A cash-based lifestyle differs fundamentally from the “buy now-pay later” approach to personal finance. What follows is a brief description of the fundamentals of a cash-based lifestyle:
Emphasis on future
A cash-based lifestyle is future oriented, accumulating cash now to realize expanding opportunities later. It does not compromise your tomorrows by committing future earnings to debt repayment. Because it emphasizes the future, it takes into account your strongest desires and those things that are most important to you and your family as expressed in the form of goals.
Live on less—save the rest
The focus of a cash-based lifestyle is on accumulation rather than consumption. To accumulate the cash reserve (savings) that is the foundation of a cash-based lifestyle, it is necessary to live beneath your means. That is where the extra money comes from to invest in savings.
The heart of a cash-based lifestyle is your budget. It is the blueprint for living beneath your means. It reflects your individual goals and the plans you have made to achieve those goals.
Goals that reflect your strongest yearnings, those needs and self-expectations that define you and your life, are what drive the cash-based lifestyle.
Time and compound interest
Time is used to multiply the value of accumulated savings. This is done through the powerful principle of compound interest. Invested savings grow, over time, by earning interest. The interest is added to the original principal and earns interest as well. It’s this interest earning interest, this compounding, that makes time such a valuable ally.
At a fundamental level, the cash-based lifestyle liberates through the absence of debt and the power of accumulated money. Income that hasn’t been committed to debt repayment is available to take advantage of opportunity or to deal with adversity. This puts you in control, which is the essence of freedom.
True monetary wealth is derived from accumulated assets particularly cash (savings), not from income (cash flow) or from consumption financed with debt.
A cash-based lifestyle requires that you save for both the short term and the long term (retirement). A good foundation for your personal finances is short-term savings equivalent to three to six month’s take-home pay. This is often called an emergency fund. Save for the short term and the long term simultaneously, but make short term savings a priority until you have accumulated the equivalent of at least a three to six month’s take-home pay in short term savings.
Save first, then spend. Pay cash for all purchases (with the exception of a house). Never deplete your savings for a purchase. Always leave yourself a minimum of the equivalent of three to six month’s take-home pay in your emergency savings.
Copyright 1996 K.C. Knouse
K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages