy a home, and sure are glad we prioritized saving for a home down payment (well beyond the commonly recommended 20% of purchase price).  Not to mention, a lot of my clients use financing to purchase automobiles, a tool we have not yet had to use due to quite a bit of good fortune and agressively saving.

Here are a few quick and dirty pieces of advice I have for anyone debating whether or not to use credit to finance a purchase.  There will be some naysayers that feel using debt can increase returns via leverage, or the added liquidity you get when you use credit, but these are MY beliefs, and I share them to hopefully provide an honest opinion to someone unsure about their options.
  • Pay cash for everything.  If you can't pay cash, you can't afford it
    • (exception: house and education)
  • But, be conservative.  When using a mortgage to purchase a home, get 20% down and no more than 2-3 times your gross annual household income
  • Buying a bigger house isn't an investment its a lifestyle choice
  • Get out & stay out of debt
  • Avoid spending for "points" or "miles"
  • You do not need to carry over a balance to increase your credit score
  • Major corporations self insure, so should you its cheaper (exception: Home, auto, medical).
    • example: Company I work for experienced fire damage, we were "self insured" and gladly paid for the repairs. 
  •  Having liquidity is an important piece of any financial plan...see definition of emergency fund
As the economy continues to recover, housing prices boom, and the temptation to borrow money to finance a more lavish lifestyle becomes increasingly difficult to resist, find a way to revisit your written Investment Policy Statment, and Stay the Course!

Prosperity and wellness to you and yours,

Tortoise Banker


  1. We don't buy anything unless we have the cash for it either. The wife did finance her vehicle for 0% but it was paid off in 5 years. We have no debt right now and the mortgage is as good as paid simply by following simple rules of spending less than you earn and paying cash. Great post.

  2. Good tips. Using card instead of credit card really helps. And spending less that what you earn helps a lot more.