Cash vs. Credit Card: What Should You Use?

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.

Envelope System

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.

Cash Challenge

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!

21 comments… add one
  • Dividends Down Under Oct 3, 2016, 5:46 am

    Nice considerations Stefan, I do think some people would benefit from using physical cash with envelopes. It does make you VERY conscious of what you’re spending – when I was younger I used cash nearly all the time for things.

    But now I just use our debit card – if we don’t have the money in the account we won’t spend it. Credit cards sadly don’t pay anywhere near the bonuses they do for you guys in the USA.


    • Stefan Sharpe Oct 3, 2016, 1:06 pm

      Completely understand where you are coming from Trist. In Trinidad we do not have any of the rewards here.

  • Amanda @ centsiblyrich Oct 3, 2016, 10:45 am

    Hey Stefan! I’m up for the challenge! We don’t usually have much cash on hand, but my husband sold some garage items on Craigslist last week, so we actually have some. So, I’m all cash for 2 weeks. It will be an interesting experiment! (And we’ll see if hubby can stick to it!)

    • Stefan Sharpe Oct 3, 2016, 1:07 pm

      Let me know how it goes! There is something about using cash that will make you very hesitant to spend! Seeing a $100 bill leave your hands is pretty hard.

  • The Green Swan Oct 3, 2016, 12:02 pm

    You said ice cream tub, singular, so I presume you buy a full gallon tub? But I’m just inferring that based on my own habits…I typically buy two half gallon tubs which gets me through the week. 🙂 But in recent years I’ve actually moved to fro-yo…it’s better for me, right?


    I love the convenience of credit cards too much to go the envelope of cash route, but I love the experiment. Plus, I do budget pretty tightly so I use that to help keep things in check.

    • Stefan Sharpe Oct 3, 2016, 1:10 pm

      Not going to lie, a few months ago it would be multiple tubs of ice cream a week haha. Fro-Yo is better, or so they say, and something I have really enjoyed as a substitute.

      I am in the same boat as you. I have a pretty good idea where my money is or where it went but if you can’t say that then cash can certainly help. But you miss out on a LOT of rewards from credit cards, if used responsibly of course

  • Lauren Wittry Oct 3, 2016, 1:33 pm

    Man, I always fail when I pass the ice cream, too! I don’t use cash (anymore) but I do have a strict list and meal plan when I go to the store, and never buy off the list. But, I started budgeting for ice cream 🙂

    I DO use credit cards however. But the money is set aside ahead of time, so a few days after my grocery trip I use that money to pay the bill once its posted, that way I benefit from the rewards. It does take some discipline though! Especially around the holidays when all those sweet delicious baked goods are staring at you from the bakery.

    • Stefan Sharpe Oct 3, 2016, 4:29 pm

      Budgeting for ice cream haha. It can be a total necessity so no judgement here!

      I agree, credit cards should be used if the money is in the bank! If money is not in the bank I will not use them.

  • TJ Oct 3, 2016, 3:19 pm

    I almost feel like I spend MORE when I use cash, because I know it’s not being tracked in my aggregator. I also never deposit the cash that my sister gives me (when I use my credit card to pay for both of us if we go out to eat).

    I really only use cash at places that charge me $$ to use a credit card. I feel like it would way too inconvenient to use cash, do you go to the ATM every couple days? Plus I’d feel like Mr. Moneybags walking around with wads of 20’s in my wallet all the time….

    • Stefan Sharpe Oct 3, 2016, 4:34 pm

      Interesting. I know it can be different for everybody. To be honest I am very aware of my finances so on a regular day there will be no difference for me except for the 2% cash back reward I get.

      Haha I could not imagine going to the ATM frequently for cash. It would be an inconvenience and having grown up in the Caribbean it is a huge safety risk!

  • Tawcan Oct 3, 2016, 4:21 pm

    Went through the same experiment a while ago and found that there’s no difference for me between cash and credit card, since we track everything in the first place. So credit card came out ahead as we get 2% back.

  • Stefan Sharpe Oct 3, 2016, 4:38 pm

    Definitely think once you become fully aware of your money there will be no difference except for the rewards. Thanks for stopping by!

  • Mustard Seed Money Oct 3, 2016, 6:29 pm

    Great post!!!

    I use to carry a $100 bill in my wallet and I would never spend unless I found something “worthy” to spend it on. I mean seriously who wants to break a $100 for a fast food meal.

    So I definitely saw a drop in my spending when I carried the $100 bill. Otherwise my spending was about the same when I had smaller bills and normally got annoyed with the rattling of coins in my pocket.

    • Stefan Sharpe Oct 3, 2016, 9:00 pm

      Wow that is a pretty good system you had going for you there! I agree it makes no difference for those that are good with money. Many are not in that situation though

  • Full Time Finance Oct 3, 2016, 6:58 pm

    Like TJ indicated I tend to spend more over time when I spend in cash. The credit cards aggregate all my spending and thus I get that real whack in the face of a category slips out of line on a longer term trend. On an individual transaction or trip though I don’t notice it as much.

    • Stefan Sharpe Oct 3, 2016, 9:02 pm

      Yeah this case scenario likely would not be the case every time. What it does it restrict your purchases to the cash you have. Over the long run I expect that they will equal the same, if you are responsible. If you are irresponsible cash can only go to 0 unlike credit. This is where cash becomes beneficial, even though you can still waste money…

  • MrSLM Oct 4, 2016, 12:37 pm

    MrsSLM and I did this a few years back, withdrew cash and that was IT for the week. It’s too difficult to maintain as a full time lifestyle (at least for us), since I like to have credit cards and such on hand in case of emergencies, but it could totally change your perception of money and going forward you may be able to apply that to your spending even if you’re using a card.

    • Stefan Sharpe Oct 5, 2016, 1:46 pm

      Exactly! It is the skills you learn when you use cash that matter more than the amount. Once you become aware of your money you will be able to save a lot!

  • Piggybanknomics Oct 5, 2016, 10:26 am

    I am a fan of credit cards. I opened one a few months back and its 0%. I will hold a balance on it until it is time where the intro rate of 0% increases. They money that will be used to pay off the balance at that time is currently in an interest bearing account. What makes it even better is the cash back aspect of the credit card. It truly is a no-brainer, at least for me, however, I am extremely diligent with my money.

    • Stefan Sharpe Oct 5, 2016, 1:47 pm

      Love me those cash back cards! Anybody who is responsible with their spending will always use credit cards thanks to the perks. If you can’t control your desires then cash is probably the best way to avoid debt.

  • Finance Solver Oct 5, 2016, 9:54 pm

    It’s a little hard for me to do the challenge because of direct deposit and I don’t think I know nearby ATMs.. I need to figure this out cause someday I’m going to need cash. I love the convenience and the benefits of using credit cards though!

    I feel a lot more pain when I see physical bills going out of my wallet and into the merchant’s hands so fantastic challenge to keep spending in check!.

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