Why Is Cash King?

Jeff Brown, MD

A recent article explains why we need to save more and spend less, for all the obvious reasons. It's too bad that we, as rabid consumers, find it so painful to heed the call. The writer counsels: "You'll be fighting with your brain about money as long as you live. So focus on the war and not the (exhausting) day-to-day skirmishes."

As you no doubt have noticed, the "D" in PMD stands for Digest. So when I come across a really good article somewhere in the literature I am happy to give a shout out and summarize it. Case in point: "Why Cash Is King" by Mark Zimmerman, in the November issue of that well-known financial oracle, Men's Health.

The article's title refers to the often-observed notion that a "wall of cash" can protect us from many of life's little and big surprises. That’s true for most situations, including the 10 recessions we’ve slogged through since WWII. (Except perhaps, in the event of soaring inflation or a societal catastrophe of such magnitude that only an ample stash of precious metals will do.)

Zimmerman finesses the part about how to earn a lot of money -- wise of him, that -- and then delves directly to saving and financial planning. The latter is what we are all about here at Physician’s Money Digest, and we agree when he says, "You'll be fighting with your brain about money as long as you live. So focus on the war and not the (exhausting) day-to-day skirmishes.... Willpower is a finite resource. A serious financial plan trumps environment every time."

For Zimmerman, the key seems to be to keep your disposable income out of reach. "[R]emove as much of your money from your day-to-day life as possible -- direct deposit, automated bill paying, automatic savings deductions from pay, and a low-risk, low-dopamine approach."

His reference to dopamine comes from a study that showed via PET scan that even the prospect of making money is energizing, and releases dopamine to make us feel good -- if only temporarily. Unfortunately, feeling good (read feeling wealthy) leads to spending, not saving. Is this the trumpet call announcing the Age of Neurobiology in financial affairs?

Bottom line, Zimmerman advocates saving more. He states that “bad (financial) habits are being played for other's gain," and we all have to ruefully agree. Zimmerman asserts that you cannot spend money and save it at the same time.

His point would seem obvious, but look at the sea of advertising in which we’re immersed daily. "The more you spend, the more you save," is an actual statement that I have seen in ads more times than I can count.

Even if we won't admit that we aren't good at saving, the daily diet of media stats doesn't allow us to deny it for long. For instance, the average 54 year old has a grand total of $94,500 in a tax-deferred savings account, according to mutual-fund giant Fidelity Investments. Less than six figures -- that's it. It doesn't look good for the prospect of retirement, let alone anything else, does it? Obviously, we need to do better.

Zimmerman has a couple of other insights worth passing along. One is to avoid the “herd mentality,” which means the feeling of safety that goes with going along with the crowd -- regardless of what they do. Maybe it works for wildebeests migrating through lion country, but in financial affairs, not so much. If nothing else, 2008 taught us that lesson.

How about the simple observation that if you stopped and thought about what you might be giving up in the future by buying a major purchase now -- such as a new luxury car -- you might not be in such rush to buy. By doing so, you might decide the old beater will be good enough for another year or two, or you might consider buying a model in a more moderate price range. As consumers, we hate making choices that require us to flex our maturity muscle, but that's typically where money is saved.

Perhaps Zimmerman's best point is that your "best financial work won't feel very good.... What's hard is tolerating all the middle steps."

His final point is some people are not smarter about money than others, it’s just that some people develop better habits in managing their money than others. Aye, there's the rub. Don't you just hate it when somebody is right in a simple, obvious way that is a way you do not want to go?