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7 Compelling Reasons to Use Cash Instead of Credit


7 Compelling Reasons to Use Cash Instead of Credit

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 reason to use cash instead of credit

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 ideas. 😉

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?

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he couldn't stomach the corporate BS.

Joe left his engineering career behind to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle. See how he generates Passive Income here.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.
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{ 63 comments… add one }
  • sendaiben September 11, 2013, 12:26 am

    I prefer using cards, for a couple of reasons you mentioned: all purchases are tracked automatically (I use Moneytree, an iOS app in Japan that is kind of like Mint in the US), and I enjoy using air miles and hotel points to have better travel experiences than I would otherwise 🙂

    • retirebyforty September 11, 2013, 8:03 am

      I liked using cards too, but cash just worked out better for us. Maybe when we start traveling again, I’ll look into more reward points.

  • Pretired Nick September 11, 2013, 4:10 am

    Your approach has been pretty similar to mine. I didn’t like having that big credit card bill every month. We never carried a balance so I should probably start getting some rewards points but it makes things feel pretty shaky with those big chunks of money flowing in and out. I don’t know, I’m still thinking about whether I should try the rewards thing….

    • retirebyforty September 11, 2013, 8:04 am

      I like the cash back rewards. Cash is king baby!

  • [email protected] September 11, 2013, 5:42 am

    We put everything on credit and pay it off every month BUT we track it as the month progresses to make sure that we stay within our spending allowances. I hate using cash!

    • retirebyforty September 11, 2013, 8:05 am

      Why do you hate cash? Some kind of childhood trauma? 🙂

      • [email protected] September 12, 2013, 6:33 am

        No, haha. I just dislike using it for some reason. Since I’ve started using credit for everything, I’ve enjoyed being able to see all of my purchases online. When I used cash, it was harder to keep track of.

  • UrbanSaltLake September 11, 2013, 6:57 am

    I can’t keep track of my cash spending. I do check my credit card balances every week, so I’m aware of my spending. I payoff my cards 2-3 times a month, so the balances are fairly low most of the time. I can’t recall the last time I paid interest on the credit card. I believe credit card companies should be paying us for using their card. I enjoy ordering discretionary merchandizes from Amazon with the points guilt-free.

    • retirebyforty September 11, 2013, 8:05 am

      Paying off 2-3 times a month sounds interesting. Go with whatever work for you. 🙂

  • dojo September 11, 2013, 7:12 am

    All our bank accounts (personal/business) are set with zero overdraft. We use debit cards only too. This way we can spend ONLY what we have in the bank.

    We do like to work with cash though since it helps us really ‘see’ how we’re spending the money and how the money ‘goes’ when we buy stuff. I also keep a spending journal and look at it from time to time, so that I can know where to ‘tweak’ our spending and make sure we save some more.

    • retirebyforty September 11, 2013, 8:07 am

      Zero overdraft is a great idea. I haven’t had to deal with overdraft, but that’s a good idea.

  • Michelle September 11, 2013, 7:18 am

    We use credit for everything, mainly because we like the rewards and it makes tracking our spending much more easier. However, we have been thinking about switching so that we can see if we spend less.

    • retirebyforty September 11, 2013, 8:08 am

      You should try cash for a month or two and see. You never know….

  • Mr. Utopia @ Personal Finance Utopia September 11, 2013, 7:31 am

    I’ve always used credit cards and never once in ~15 years ever carried a monthly balance, so using cash wouldn’t be a benefit there. I’ve always kind of rolled my eyes at using cash because it just seems like a hassle. I suppose I’ve never really considered the psychological aspects though. While our spending isn’t out of control per se, I wouldn’t be surprised if a partial switch to cash helped trim some of the fat. Something to consider…

    • retirebyforty September 11, 2013, 8:08 am

      You should try it for a couple of months. It made a big difference for us. I was surprised too, but it works.

  • Kurt @ Money Counselor September 11, 2013, 7:54 am

    I like the Jack Reacher reason! I use cash except for gasoline and large ($100+) purchases. Part of the reason is I suspect the info collected by various parties when I use a credit card will somehow be used against me. Of course I’m the paranoid type. 🙂

    • retirebyforty September 11, 2013, 8:10 am

      You are paranoid. 🙂

  • No Waste September 11, 2013, 8:08 am

    I would feel like I was going backwards.

    As it is, I get hundreds of dollars in cash rewards each year without an annual fee and I never carry a balance.

    Plus it’s so easy to track with Mint.

  • Mike September 11, 2013, 8:14 am

    I find cash typically works a lot better. I find it is a little too easy for me to go overboard with credit. So it’s wiser to simply avoid having a credit card in the first place.

    • retirebyforty September 11, 2013, 11:13 am

      Cash works well for me too. Maybe it’s because that’s what I used when I was a kid?

  • Done by Forty September 11, 2013, 8:35 am

    I’ve long suspected that consumers (including us) come out behind when using rewards credit cards. Even a 3% increase in spending would cause you to come out behind, assuming a great 2% reward average.

    Alas, we still use the cards…for now.

    Here’s my favorite post all time on this subject, from over at Pocketmint: http://pocketmint.net/2012/10/the-credit-card-rewards-system-is-gaming-you/

    • retirebyforty September 11, 2013, 11:15 am

      That’s a good article. I read a little about logo conditioning too. The human mind is quite complex and you never know who is programming you…
      There is another study that showed McDonald customer spent a lot more when they pay with credit cards. It’s pretty fascinating.

  • Corey September 11, 2013, 8:38 am

    I’ve long been a supporter of credit cards for everything, but this makes me wonder if I would spend less if we used only cash. I think i’ll figure out a month to give it a try. Do you buy anythings online? I’m already thinking about how it would be hard to go all-cash since we occasionally buy things online (i.e. amazon).

    • retirebyforty September 11, 2013, 11:16 am

      You should try it for a couple of months. We do buy a few things online and we use credit card for that.
      The cash is mostly for discretionary spending like eating out, coffee, and clothes.

  • Taynia | The Fiscal Flamingo September 11, 2013, 9:08 am

    Cash only is such a beautifully and particularly useful concept for people who are emotional spenders, lack financial discipline and / or are in consumer debt. I wish more would latch onto the concept. Bravo for sharing. Especially the bit about Mr. Reacher.

    • retirebyforty September 11, 2013, 11:17 am

      Thanks for liking Reacher. 🙂 I was really out of ideas.

  • Martin September 11, 2013, 9:12 am

    I just can’t hand cash over. Seriously. I struggle. That same purchase on credit is a ton more difficult with cash.

    • retirebyforty September 11, 2013, 11:17 am

      It’s physically painful. 🙂

      • Lovemymoney March 7, 2018, 7:00 pm

        I thought it was just me being an uber cheapskate… according to my budget i should have gobs for saving each month wiped out by paying off the monthly credit card bill. I’m trying this starting tomorrow! Thanks!

    • David @ VapeHabitat August 14, 2018, 9:55 am

      I use cash 80% of the time, the rest goes for a credit card. Tend to make it 100% cash better sooner than later.

  • moneystepper September 11, 2013, 9:18 am

    I think it depends on the persona and their attitude to money.

    If you can manage a credit card appropriately (ie don’t spend just because you can, never incur interest, etc), its a great tool to build cash-back, rewards, credit rating and effectively obtain one month’s extra cashflow.

    However, if you have any weakness in these areas and those suggested in your post, then the rewards won’t be worthwhile!

    • retirebyforty September 11, 2013, 11:18 am

      I agree, but I think most people don’t have the discipline for complete control like that. That’s why we have so much credit card debt.

  • C. the Romanian September 11, 2013, 9:23 am

    In Romania we mostly use cash. Debit cards are gaining some ground, but credit cards are still a stretch here in Romania. I personally know nobody who has one 🙂 So yes, we usually pay with cash and indeed it’s a different feeling that swiping the debit card (my wife for example, never knows how much is on her debit card which means that she doesn’t care too much about how much she spends). Cash – you can see it go and it’s always easier to keep track. I might be old school because of the circumstances, but I always go for cash…

    I heard though that in the US there are stores where you can no longer pay with cash – if that’s true, it means that it’s even more difficult to use cash though.

    • retirebyforty September 11, 2013, 11:19 am

      That’s interesting. I’m sure Romanian will start using credit cards soon. In Thailand it was like that 10 years ago. Now everyone uses credit cards. I haven’t heard of a store that don’t accept cash. Seems silly to turn away customers… Well, I guess Amazon…

    • Jack @ Enwealthen September 11, 2013, 12:03 pm

      That was one the more interesting things I noticed when I would travel to Bucharest regularly.

      Great cell phone service. Lots of cash.

      And by lots of cash, there were lots of people using cash, and there were banks on literally every corner. In some parts of town you couldn’t throw a stone without hitting 5 banks and a Western Union.

  • [email protected] September 11, 2013, 10:00 am

    I love using credit for the cash back, but I will use cash to get a “cash discount” if it is offered or if it is a small mom and pop store and I’m not spending that much. I pretty much scrutinize and think twice whenever I’m spending whether it is with credit or cash, so I go with credit for the cash back rewards.

    • retirebyforty September 11, 2013, 11:19 am

      That’s a pretty good policy. You should try using allowance for a couple of months. You never know what it will do. 🙂

  • Bob September 11, 2013, 12:57 pm

    We simply treat credit cards like debit cards – spend only what we have in the bank.

  • Bryce @ Save and Conquer September 11, 2013, 1:09 pm

    Your monthly credit card bill went from $2000 to $700, but what is your total monthly cost when your cash purchases are added? I assume less than $2k, but I don’t recall seeing what you are really saving by using a cash allowance. Personally, we use rewards credit cards for most everything and I watch to see if our expenses are going up or getting frivolous. I share my findings with my wife every few weeks.

    • retirebyforty September 11, 2013, 1:19 pm

      We average around $1,300 to $1,500/month now. We also cut back quite a bit when I left my job.
      You should try using cash for discretionary spending for a couple of months. It might work out for you too. Or not…

  • JayP September 11, 2013, 2:05 pm

    Interesting. We tend to use cards to get the points(and pay off the balance each month). I rationalize it because, even if I’m signing, I’m incredibly cheap and its painful to even sign the receipts. Still, I’m sure if I had cash in pocket it might be even more painful.

    On the flip side, using cash is sometimes easier for me, because I know I wont get a bill later. Plus its really nice getting a $20-$70 credit every couple of months for rewards points. I look at those as free meals, movies, etc. Gas for example – sometimes they offer 5% cash back. I suppose I would use the same amount whether I pay cash or credit.

    • retirebyforty September 12, 2013, 4:49 pm

      That’s what I thought before I tried switching to cash. 🙂

  • Survive The Valley September 11, 2013, 4:12 pm

    I agree that if you find it difficult to manage your spending using credit cards, it’s best to stick with cash. That being said, I think credit cards offer the following benefits you can’t get with cash:

    1) Reward points – it’s awesome to get anywhere between 1-5% back on every purchase!
    2) Traceability – I’m not running from the pigs so knowing exactly how much I’m spending and automatically getting everything categorized in Mint.com is a huge win for me.
    3) Protection – If you use a good credit card like AMEX, in case anything happens, you’ll likely be able to cancel any charges. Cash can get stolen, lost, etc. and is nearly irrecoverable if misplaced.
    4) Purchase Protection – Buy something and decide you don’t want it anymore but the store has a crappy return policy? Or how about buying a big ticket item that breaks down 1 day past the manufacturer warranty period? Most credit cards have purchase protection and extended warranty benefits that are amazing. I’ve submitted claims for extended warranty with my AMEX Costco card on several occasions and it’s completely hassle free. Check out my site for more details about my experiences!
    5) Carrying a big wad of cash crimps my style when wearing skinny jeans (j/k!)

    One way to control your spending while using credit cards… I use Mint and I’ve set up strict budgets for various spending categories. As you charge your credit card, they get categorized. Set up budget alerts for when you want to get alerted to high spending. Set up a Google Groups email that includes you and your significant other and tied to the Mint account so that everyone gets the alerts and are on the same page. This has worked pretty well for me and my wife.

    • Moon September 12, 2013, 1:46 pm

      Same here. I think we are the minority here though. I found cash is easily spent and I never know where it went after the end of the day. I use Mint too for a few years now, I check my Mint a few times a day and I love the fact that everything is categorized so I don’t have to manually tracked my spending. I honestly find it very hard to manage my spending with cash.

    • retirebyforty September 12, 2013, 4:50 pm

      Credit cards are great, but cash just works better for some people.
      I don’t like carrying a wad of cash either. 🙂
      Ahh… That’s a good way to use Mint. Nice tip.

  • krantcents September 11, 2013, 4:36 pm

    I am just the opposite! If I have cash in my pocket, I will spend it and have nothing to show for it. Cash is very easy to not hold yourself accountable.

    • Moon September 12, 2013, 1:48 pm

      Totally agree! If I ever get $40 out of the ATM machine I will just spend it with the mentality “It’s already out of my bank account so the money has already been deducted. Doesn’t matter what I spend it on, it won’t make a difference to my account.”

  • Martin September 11, 2013, 9:00 pm

    I like your reasons, but I still believe in a different approach. I like to use the credit cards for all sorts of benefits and I am also like Krantcents above, if I have cash on hand I tend to spend it. So my approach is save first and then go and shop, but withing the savings you have. And once the bill arrives, use the savings to pay the balance off.

  • Julien @cashsnail September 12, 2013, 12:21 am

    I don’t use cash at all because it simply annoy me to carry coin. I just keep a 20 in my wallet just in case but only if my debit card don’t work.
    On the other hand, my wife constantly keep cash on her to buy lunch at office or snacks in vending machine.

    But how do you define “discretionary spending” ? When eating out alone or with friends ? To buy clothes ? Gym membership ? Books/video game ?

    • retirebyforty September 12, 2013, 4:52 pm

      I don’t like coins either. I just leave them in the change jar or give it to our kid to put in his piggy bank.
      Discretionary spending – eating out, clothes, books and other entertainment expenses.
      I don’t count monthly fees so Gym membership is not a part of it.

  • [email protected] September 12, 2013, 12:39 am

    Credit cards definitely make me spend more. But I have a much harder time tracking my spending without cash.

    • retirebyforty September 12, 2013, 4:53 pm

      It’s harder to keep track, but I just bin it. I know I spend $80/week on discretionary stuff (plus groceries) and that enough info for me. 🙂

  • Wallet Engineer #1 September 12, 2013, 11:23 am

    Until this month I did not even own a credit card (and carry no debt of any kind) and used my debit card instead. However, I do agree with many of your points such as delayed gratification and the psychological impact. the assured small (I already keep an iron fist on my money), positive benefit of using cash is outweighed by MINT.com’s ability to track and categorize everything for me. I’m a fiend for data. I think, though, that if you carry any amount of credit card debt you should use cash until the debt is repaid.

  • davidmichael September 12, 2013, 9:22 pm

    As an RV Traveler, Credit Cards are essential on the road for us. They are automatically paid each month, plus I write down our expenses at the end of the day to make sure we stay within budget. And they serve as a great record of expenses

    From the standpoint of profit/loss, my Costco Amex card costs me $110 a year but I receive an annual rebate of $310 to $410 a year making a net profit of $200 or a 200% return. On my second card I receive airline miles that have no blackout dates.

    Also…I use my cards for rental car insurance that can save a hundred dollars per week.

    I rarely use cash in our travels although we have a cash fund of $200 available at all times. This lasts about two-three months.

    So, in summary, cash may be king, but credit cards are convenient (as long as you do not abuse them.)

    • retirebyforty September 13, 2013, 6:11 am

      Credit cards work a lot better you as an RV traveler. You have plenty of time at the end of the day for book keeping too.

  • Little House September 13, 2013, 7:00 am

    My biggest problem with cash is that it gets misplaced or “disappears” much too fast! If I were to switch to a cash system, I think I’d have to go with a prepaid Visa card. It’s something I’ve thought of.

  • [email protected] September 15, 2013, 6:19 am

    Compelling reasons indeed! Thanks for sharing!

  • Mel December 17, 2013, 1:41 pm

    I try hard to use cash and I give myself an allowance-about $300 a month which excludes groceries and gas. We also save specifically for vacations and home improvements so I use the credit card for large purchases like air travel and home improvements so I get the rewards (more travel) and can pay off the balance right away.

  • Corey December 9, 2015, 8:37 am

    I’ve just started using cash only, and it has made a huge difference. When I was using cards, I would look over my spending at the end of each month using mint.com to speed things up. I never spent outrageously, but with cash I’ve managed to cut my monthly spending in half, which feels amazing.
    I was a little confused by your spending allowance. Do you spend $80 on groceries and everything else (movies, coffee, . . . ), or $80 for general spending and an additional amount for groceries?

  • Todd December 29, 2015, 4:09 pm

    You forgot number 8: the ubiquitous cash discount (if you know the art of the haggle). I just had a minor car repair. Total cost after taxes: $265. I offered cash and asked for out-the-door total of $220. They gave it without hesitation. That’s a 17% discount. Show me a credit card that offers net benefits to match that value.

  • John July 20, 2016, 7:57 am

    I charge everything to my credit card and I pay it in full every month. In the last thirty years I never was late with a payment (840 F.I.C.O.). I don’t remember what it was like to pay interest. However, I use Quicken and I enter every expense every day, no if ands or buts. It’s what I do every morning, plus checking my bank and credit card websites also, because careful indian is worth four palefaces. If I have problems with a merchant (Very seldom I do) my credit card takes care of me. I make to envelopes every year, one from January 1st to June 30th and another one from July 1st to December 30th and I put the credit card receipts in them. If I have any problems, the receipts are there and I can complain, return, check or prove whatever is required. Another thing to take into account it’s common sense; are we going to buy whatever we see? With cash I had to turn the pocket inside out and kill the bacteria with a hammer…

  • Sarah June 30, 2018, 11:19 am

    I use my debit card for everything and have ever since I was old enough to have one many, many years ago – I have heard so many people suggest that you spend less when using cash instead of plastic because you are more mindful of handing over real money. My husband and I set a monthly budget together and I give myself a weekly allowance for food, life spending and petrol. I have an app on my phone to track what I have spent against my weekly allowances so I feel like I’m pretty good at keeping an eye on where my money is going. I’ve always used my debit card for all my spending if I ever have cash it has usually been because someone has given me some unexpected cash (like my husband got a big tip at work which he has pass to me or my family has gifted me some cash or I’ve sold something and the person has paid me in cash) so in my head I always think of cash as treat money and spend it that way! I might do an experiment of going card free for a month and see if it changes my spending habits!

  • Scotty Byrd August 5, 2018, 11:58 am

    I have never owned a credit card I’m sure I don’t have much credit than again I personally just use a debit card and cash !! I pay with cash at gas stations or anywhere I’m at physically for the main reason it’s fast also when I get change back I can use that to put in a piggy bank ! Only time I use debit is when order online personally I think credit card are a trap since you’re more likely to spend versus when you have to actually touch than money than hand it over !!

    Also I hate card readers and swipping the constant you need to swipe aw you need to use chip reader just is annoying to me I’d rather just hand over money and not have to worry about signing for a ten dollar pizza ? Plus the feel of cash ? is the best !!

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