Most people who recommend using cash only think credit cards are evil. If you use credit cards your life is going to be consumed by debt. This assumption is completely wrong.
Credit cards are extremely useful. Compared to cash, a credit card allows you to build credit, have financial protection in case somebody steals your credit card and goes on a spending spree, and gives you an interest-free loan if you pay them off in time.
The downside of using a credit card is the ability to recklessly spend money. This is where many people run into problems because let’s face the facts, people are irresponsible with money. Purchasing an item on credit simply involves pulling the card out of your wallet/purse, swiping it in a machine (or inserting the chip) and signing your name on the signature pad. It is very easy to swipe a piece of plastic and not worry about the result of the expenditure until the bill is due. Considering the average American has 7 credit cards, it makes going into debt very easy if a credit card is used irresponsibly.
This holds true for debt cards as well, even though the two operate differently. The concept is the same, swipe a card and get the item.
Why Use Cash?
Cash is tangible. It is very easy to swipe a piece of plastic and not worry about your money. But what if you saw your stack of cash slowly depleting?
The psychological effect of seeing your money leave your fingers will make you be more conscious of your spending habits. Using cash allows many people to realize they are making impulsive decisions and buying items they do not need. Recognizing this habit can lead to less spending and more savings.
Case Study: Using Cash Dropped my Grocery Bill by 17%
I wanted to create a cash vs. credit card test. I went to the grocery every weekend like I normally do to stock up on food. Typically I do not pay much attention to my bill as I go into the store with a list in mind. Like any regular person though I always have to pick up that tub of ice cream on sale or maybe get a drink while waiting in the checkout line.
The difference between my normal trips and this one was I only carried $35 in cash, in order to test this experiment. This is my normal allocated budget for food per week. While checking out, my bill amounted to $41. It was embarrassing to know that I could not afford everything I wanted. But this is the benefit of using cash. It stopped me from crossing my budget. If I used a credit card I surely would have purchased every item. This inevitably forced me to put a splurge item back onto the shelves.
The envelope system is a great way to assign your cash to a specific use. For example, you receive a paycheck of $1,000 every other week. Out of that you assign $300 to rent, $100 to groceries and so on. You put this money in an envelope and categorize each one based on what the cash should be used towards. You are allowed to transfer money from one envelope to another but once all envelopes are empty, that’s it for the month.
This is a popular method used to gain control of spending as it allows the user to see where their money is being spent as well as stop them from overspending.
So Is Cash Better Than A Credit Card?
Credit cards clearly have more benefits than cash. After all, my credit card gives me 2% cash back on every purchase so essentially I am only paying 98% of the price. Additionally, building credit is crucial to securing lower interest rates on loans and other debt such as a mortgage.
However, these benefits are not always worth the savings. If somebody cannot control their credit swiping they may spend $500 more a month as opposed to the $100 in savings they may get from utilizing a credit card. This is where cash is beneficial. Once the stack of money runs out so is their spending spree. Cash forces people to recognize their spending habits, and hopefully adjust their spending going forward.
Using cash forever is not a smart financial move so I encourage anybody with irresponsible credit card habits to use cash only until you gain control.
Here is my challenge to you. Use cash for a limited period of time. Let’s say two weeks. Utilize the envelope system and see if you can make it the two weeks without depleting your envelopes. Let me know your progress below!