It’s been a couple of years since I wrote about our use of cash allowances so I thought I’d go over it again now that we have a lot more readers. I agree that sometimes, credit cards are great. They are very convenient and provide many benefits such as purchase protection and cash/point rewards. If you pay off your balance every month, credit cards can be a great financial tool. On the other hand, credit cards can be quite harmful if you carry your balances. I don’t need to tell you that the interest rates on credit cards are very high and many people are paying a ton of interest every month.
Why Cash Allowance?
We have always paid off our credit cards every month so logically it makes a lot of sense for us to put everything on the cards to maximize the rewards points. However, when I was charging everything on the cards, I’d have a $2,000 bill at the end of the month. I was making good money and was able to pay it off, but I was still spending a bunch of money.
In an effort to reduce our spending, we moved to a cash allowance system and it worked out great for us. Our credit card bill is now much lower than when I was charging everything. For 2013, our credit card bill has been about $700/month. This is much better than the previously mentioned $2,000/month. Anyway, here are some reasons why you should try using the allowance system for a few months if your credit card usage is dragging you down.
7 Compelling Reasons to Use Cash Instead of Credit
1. Purely Psychological. Credit cards make it too easy to spend money. Just swipe the card and you can bring home the latest smart phone/tools/clothes. It’s much harder for us to let go of our hard earned cash. The physical action of handing over cash to someone else is a lot more difficult than swiping a card. Try handing over $100 cash for a pair of shoes. It’s much more painful than just swiping a card.
2. Easier to budget for discretionary spending. We each get $80/week to spend on whatever we want. That’s our budget for discretionary spending (plus groceries). Once I run out of my $80, I have to wait until the next week before buying something. When I was using the credit card for discretionary spending, I usually lost track of how much I spent already.
3. No consumer debt. If you use cash, then you won’t have a problem with consumer debt. Credit cards enable us to spend the money that we don’t have and it’s easy to lose control. How else do you explain the average US household’s credit card debt of $15,263?
4. Delayed gratification. When I need to make a larger discretionary purchase, I have to save up for it. This delays the purchase and many times, I found that I didn’t really need it after all. Putting off purchases also give you time to research for a better product and deals.
5. Less guilt. When I have cash left at the end of the week, I don’t feel guilty about spending it on myself. Sure, I can save it too, but usually we just go out for happy hour or something like that. We can enjoy it because we know it’s already budgeted.
6. Change jar. This is a small side benefit. I hate carrying coins and I always put them in a change jar when I get home. This is a side saving that builds up over time. It’s always a nice little surprise when we drop by the bank to deposit it. Also, RB40 Jr. has been enjoying putting the coins into his piggy bank.
7. Cash is not traceable. Your credit card purchases can be easily tracked and if you’re on the run, the cops will catch up with you very quickly. Jack Reacher uses only cash and you should too. Yes, this one is a stretch, but I am out of idea.
Of course, the cash allowance might not work well for everyone. There are some downsides. It’s more difficult to keep track of every penny you spent when you use cash. You also lose out on reward points if that’s something you care about. For us it worked well simply because we are spending less money overall. We still use the credit card for some purchases, but for local discretionary spending, we like using cold hard cash.
Many of you probably can control your credit card usage much better than I did. You should really try the cash system to see if it makes any difference. You might surprise yourself. Have you tried it?