Cash Is Trash
Two old sayings on Wall Street--Cash is trash and Cash is king. Cash is trash means it is stupid to be in cash when other assets are going up. If your main asset is cash when stocks are soaring then cash is trash. Cash is king if all other asset groups are going down and you have cashed out and are sitting in cash.
A stupid place to be but one that, it seems, many people place themselves is to have a lot of debt and a lot of cash. (Actually better than lots of debt and no cash but stupid nonetheless.) A big pile of debt in one corner and a big pile of cash in the other--the financial equivalent of comfort food.
Here are a few comments from a column I stumbled over that discusses this situation.
It only occurred to me recently that maybe, deep down, people not only like living on borrowed money, they've grown so accustomed to its seductive presence that they can't imagine a life without owing.
Not sure I agree with that but interesting that someone would even think it up. Also, it seems you are being 'conditioned' to live with debt.
Worse, young people are being trained to depend on debt before their adult lives even begin, says Tamara Draut, author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead." A growing number of students routinely take on five-figure and sometimes even six-figure debt just to get a bachelor's degree, notes Draut, who is also director of the economic opportunity program at Demos, a New York-based research institute.
"The normalization of student debt, I think, probably makes young people more comfortable with other types of debt, like credit-card debt," she says.
See what I said about that student debt? But what about having cash and debt--the trap?
The ho-hum $17,000 credit-card debt
While these numbers are always stomach-churning, they're not new. What is eye-opening now are those who are clinging to their debt. For these folks, debt has become such an integral part of their lives that they don't want to part with it.
I spoke to Susan Farr, 54, a lawyer in Illinois, about her reluctance to pay down her $17,000 credit-card balance -- even though she has the cash from a divorce settlement this past spring.
Understandably, her sense of security was roughed up in the year and a half it took to arrive at a settlement. With three kids in college, she amassed nearly $20,000 in various debts, which she consolidated on a zero-interest credit card last January.
"It just feels so darn good to have money in the bank after not having any for so long," Farr says. Yet she knows the cash is something of a mirage, because she intends to use the settlement money to pay off the card. "I've discounted the fact that I'm $17,000 in debt -- I think of myself as debt-free."
True, Farr's $200 monthly payments are going straight to principle -- and she plans to pay down the full balance on her card by December, before the higher interest-rate cycle kicks in -- but why pay rent on the debt instead of paying it off now?
Farr doesn't seem addicted to debt, not by a long stretch. She put down more than 50% in cash on her new post-divorce home and has all the property taxes for 2007 already in escrow -- on top of saving $1,400 a month for her emergency fund and short-term savings.
Yet she has a psychological need to hang on to the cash -- and tolerate the $17,000 debt -- for as long as she can, even though she could be debt-free today if she so chose.
Ok, so she needs a financial security blanket. But it doesn't make financial sense. What do you do?
But first another true confession.
Money in the bank vs. the bill in the mailbox
Dana Balansag, 30, feels the same way. A compulsive saver, she and her husband have about $24,000 stashed away in an emergency fund, on top of several thousand dollars saved for other expenses. (She asked that her city not be disclosed.)
Could she pay off the $12,000 balance on her car loan today, if she wanted? Sure. "But I'd rather have the cash in hand in case something comes up," Balansag says, reasoning that her three-year-old car has enough value that she could always sell it to pay down most of the loan if she had to.
She says it's worth it to her to keep paying $300 a month toward her car for the peace of mind she gets from knowing her nest egg will remain untouched -- even though at about 5% interest, she will end up paying $1,100 more for the car by the time her loan is paid off.
$300 a month is a lot to pay for peace of mind, misbegotten peace of mind as well.
So what to do?
But first one last true confession.
She'd gotten used to having the cash for an emergency fund, she wrote, and dreaded the idea of watching her savings dwindle.
"Is the psychological benefit of paying off the debt going to offset the return of my old anxiety of not having a cash buffer?" she fretted.
A better question would be: How much will it cost her to maintain her debt? At 6% interest and a 10-year term, she could end up paying over $5,300 in interest. Having cash and living with debt, even temporarily, seems like a recipe for futility at best and financial loss at worst.
Now for the answer. Expect a big letdown.
She finally decided to pay off her debt in the coming month. Other people in the forum applauded her, pointing out that once her loan is paid, she'll be saving even more money.
That's the point: Let go of the debt. When it's gone, your cash is your own again -- to invest as you please in the life you want now and the future you dream of. Living with ongoing debt, just because it's easy or you can "afford the minimum payments," is like living on borrowed time. Your life isn't your own until you own it.
Not a bad last line. Forget the article, remember the last line.
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