Is there a better feeling than paying cash for a large purchase? You save up and put that money away diligently until finally, you’re able to make that major capital purchase. But today, we’re going to ask: Is cash really king? Is that good feeling truly worth it?
When it comes to paying cash for major purchases, it seems simple: you save the money, and you finally go out and make the purchase. It feels good because you’re not spending money you don’t have, and you’re not paying interest or overextending your monthly cash flow. But how does this strategy actually impact your long-term financial picture?
The reality is, it’s hard to save money. When you’ve defied the odds and built up a strong cash position, the common approach is to spend it on something big: a car, a vacation, real estate. Paying cash means you avoid paying interest. That part is true.
But what’s not seen is the interest you don’t earn when you drain your savings to zero. You’re no longer earning compounding interest on that money. For about 20 years, when the Fed kept interest rates artificially low, savers didn’t feel the opportunity cost. But now, with rates returning to historical norms, we use an opportunity cost of 4% to 5%.
You might say, “But I’m not earning 4% to 5% on my savings.” And we respond “That’s a choice.” We educate our clients about how to position money to earn that kind of return without additional risk, while still maintaining liquidity, use, and control.
So much of how we use money comes from how we were taught how we saw our parents or role models operate. For example, there was a time when people paid cash or used checks to buy groceries. Now, most checkout lines don’t even accept cash.
My own father never had a checking account until he was 73 years old. He only opened one because Social Security required direct deposit. His philosophy was simple: if you can’t afford to pay cash, you don’t need it. Back then, cars were inexpensive maybe $600 or $700 so he’d save and pay cash. He never earned a high income, and when he passed, his estate was worth around $50,000, mostly from a $40,000 home.
That’s not bad, considering. But think about this: had he paid more interest strategically, he might have had three to four times that amount. He didn’t know any better. Like many of us, I was taught to use money in a way that benefitted banks and financial institutions, not myself. Once I shifted to thinking in terms of control, everything changed.
The problem with paying cash is that you never see the interest you’re not earning. That unearned interest vanishes silently, with no statement to remind you. We just assume that money is safe and available. But we don’t realize how compound interest builds over time, starting slowly, then steepening sharply with continued contributions.
The key to financial independence isn’t about paying things off or paying cash just because you can. It’s knowing you can if you choose to. That’s true independence.
Let’s look at a scenario. Suppose you have $100,000 in debt and $100,000 in cash. Your net worth is zero. Someone might say, “You’re paying 7% interest pay off that debt and look at all the interest you’ll save.” On paper, it makes sense. But here’s what’s not seen:
When you pay off that debt, your cash is gone. The day before, you controlled $100,000. The day after, you don’t. Your net worth hasn’t changed it’s still zero but your control has vanished.
So did you actually make progress? Or did you just lose flexibility and optionality?
We see this all the time when people receive large sums of money. They instinctively pay off their mortgage or other debts, especially if they bought term insurance and suddenly receive a benefit. It makes them feel secure but they’re overlooking the opportunity cost.
Yes, you maintained the mortgage payment before. Now, you’ve given up the capital that could have provided further leverage or opportunity. You may feel safe, but you’ve lost control and future earnings.
This reminds us of what Nelson Nash taught: “We finance everything we buy.”
You either borrow money and pay interest or pay cash and give up interest. It’s pay up or give up. There’s no middle ground.
So when it comes to big financial decisions, paying cash might feel good but it can secretly be holding you back.
If you’d like to learn more money strategies specific to your situation how you can get ahead and stay ahead visit our website at www.tier1capital.com and click the “Schedule Your Free Strategy Session” today.
Thanks for reading, and remember it’s not how much money you make, it’s how much money you keep that really matters.