How To Have Too Much Cash

Cash is king. You hear that term being thrown around and for good reason – having available cash is vital to financial health. Without having a cushion of cash, you are very vulnerable and can easily be taken advantage of during hard  times.  When you have a solid emergency fund with enough funds to carry you for six to eight months, you can handle most emergencies — even a job loss– with out having to take extreme measures.

A young lady I talked to yesterday unfortunately didn’t have that cushion and had to resort to using an extremely high cost avenue to borrow money. She had four different payday loans. With one coming due every week,  it seemed like she’d pay one and then the other one was right there the next time.  She ended up getting caught in a costly vicious cycle — renewing one to pay the next one with no chance she’d ever pay them off.

A tax refund on the way was a ray of hope for her. Her gut instinct was to hold on to that refund with dear life and her instinct was right. The refund wasn’t enough to pay off all of her loans so she would be back in the same spot in no time.

Here is the plan we came up with to get her out of debt and turn her life around:

Deposit the tax refund into a saving account to start her emergency fund.

Secure a short term loan that she could pay monthly – a loan from a family member at an interest rate of 5%. She would be paying a much higher interest rate to them than the 1% that the banks are paying but a much lower rate than the pay day loans.  If a family member wasn’t willing to loan money, then she could try peer to peer lending  — sites like Prosper and The Lending Club might loan her the full amount at a higher rate than a family loan but lower than the pay day loans and she could make monthly payments.

http://money.msn.com/credit-cards/borrowers-alternative-peer-lending

http://www.prosper.com/

http://www.lendingclub.com/

Start tracking her spending and live below  her means. She can use a site like mint.com or yodlee.com to track every dime she spends to make sure she saves into the emergency fund each month to build it up to a full six months of expenses.

In my twenty-something years as a financial planner, I have never had anyone complain they had too much cash or that they saved or invested too much money.

How do you have a stash of cash?

You never get in a position where you have to pay high interest rates to someone else -like pay day loans.  You do whatever you can to always live below your means and when you get a lump sum like a tax refund or some kind of a windfall, you hold on to it for dear life.

I have faith this young lady will turn her financial  life around very quickly and never put herself in a position again to be so financially vulnerable.

 

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