How does “being penniless” sound? The only situation worse than that is to have no cash and be in debt at the same time. In that situation you cannot escape the debt until you get the funds to pay off the debt. And until you do, that debt will keep getting larger because of interest charges by the lender. So acquiring cash is indeed crucial. Without cash in hand your only reasonable options are to either sell something to acquire the cash or exchange something of value for relief from the debt.
You might inherit cash but that is a wishful game plan and most of us never inherit early in life, if at all. You might also win a lottery for modest to large amounts but the odds of doing so are very low. You might gamble and win at a casino or a racetrack. But even if you win at gambling eventually most people end up paying it back to the source over time. In selling something in desperation you likely will get less money for it than its full value.
Trying to exchange something with the lender depends on the situation. If the lender is a private individual they might accept some material item of value to them but knowing you are under duress the lender can squeeze you for something worth much more than the debt. If the lender is a bank they likely already have the item as collateral on the loan. You will forfeit it by the foreclosure process. Having cash on hand or readily accessible is crucial to controlling and eliminating debt. That’s one motivation for having as much cash available to you as you can manage to acquire.
A critical positive reason for having lots of cash is the enable maneuverability. Cash is king. Everybody is willing to accept cash – almost no questions asked. Regardless of your creditworthiness cash is never silent. Use of cash has a ring to it, real or imagined. Remember the noise of shaking a coin out of a piggy bank. Remember the “Cha Ching” sound of an old style cash register being opened? Remember that bell ringing in the slot machine when someone won a jackpot? And remember the bell ringing in your head if that winner was you?
Whenever you are backed into a financial corner you can escape by offering cash. Whenever opportunity knocks to acquire something at favorable cost, cash allows you to act immediately without incurring interest charges. Whenever a good financial decision requires cash to act on it you can do so. Whenever an opportunity arises to use cash to lessen your future debt dramatically, you have the means to take it. Let me mention some every day and not so every day (but valuable) examples.
You dine at a restaurant with a guest and either left your credit card out of your wallet or the proprietor does not accept your particular credit card. Being one who follows the Boy Scouts’ motto of “Be Prepared!” you always have enough cash in your wallet for such a potential circumstance. You rescue yourself from “washing the dishes” by using your cash. You avoid the embarrassment of asking your dinner guest to temporarily pay some or all of it by using your cash.
You are purchasing an automobile and want to avoid trading in an existing car. The car dealer will always be reluctant to make a sale for “100% financing” from the dealership, meaning allowing you to finance (borrow) the full negotiated price of the car. That’s considered “having no skin in the game.” The dealership is taking all the risk, should you default on the loan. Instead the dealership will require a minimum down payment. You need sufficient discretionary cash to do that.
A more interesting example involving an automobile purchase actually happened to me. Some time ago my daughter had a hurry-up need to purchase a car. Due to having less than stellar creditworthiness she was offered a pretty steep loan interest rate atop the somewhat high cash down payment. She telephoned me (from the dealership) to inquire as to whether I would either co-sign the loan or do the loan in my name – knowing my superb creditworthiness would lead to the lowest financing rate of interest.
Co-signing for convenience is something I never do (nor should you). It puts your name on the loan and if the other signer (who is supposed to pay the debt) defaults you are liable for the debt. Co-signing with purpose is also something I avoid unless I am absolutely sure I want to do it. Regardless, agreeing to co-sign for the car loan would be ineffective as her lower credit rating would still govern the rate of interest. My doing the loan alone would actually be illegal in some, if not all, other states). Financing a loan for an automobile for another person who cannot purchase it due to poor credit is not allowed and if a dealer knows this is taking place they will not sell you the car. That’s an example of an improper “straw purchase”.
A straw purchase occurs when a person (an agent) agrees to acquire goods or service for someone who is either unable or unwilling to purchase the goods or service them self. Straw purchases are legal except when the ultimate receiver of goods or services uses those goods or services to commit a crime with the prior knowledge of the straw purchaser or if the ultimate possessor is not legally able to purchase the goods/services.
Purchasing a firearm at a federally licensed dealership for another person can be illegal if improperly done. In most states, knowingly purchasing alcohol for an underage person is an illegal straw purchase in most states. I was unaware of this restriction on an automobile purchase. When my daughter suggested it to the dealer he advised her (and thus me) that he indeed could not and would not sell her the car that way.
I could sense how the dealer had put my daughter in a bind and left her feeling she was at a dead end. I said to her “Ask the dealer if he would accept cash.” She said “I don’t have the cash needed.” I said “Just go and ask him.” She quickly came back on the phone and said the dealer had smiled and replied “Cash is always good!” I said “Tell him you will pay in cash so please hold the car for you until tomorrow.”
The next day I went to the dealership with her and paid cash for the car, purchasing it in her name and my name. In time, we worked out a fool proof way that she could and would repay me over time (which she did). We signed a short contract between us. I would not have done this had she had not long ago built up my confidence that she would pay me back. I also added a bit extra to the deal so there was something in the deal for me.
I charged interest at 1% over my bank savings account rate. Part of me also wanted to “outsmart a car salesman.” Above all, I wanted to illustrate to my daughter the necessity for and maneuverability of having cash at hand.
Cash also allows one to back out of an existing loan deal if a better one arises. A positive change in the national economy can cause a drop in loan interest rates. An improvement in one’s credit rating can lead to qualifying for lower interest rates than previously possible. With cash on hand one can act to negotiate a more favorable alternative loan (with either the same lender or another lender) and then pay off an existing loan in full. If either desired or necessary, an in between step to conserve cash is to partially pay off an existing loan outstanding balance and obtain an alternative lower cost loan for the remaining amount of money.