Is cash management just about meeting our spending needs?
While our expenses certainly need to be provided for, are there other important uses of our money that should be a part of our lives?
I believe there are three specific uses of money that we all should keep in mind as we think about how to utilize the funds we have available. All three are important for different reasons and all three should be included in a healthy personal financial plan.
Use #1 – Give it away
To many, this use will seem a bit strange. Winning at personal finance includes giving money away? Yes, it does.
As a Christian, the concept of giving money away is a central tenant of our faith. Not to get too theological here, but God calls on us to cheerfully give away a portion of our income in recognition that it all comes from Him. Yes, I worked to earn the money, but He gave me the ability (through my knowledge and health) to make a living. To be clear, we’re not saved by tithing and we don’t live under the Old Testament law any longer, but it’s a great practice to continue. In fact, tithing is the one and only area where we are specifically directed to test God (Malachi 3:10). I’m up for the challenge and He is, too!
Is giving to others valuable to those who don’t practice Christianity? Absolutely! It’s well documented that giving to others benefits the giver as well as the recipient. Here are just a few ways:
• Increases happiness
• Reduces stress
• Reduces depression symptoms
• Improves the community in which we live
• Potential tax savings (Hey, I’m a CPA. I have to include this one.)
• Reduces the power of money in our lives
• Increases gratitude
This past Christmas season, my wife and I learned of a local family that was struggling financially and had no money available to purchase presents for their kids. Now keep in mind that I hate shopping in general and really dislike battling crowds struggling to finish their holiday shopping. However I had the best time going down the toy aisle at our local Wal-Mart and picking up a few items for them. As corny as it sounds, helping your neighbor really does help us, too!
Use # 2 – Saving
Saving are required to meet three specific needs:
1. Emergency use
A significant reason for personal debt is the lack of an adequate emergency fund. Perhaps you were involved in a car accident. Maybe you incurred an unexpected medical emergency. Or you lost your job.
Situations like these often arise suddenly and without warning and the financial consequences can be devastating and long lasting. The antidote to the financial stress that can easily come with situations like these is having an emergency fund.
Many financial advisers recommend we have three months to one year’s worth of expenses set aside in a safe, FDIC-insured account. This range can be narrowed down depending on your specific circumstances.
2. Purchasing large-ticket items
Savings are also great for purchasing big ticket items like cars, furniture, college tuition and home improvements and repairs (ex. a new heat pump). There are two great benefits of using savings to pay for such items versus using promotional offers (like 90 days same as cash):
a. When using cash, you don’t get hit with unexpected interest charges from fine-print financing terms. The vast majority of promotional offers are NOT paid within the term of the interest free period. I know you meant to, but you get busy and forget a payment is due, which is exactly what the lender is counting on! Usually these deals include terms that allow the lender to go back to the day of purchase to calculate the finance charge. Ouch.
b. When you use savings to purchase a big-ticket item, there is often (but not always) an opportunity to get a cash discount. We’ve personally received discounts on our insurance premiums, orthodontics, gym membership and even newspaper subscriptions because we paid up front with cash. While individually the amount saved may not be huge, they can really add up over time! Larger savings are possible when using cash to pay for furniture or used cars.
3. Wealth building / retirement
The percentage of workers covered by a pension plan at work has been steadily declining. According to the Department of Labor, “From 1980 through 2008, the proportion of private wage and salary workers participating in DB pension plans fell from 38 percent to 20 percent”. Like it or not, today’s American worker has to take more of the responsibility to save for their retirement than did earlier generations. Whether through a retirement plan (like a 401(k)) at work or on your own (in an IRA or taxable brokerage account), we need to save for retirement!
Eventually, either by choice or physical necessity, we will most likely have a period in our lives that won’t include gainful employment. With the average Social Security benefit in 2016 amounting to only $1,341 per month, clearly an additional source of income will be needed for many of us. Saving today for those future needs is the answer!
Use # 3 – Spending
I’ve grown accustomed to eating every day, having clothes on my back and a roof over my head, so I’m in full agreement that this use is important to us all. The problem is that for many of us, it’s the only way that we use money. In fact, many American families spend more than they make (thus the reason for the high debt situation in our nation)!
To get spending under control, the best method I’ve seen is to prepare a spending plan each month. With practice it gets easier and the benefits are immeasurable.
I am also a big advocate of limiting your lifestyle inflation. Simply put, as your income grows over time, limit your spending growth to only a portion of the income increase and allocate the rest for Uses #1 and #2. In my personal situation this was a significant reason we’ve been able to grow our investment portfolio. It takes time, but it is time well spent (or said better, it is time well invested!).
A well rounded personal financial plan should include all of these uses. It makes for a much better financial life and higher enjoyment of the resources you have available, both for today and the future!
What do you think of these uses? Any others you’d add? What kind of challenges can arise in trying to meet all three?