Spending Cash Is the Same As Borrowing If You Have Debts

by Mike Holman

A common financial strategy for someone who is trying to pay off their debts is to allocate some of their savings into a different account which might be used for some sort of fun.  The idea is that while you want to focus on paying off debts – ie have some gazelle intensity, you should also be realistic about your focus and give yourself some rewards along the way to stay motivated.

I think this is a perfectly reasonable thing to do although I would argue that someone who has excessive debt has already had their fun and then some.  One problem however is that sometimes people will make a purchase saying that they “saved for it” or “paid cash for it” which makes it a financially responsible action.

The fact is that if you have money in cash instead of using it to pay off debts, then you are essentially borrowing that money at the rate of your highest interest rate loan minus the net amount of interest earned on the cash (which these days is jack squat).  This is the logic behind not having a cash emergency fund (or not having a large one) since you are paying a high premium to keep the money in cash.

I’m not suggesting that everyone who has any debts shouldn’t buy anything non-essential until the debts are gone, nor am I suggesting that you can’t have some fun along the way.  What I would suggest is that you shouldn’t base any purchase decisions on how much cash you might have on hand but rather on your overall financial situation which includes your goals.  At the very least, don’t pretend that some of your money is “special” and doesn’t apply to the rest of your finances – it’s all one big bucket of money and debts.

If you are committed to paying off some or all your debts before taking any rewards then you should stick to that goal.  Having some cash in a different account or receiving some sort of bonus shouldn’t affect your strategy at all.  This is not to say you can’t change your goals (I change mine all the time) but don’t cheat on your financial plan

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