Articles and books on personal finance will provide as many tips as
possible in an effort to make at least a couple of them stick. This
approach may convince readers to save for emergencies and pay out less
than they bring in, but in some cases you can say to much without
explaining anything.In this article we'll focus on just one technique
to improve your finances - paying in cash. Here's how making cash-only
purchases can help you to budget, save and invest.
A Plastic Paradise
With rapid increases in the use of plastic over hard currency, some
people consider carrying cash old fashioned. To be fair, plastic is much
sexier than a bit of coloured paper with a deceased president gazing
into the great beyond. Some banks even allow you to customize the colour
and graphics on your credit and debit cards.
Debit and credit cards also offer the advantage of security. With
them, you need a signature and/or a PIN number to access your funds.
Cash is only protected by your ability to defend it should someone want
to take it from you.
Except for the odd country store, plastic is accepted in as many
places as cash is. Yet cash is almost always the better choice for
making a purchase. Here's why:
Overpaying
One of the drawbacks of credit and debit cards is that they encourage
you to spend more than you intend to by giving you easy access to more
capital. With cash, spending more than you intend requires going to a
bank or ATM, then returning to the store to complete your purchase. This
provides time to reconsider whether your budget can handle the extra
strain.
Carrying only the cash you are prepared to spend on a given product
can prevent you from 'buying up' and paying for features you don't need.
This works for minor items, but buying a boat or pickup truck requires
more cash than you may be comfortable carrying on you. If a cheque can't
be used, a debit card is better than a credit card because you can only
spend money you already have.
Over-Shopping
Cards won't just lead you to pay too much for single purchases, they
also encourage you to buy more items than you mean to. Stores build
displays to make their wares appealing so that you will purchase more.
In some cases a checklist is insufficiet in preventing impulse buys.
People tend to spend more with credit cards than with cash. One study
found that people spend up to 18% more when using credit cards, and
McDonald's notes that average purchases rose from $4.50 to $7 when
customers used plastic over cash.
Only carrying enough cash to buy the things on your list is the best
way to shop within your budget. If you take the time, you can find sales
or inexpensive alternatives to your regular brands to make your cash go
further.
Cash Vs. Credit
For the purpose of this article, cash means money you have already
earned. Using your Visa for a cash advance does not solve the problem of
using high-interest debt to cover your expenses.
Cash has one clear advantage over credit cards: if you carry a
balance on your card, or only make the minimum monthly payment, you will
incur interest at a rate of 15% or more on your purchase. This means
paying $15 or more for every $100 you spend. If you save enough cash for
the same purchase, you give yourself the equivalent of a 15% discount by
not using your card.
Cash Vs. Debit
If we just portrayed cash as a better alternative to credit cards,
few would argue against us. In contrast, debit cards enjoy a protected
status, despite ATM fees.
A debit card can also trivialize purchases. Being a square of
plastic, it is difficult to tell how much money is spent through your
debit card. It becomes a matter of $2 here, $6 there and so on until you
give up tracking how much you spend. It's a shock when the monthly
statement comes. With cash, you can monitor your funds as you spend.
Conclusion
Using a credit or debit card offers more security than cash in most
cases. For large purchases, cash is often not an option and writing a
check or getting a bank draft may be more trouble than it is worth. In
addition, a properly used debit card can be a great alternative to cash.
A credit card can also be a convenient tool, but it's only a fair
substitute for cash when your balance is paid in full at the end of each
month. Otherwise, your reward for convenience is debt.
If you tend to overspend, shopping with cash is one way to adhere to
your budget and limit impulse buying.
