Some people say credit is kind and others say cash is king. What do you think and why?
As I travel down my own path to financial independence I often think about which one ultimately comes out on top. I’ve broken down the power in each and I’d like to share with you what I’ve learned and discovered over time.
Cash is actually super powerful! The amount of cash available to you at any given time determines what you can do or buy. It determines how much you can spend and how much you can save. Your liquid cash is the fuel to your financial flame. Nothing in life is free, someone’s paying for it somehow someway.
All true but…
Credit is pretty powerful also, and the power is in the leverage it gives us. If I have $100,000 sitting in a bank account I can either buy one investment property that costs $100,000 or I can use credit to leverage that money by way of a home loan. Now I can purchase several investment properties with the same amount of cash.
With that being said…
Credit is not possible without cash. Looking back on my investment property example consider the following:
- The bank will not lend me any money before first verifying that I have my own money and that I can afford to pay the loan back over time. They don’t expect me to pay the loan back with borrowed money. I need to show the bank that I have cash (or the income) to make good on my payments.
- With a home loan (or any other type of loan/line of credit) comes a monthly payment. I need cash for that. You need enough cash or income to maintain your monthly obligation to each lender.
I still haven’t decided who takes the crown here but I am leaning heavily towards cash. Credit is a tool that people with cash can use when they want to stretch that dollar a bit further over time. Don’t forget credit comes at the price of interest rates. When we think about credit in the context of “having good credit” cash still plays a huge role. You need to first have cash (or income) to qualify for any type of loan and be able to keep up with payments.
I leave you with this; be mindful when considering using credit. It’s important to first understand the long term affects it will have on your financial situation and how much it will actually cost.
For now the debate continues…