If you’re serious about building financial freedom, one of the most important decisions you can make it to stop using credit for paying expenses and for making purchases. In fact, in the four bucket system for managing your spending, category three is focused on laying up cash reserves for the sake of planning large purchases. Again, here are the four categories in the system:
1. Commit the first 10% or more of your income for investing
2. Commit the second 10% or more of your income for giving
3. Commit the third 10% or more of your income for cash reserves
4. Commit the final 70% or less of your income for paying expenses
In this article, we’ll be talking about how laying up cash reserves can empower you to make better purchases and getting better deals.
The Power of Using Cash Instead of Credit
Did you know that $1 isn’t necessarily $1? It all depends on how the money is being spent and, most importantly, who is doing the spending. For example, when you purchase an item using credit, every dollar that you spend decreases in value due to the need to pay the dollar back PLUS the interest accrued on the money that is being borrowed. Not to mention that if you make a large purchase using credit, merchants are much less likely to agree to give you a better deal if you ask for it.
Cash gives you negotiation power, which instantly makes dollars spent in cold hard cash more valuable than those spent using credit. So how can you use the power of cash to get a better deal on your large ticket purchases in the future?
Building Your Cash Reserves
The best way to get in to the habit of building cash reserves is to plan a purchase right now, determine the amount of money you’ll need, determine a deadline and then start laying aside cash in “payments.” For example, say you decide within six months that you’re going to buy a couch and the couch will cost you about $600. You would then set aside $100 a month for the next six months, and about the fifth month you’d start looking for some deals. This way, if you end up needing less than $600 for the purchase (if you hunt down or negotiate a good deal), you’ll have some extra spending money left over.
So go ahead and start you planning, and prepare to discover the power of using cash instead of credit and how it can help you achieve financial freedom.
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