Author K.C. Knouse agreed to discuss his book: True Prosperity: Your Guide to a Cash-Based Lifestyle with LiveOnCash.com.
LiveOnCash.com: Why is it so easy for people to get caught up in debt?
K.C. Knouse: We live in a “get it now” society. Abundant, easy credit makes it possible to get things now even though we don’t have the money to pay for them. As loan payments accumulate, there is less cash available to buy things, so more debt is taken on to get what is needed or wanted. This, in turn, leaves even less cash, and so more debt is needed to continue to buy things. Debt leads to more debt. This is what I call the cycle of debt.
LiveOnCash.com: How do people get out of debt?
K.C. Knouse: The simple answer is to quit borrowing. If a person quits borrowing and makes timely payments on the existing debt, that debt will eventually be paid off. The person will then be out of debt. Of course, how to manage without continuing to borrow is the real problem. That is where a cash-based lifestyle comes into play. It makes it possible to live on cash while debt is paid off and beyond.
LiveOnCash.com: What is a cash-based lifestyle?
K.C. Knouse: It took a whole book ( True Prosperity: Your Guide to a Cash-Based Lifestyle ) to describe a cash-based lifestyle in detail. However, in a nutshell, a cash-based lifestyle is simply living and prospering on cash – paying cash for everything that is purchased with the exception of a house (there may be a few other exceptions). In a cash-based lifestyle, interest is earned on savings rather than paid out on debts. Habitual saving replaces compulsive spending. Accumulation of cash takes precedence over consumption.
LiveOnCash.com: How can the average family afford to pay cash for all purchases?
K.C. Knouse: If they can afford to repay loans with interest, they can afford to save and pay cash. Paying cash is cheaper in the long run and therefore more affordable than borrowing. It is a matter of planning ahead and having clear spending priorities.
LiveOnCash.com: You use the phrase “living beneath your means” frequently in your book. What does that mean?
K.C. Knouse: It means exactly what it says. If you make $50,000 a year, live as if you make less than that and save the difference. If you are a two-income family, live as if you have one income and save the other income. Living beneath your means is the only way to establish a consistent, aggressive savings program. The problem we face today is that many two-income families live as if they have three-incomes.
LiveOnCash.com: What are some things a family can do to live beneath their means?
K.C. Knouse: I offer several strategies in my book, True Prosperity: Your Guide to a Cash-Based Lifestyle. Here are a couple of them: First, quit paying for convenience. Here are a few examples: sack lunches instead of eating lunch out; prepare your own food instead of buying prepared meals; shred your cheese, chop your vegetables, and cut up your chicken, instead of buying these products already chopped or cut; buy concentrated juice products instead of whole juice products; wash your own car instead of taking it to a car wash; go to the early bird or matinee showings of movies, or better yet, wait until movies come out on video or DVD and rent them.
Second, plan ahead. Buy items when they go on sale not when you need them. When you buy on sale, stockpile those items to last until the next sale opportunity comes along. Build your menu around sale items, especially meats. Set money aside monthly for car, appliance and home repairs and maintenance. Living on cash and living beneath one’s means requires planning in order to have money available when it is needed. This is why a budget is so important.
LiveOnCash.com: Speaking of budgets, what do you tell people who say budgets don’t work for them?
K.C. Knouse: A budget is a tool that is used for planning and to provide information. It cannot fail; it always results in a plan, and it always provides information. Now if a budget isn’t effective in achieving financial goals, changes must be made to the budget based on the information derived from experience with the budget. Maybe money wasn’t allocated properly among the various expense categories. Maybe spending habits need to be changed. Maybe spending priorities need to be re-examined. Maybe more flexibility needs to be introduced into the budget, maybe less. Budgeting is a trial and error process. And a budget must change as life circumstances change. However, as long as a person continues to budget and act on the information the budget gives her, she will make progress toward her goals.
I have found from my experience that eventually the budget brings about new patterns of spending and saving that become habitual. Over time, a person spends within the budget without being overly conscious of it. The budget becomes internalized.
Some people have trouble making a budget. A budget is simply spending money on paper before any actual spending takes place. Spending, even spending on paper, means making decisions. When people have trouble making budgets, it is because they find it difficult to make spending decisions.
Decision-making is much easier if a person has a clear set of priorities to guide them. Long-range financial goals shape priorities and make decision-making easier. Goals also give an incentive to follow the budget. So I’d say for a budget to work, make sure you have long-term financial goals.
LiveOnCash.com: In your book, you advise people who are trying to get out of debt to save and pay off debt simultaneously. Why not pay off debt first then save?
K.C. Knouse: The reason people are in debt is because they have spent money they didn’t have. They have used credit as a substitute for savings. To change this situation, people need to accumulate money so they have it when they need it and no longer have to rely on credit. If they wait until they pay off their debts to accumulate money, they will continue to have to rely on credit. They remain in a cycle of debt. As I said earlier, if a person makes regular payments on his debt and takes on no new debt, he will eventually get out of debt. It is very difficult to avoid new debt, however, unless a person has money over and above his normal monthly expenses and debt service. This money is savings. So saving must occur while debt is being paid off. Savings replaces credit as a means for paying for things, eliminating the need for new debt. This makes it possible to get completely out of debt and to stay out of debt.
LiveOnCash.com: You devote an entire chapter to goals in our book. Why are goals so important to successful personal financial management?
K.C. Knouse: Goals give us direction. When we have direction, it is easier to prioritize our spending. It is easier to make spending decisions. Therefore it is easier to budget. Goals motivate us to apply discipline to our spending in order to live beneath our means and save. Regular saving is the cornerstone of personal financial success. Without direction, we are lost and our personal finances will reflect this fact. To be successful, we need to know what is important to us. Goals reflect this.
LiveOnCash.com: You don’t rule out using credit entirely. When is it okay to get into debt?
K.C. Knouse: It is okay to get into debt to acquire something that will appreciate in value such as an education or a house. Education makes it possible to earn more money over a lifetime and therefore pays for the interest on the debt and more. We pay for housing whether we buy a house or not. Making payments on a mortgage allows us to build equity, which is a form of savings, with the same money with which we would have paid rent. So it is a better use of our money. Also, houses tend to appreciate in value over time.
Some would say it is okay to get into debt for an emergency. They would argue that there is no choice. This may be true in some cases. But from my experience, most emergencies can be predicted and planned for in advance with savings. For example, many people get into debt because of medical emergencies. I plan ahead for medical emergencies by setting aside money each month to meet my health insurance deductible and other out-of-pocket expenses. When a medical emergency arises, I already have the money to cover my share. The same goes for auto, appliance, and home repairs and maintenance. I know that my car and home will need maintenance and repairs and that appliances will need repair or replacement. So I set aside money each month in anticipation of these needs. Many emergencies are not emergencies at all but foreseeable expenses for which we have simply failed to anticipate and plan.
I use credit cards for convenience. However, I pay off the balance every month and incur no finance charges. Also, I have the money in the bank to pay for my credit card charges before I make the charges. So I am spending money I already have. I am not getting into debt. I get cash back from my credit card purchases. So credit card use actually makes me money.
LiveOnCash.com: Thank you for sharing your thoughts with us.
K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages