The magic word? Collateral.
Everything we do in finance is based on…collateral. When we buy a car with a loan, the car itself is collateral for the lender. When we buy a house with a mortgage, the house is collateral. When we get a loan for a business, there is usually some determination as to collateral to potentially back the loan. When we obtain a loan without collateral, we are asked to pay higher (or high) rates, since non-collateralized loans are riskier that collateralized loans.
Cash obviates the need for collateral, right? At least to the extent that the cash covers a need, and makes a loan unnecessary. And cash is, in essence, collateral.
The common approach to day-to-day finance is what I refer to as the “saw-tooth approach”. Imagine a carpenter’s saw, teeth-up. You add cash to your checking or savings account, then you spend it. You add cash to your checking account, then you spend it. Again and again. Up, down, up, down, up, down. The cash creates temporary collateral, then it’s gone. The cash has one purpose here, to cover a cost, or need. It isn’t working for us outside of that immediate need.
We try to take some of that cash and save; some are more able to do so than others. Paying the bills, large or small, is important. What if we could find a way to take some of that money and create an ever-growing collateral base? Would creating a growing collateral base improve our ability to purchase, to find cheaper loan rates? Would it provide financial comfort? Perhaps the larger (non-immediately repetitive) purchases would fall into this game plan? Purchases such as cars, vacations, homes, college funding, etc.? Retirement?
Let’s explore a game plan for growing collateral in the next post, “Traditional Yet Unconventional”.