THE GFC AND COVID – TWO LESSONS MISSED
Starting in 2007/2008 the GFC dominated business actions. If you didn’t have the cash or other funds in investments, you were directed by your bank into more expensive finance options, or forced to close your business. In 2020, there was COVID, with the same scenarios occurring again. In fact, a number of businesses did not last even three months this time. They lacked access to cash, and/or could not obtain further finance to manage their debts and stay viable.
During these business and dollar destructive periods, two great lessons were observed:
- cash equalled freedom and endless profitable opportunities, whilst
- debt created handcuffs to disappointment and other negative outcomes.
It would appear however these two business lessons still have not been learnt. What is worse, were the actions of governments, the ATO and the RBA here in Australia, which have indicated cash and savings were not important, paying debts could be put on the back burner forever free of charge, and interest rates were too cheap for too long.
The result, whilst supporting businesses and consumers with cheap debt and discouraging savings, the above organisations sacrificed future savings, in order to keep businesses and consumers viable in the COVID years. Today, we note that the RBA, encouraged by vested parties, are again reducing interest rates when the real inflation figures are being compromised by incorrect calculations and omissions.
The future therefore, does not bode well for many, when there will be little or no savings available to fund new business or spending. After all, businesses and consumers will still be paying off outstanding debt, if they have available funds, which for many will be unlikely.
A BRIEF REVIEW OF CASH AND SAVINGS
DISADVANTAGES:
The problem with the critics of cash and savings is that they often fail to acknowledge the dangers of their ideologies or of real-world problems, such as the following.
- The RBA does not seem to understand that their main message was that savings was bad, and debt was good. As a result, they provided criminals and fraudsters another incitive to take advantage of frightened savers who could see their income from savings decrease and which could cause potential hardships.
- The RBA also fails to appreciate that when debt is too cheap for too long, many people take on debt without remembering when things go wrong, they still have to pay the debt plus interest. Borrowers also forgot they were sacrificing their future for benefits today.
- The banks do not encourage savings and cash via low interest rates, with branch closures and a bias towards the digital world. Consequently, they provided criminals and fraudsters another incentive to take advantage of frightened savers who see their income from savings decrease and cause potential hardships as above.
- The current digital ideology by business owners and customers that believe a business saves money by a digital only payment system. Unfortunately, digital facilities are not free to either party. A digital system also may create a marketing and sales nightmare when disgruntled customers don’t buy and advertise that fact, or in the event of disasters, whether they are nature based or politically created.
- The message by parties that want your cash advising cash in bank accounts is lazy, or inefficient, and too many people fall for this message, rather back up cash and savings is a contingency asset when problems occur.
ADVANTAGES
Too often the advantages of holding cash in hand or in your bank accounts is dismissed or minimised by many commentators or salespeople, as they fail to acknowledge the following advantages of cash and savings.
- Emotional freedom and funds to make your own decisions unencumbered by others, and having the strength to say no to bad deals such as customers with little business history, or with bad repayment records.
- Ability to buy assets and services, often with a good tax-free discount.
- Power to disadvantage rivals by denying them access to key assets and services.
- No time wasting with paperwork to obtain finance which may then be declined anyway when trying to buy assets and services.
- Having the funds to create a cash contingency buffer to cover unexpected costs and unforeseen damaging events and taxes, etc.
A BRIEF REVIEW OF DEBT
It must be said that obtaining debt, at the right rate, under the best terms, and for the right reasons, is a valid strategy to grow your personal and business assets and wealth. For example, buying a home can be the right strategy, or buying a business asset at a good discount, providing both are done correctly and subject to proper due diligence. However, buying a home with a small or no deposit as now being advertised, is not a good decision.
The reality is that debt becomes a real problem in the following situations.
- Using debt to fund day to day living expenses is a poor decision as it is unsustainable long-term, which inevitably leads to negative outcomes.
- Buying “look at me” assets and lifestyle, as it usually leads to you becoming a target for criminals who may believe you have assets and cash/unused credit funds that can be stolen. Alternatively, it gives people an excuse to demean you in public because of their misplaced jealousy about your lifestyle, spending habits and perceived wealth.
Common pitfalls of debt
Amongst the pitfalls of obtaining or selling debt, is the concept that nothing bad will happen. The truth is that it does. Too often, the following factors are forgotten.
- The minute you take on debt or sell on debt, you are at the mercy of your lenders or customers, which can dictate how you operate or if and when they will pay you.
- Most people which take on debt, and a great number of businesspeople and labor/socialist oriented politicians as history shows time and time again, cannot manage debt.
- Once having used debt to grow once, it becomes an addictive habit for many people and businesses, rather than a get out of jail event.
- Many debt-addicted people and businesses rarely have a contingency fund or sellable assets for when incomes reduce or close off, or government taxes and regulations increase.
- Adequate due diligence and commonsense is rarely applied in a world where debt is increasing, both hidden and exposed when selling on credit, and accordingly, a business is often handcuffing itself to potentially insolvent customers, etc.
In summary
The above information, has been proven time and time and again, which shows that consumers, and experienced businesspeople and politicians, have failed to learn the lessons of both the GFC and COVID years. Equally frightening, is that these lessons were both learnt within living memory. It does make you wonder therefore, when will the following lessons be learnt that clearly shows:
cash in bank equals freedom and endless profitable opportunities,
debt equals handcuffs to disappointment, loss of opportunities, and unfortunately, often to insolvency and bankruptcies.
Want to know more, contact Kim at kim@creditmatters.com.au, or 0411 649 261, or have a look at what we offer via our website at www.creditmatters.com.au
