Pile of Cash Test
Several years ago, I was meeting with a coaching client who wanted to buy a new vehicle. When the conversation heated up, it quickly went in the direction of buying a very nice, very new, $35,000 vehicle (this was back when $35,000 was a lot for a new vehicle). They were dead-set on using a car loan to make this happen. When I attempted to convince them to make a cheaper choice and pay with cash instead of locking themselves into another sequence of expense payments, I made the argument that using debt is altering their decision-making process. In short, they wouldn’t be buying this much of a vehicle if they weren’t using debt. They aggressively disagreed with my thesis. In their opinion, they were simply using debt as a tool to make the best mathematical decision. According to them, they would make the exact same decision with cash, but they are outsmarting the system by doing it this way.
This is the moment I issued my always-favorite “pile of cash” test. I challenged them to go to the bank, withdraw the money, and set it on their table. If they could look at all this money and honestly tell themselves they would exchange it for this vehicle if the “smarter” option of financing it wasn’t on the table, then go ahead and use debt for the purchase. So they did! They went into their bank, awkwardly asked for $35,000+ in cash, and walked out several pounds heavier (looking like a suspicious drug deal was about to go down).
What happened next, you ask? When they looked at the cash and thought about it, they realized there was no way they could justify using this much money to buy the vehicle. The entire idea of debt was psychologically impairing their judgment. A few days later, they purchased a used $20,000 vehicle with cash, put $15,000 back in the bank, and felt at peace with their decision. I hear them tell this story often….it was a big turning point in their story.
It’s funny how we play little psychological tricks on ourselves when it comes to money. Many of them are small and silly, but sometimes, like this couple, they can profoundly impact us on our journey.