Whether you’re a Dave Ramsey junkie or trying to learn from some big mistakes in your spending habits, it’s no secret that using credit cards encourages more spending. But hopefully you have some clue about how important a budget is to curbing your spending before reading this. Both credit cards and cash have major benefits and drawbacks.
If you have a problem with overspending, deciding between cash-only or credit/debit card-exclusive systems is like trying to stick a Band-Aid on a gushing artery. You can’t renovate what you don’t own, so get a grip on a budget first. Once you’re set with monthly expenditures, take a close look at your credit car bills and cash spending. Above all: To thine own self be true. Know your natural inclinations to spending and adjust to reduce it.
Once you’re ready to take a stand, consider the following:
The pros to cash-only:
• Cash is finite. Your credit card limit is, too, but assuming an outrageous spending limit will only incur huge finance charges. Once you run out of dough for the month, you’re done. This means no furtive, late-night dashes to the ATM. If your budget is up for the month, train yourself to not buy anything else. Just as with starting exercise, you’ll have some soreness at first, but the repetition and strength of habit will make it easier in the future.
• Cash is accepted everywhere. Some credit cards are not. Plus the swipe machines go down occasionally, and you won’t have an option then either.
• Avoid late fees. Even if you pay off your credit card bill at the end of the month, quirky things happen. Bills don’t arrive on time or get lost. If the unexpected can happen, it will. Credit card companies thrive off late fees, and even one late payment can mess with your interest fees. When you pay with cash, the transaction is completed immediately.
• Cash is convenient for random expenditures such as tips and split bills at restaurants. No more worries about having an extra dollar or two on hand for cash-only needs.
The cons to cash-only
• Cash is finite. If a mugger demands your wallet, you lose the dough. Lost your wallet? Gone. There’s always the envelope system, but there is a substantial risk of theft or loss.
• Using credit earns rewards. Yes, you don’t want to spend in order to get those free air miles and vacation discounts. That would be equivalent to paying $10 in arcade tokens to win a 25-cent finger puppet. If you have set a firm budget for yourself, stick to it and just check your rewards every now and then.
• Credit/debit cards provide an electronic record of spending. Wondering where your cash went? Keeping up with every receipt can be tedious. Most credit card companies offer a monthly breakdown of bills, food, entertainment and other discretionary spending. Plus, you don’t have to pay 47 cents per envelope to mail your monthly bills (and hope they arrive on time).
• Credit/debit cards can be more convenient. If you’ve honestly tried the cash-only system, at least once or twice you’ve been out and about and forgotten to “withdraw” food money from the envelope. Hauling your three children back to the house, delaying lunch by 45 minutes, to grab some green is excruciating. Plus, having to walk back and forth between the pump and the gas station to prepay and then collect the difference is not an option in 100-degree heat with little bodies in the backseat.
If you are on the fence trying to decide which is best for you, try going 3-5 months on a cash-only system to establish spending discipline. Once you have a good grasp on learning where your money is going (and only spending what is in your budget), try a mix of cash-only and credit card. Perhaps make your discretionary spending — food, entertainment, clothing — cash-only, while using a credit card or bank card for fixed expenses.