“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope

The problem

A lot of people seem to think credit is the reason the global economy is in such a mess and cash is king. While part of that might be true, I don’t think things are that clear-cut. Firstly, debt can be good as long as you know how to use it. That means paying off the full balance on your credit card every single month or else not having one at all.

Secondly, amassing as much money as possible won’t solve all your problems. It doesn’t make sense to have a stash of cash sitting in a savings account earning measly returns when you’ve got a mortgage (or two) on your house charging interest at twice that rate. A lot of people don’t make this connection. They don’t understand that increasing income (in a savings account) and decreasing expenses (on your house repayments) is exactly the same thing. They get stuck in what behavioural economists call “framing”, i.e. falling into the trap of viewing the same thing differently just because it happens to be phrased a little odd.

The solution

So, what should you do? One recommendation that might not go down well with a lot of people (like most new ideas do) is to forget about having an emergency account. Instead, set up a home-equity line of credit, which you can then use as an emergency reserve. Obviously that means whatever would have gone into your savings account should go into your house. Blowing it elsewhere defeats the point.

Another idea is to pay your instalments once a week instead of once a month, effectively resulting in an extra payment each year. For example, instead of paying $1,000 per month, you pay $250 dollars per week. This means that instead of paying $12,000 per year ($1,000 dollars x 12 months), you pay $13,000 per year ($250 dollars x 52 weeks). The extra $1,000 “amortised” to your mortgage means you pay it off sooner and save on interest. Now doesn’t that sound doable?

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