I recently discovered a new personal finance blog called Man V Debt. The author is a guy named Baker who, along with his wife, is waging a personal war on debt. One of his first steps was getting rid of all his credit cards. GASP?! I guess you can tell which side of the war I am on. Here is a guest post from him.
There are two extremes when introducing the concept between using cash (or debit) and using credit. In the one corner, you have those crazy people (a.k.a. me) who live completely without credit cards altogether. Not only do they cut-up their credit cards, but they tend to go as far as canceling the accounts. In the other corner, you have the credit card “gamers.” They are constantly juggling specialty credit cards, in-store charge cards, and 0% balance transfers. They are mixing and matching specific purchases with specific credit lines in order to maximize cash-back, airline miles, or gift cards to the mall. The average person, however, finds themselves wandering somewhere between these two extremes.
Before we get into the details of why my wife and I have actually embraced one of the extremes, let’s review some of the basics:
Benefits of Cash
- Increased Emotional Attachment – You’ve probably heard the different studies about how the average person spends more when using credit cards. Some say 8%-10%, but I’ve heard others claim as high as 12%-18%. At the end of the day, I couldn’t care less about some university study. What matters most is how it affects me. As I’ll explain later, using cash/debit triggers different reactions in my brain that I know help curve my impulse spending.
- Tangible Budgeting – There’s nothing like looking into an envelope marked “FOOD,” which holds exactly $82 and seeing the cashier ring up $90.74 in groceries. That’s the kind of in-your-face budgeting that credit cards are great at detaching you from. Sure, we are only talking about $8 in this example. But if you are like me, you love hunting for a deal, utilizing coupons, and would surely bend over to pick up a quarter in the parking lot. What’s the point of budgeting if not to save that $8 from vanishing.
- Simpler Financial Accounts – Although cash often times takes more effort to track effectively… …it does a wonderful job of simplifying your overall accounts. I’ve conversed with readers whom have over 10 different credit cards. They have one for 3% cash-back on Gas, one for 6 months same-as-cash at Lowe’s, one for 2% at Kohl’s, and one that earns triple miles every time you buy a Venti Cinnamon Dolce Latte from Starbucks. The best of the best do a great job of keeping it all together, but personally the thought makes my head want to explode into a million pieces. Call me “old-fashioned,” but I just love the ability to walk up and pay in cash.
- Prevents Unexpected Fees & Change of Services – Recently, credit card companies are really starting to play some games with consumers. Changing limits, due dates, rates, reward programs, and even annual fees has become much more frequent. Although there is currently legislation in the pipeline to combat some of this, we all know it will be a long while before the actual enforcement of the new regulations. Luckily, a pair of scissors and a phone call was all it took to elect out of this madness (actually it took months of aggressively paying down the debt, first… but you get the point).
- Lowers Risk Of Identity Theft – The less open lines of credit you have (used or not), the less your risk of identity theft. Actually, it doesn’t get any simpler than that.
Benefits of Credit Card
- Greater Convenience – If we are being honest, there is nothing easier than swiping your credit card. In fact, Visa is now promoting the new scanners that let you simply “wave” your card, as if swiping and signing were just too time consuming. There is some merit to all of this, though. If I’m really, really frustrated sometimes I’ll throw everything out the window and swipe my debit card. I know… I know… don’t tell anyone.
- Digital Tracking – I struggled with this one, at first. After all, I’m a child of the computer generation and do all of my banking and fixed-expense bill paying online. Luckily, I still get my fix with my occasional use of my debit card. We’ve also learned to maximize the benefits of tracking spending on paper, as I’ll explain later.
- Cash-Back/Rewards – Usually rewards are somewhere between 1%-3% depending on the type of card and the category of spending. The most “sophisticated” of the credit card jugglers can usually get around 2% overall. If you are able to exercise extreme control you can approach this type of return on your spending.
- Physically Safer – If your purse or wallet is physically stolen, most credit cards offer 100% protection. It should also be noted that this is true of most debit cards, as well. However, there’s no protection if some bad guy steals your cold hard cash. Although most of us aren’t regularly the victims of thieves, this is still something you should take into consideration.
- Establish Credit History – Of course, credit cards when used wisely can help build up credit history. Be careful using this as the ultimate excuse, though. The streets are littered with tons of people (myself included) who wish they never would have starting using credit cards in the first place!
What Made Us Decide On Cash?
Ultimately, we decided that the benefits of cash far outweighed the benefits of credit. It was a close battle, but in the end cash won out because of a little principle we like to call:
The “Do We Really Have The Money For This Now?” Syndrome.
Every time we went to pay with cash we were confronted face-to-face with this question. Even when we used debit, for a split second our minds would jump to thinking about the balance of our bank account. However, whenever we used credit cards we were immune to this type of mental hurdle.
Our strategy for curving impulse buys and staying on budget is to make sure we have to jump over as many mental hurdles as possible. Each additional hurdle made us either confront our impulse buy or quickly generate an acceptable excuse. Often times no excuse could be found.
In addition, we found that tracking our discretionary spending on paper offered even more psychological reinforcement. Once we spent the money out of a given envelope we would immediately write down the purchase on the outside. Once again, if only for a split second, we were confronted a second time with the type of charge and the amount. Tracking spending this way has helped reinforce our responsible spending and has often times brought another round of regret to our overspending.
To some these may seem like insignificant observations. But I can tell you first hand that they’ve helped usher in a new era of awareness and transparency into our financial life. The benefits of these “mental hurdles” are what ultimately pushed us over the edge in our decision to ditch the credit cards.
What about you? What systems have you adapted into your financial life to help you control spending? Do you save more by using cash or credit? Join in on the discussion by commenting below!