Cash Or Credit?

cash or credit retire by 40
I really need a light box!

Cash or Credit, that’s the question. The credit card was a great invention. It’s convenient, it’s easy, it’s quick, what’s not to like? I got my first credit card pretty late. I think it was probably my Junior year in college and I didn’t use it much. Before that, I paid for items with checks or cash. Once I graduated from college and got a stable full time job, I started using the credit card more and more because the cash back reward was great. I almost always paid off the full amount every month so I didn’t accumulate any credit card debt. I was getting airline mileage, reward points, and cash back. It was great! So why did we convert back to cash over the last 2 years?

Credit cards made it too easy and painless to spend money. When we were putting every purchase on the credit cards, I didn’t bat an eye when I swipe a $40 charge for dining out. These charges had a tendency to accumulate and by the end of the month, the credit card bill was out of control. Sure, I could pay, but it was eating into my retirement savings.

Let’s take a quick look at the March 2009 credit card statement. I see eyeglasses, Indian restaurant, 1 sale a dad (?), Ikea, Clearwire, DSW shoe, Korean restaurant, Petco, Mc&Schmick, Asian grocery store, Trader Joe’s, Aaron Brothers, gas, groceries, clinic, cafe, Chinese food, NWA, Homegoods, Napa, Safeway,, public transport and more groceries. That bill turned out to be around $3,300. That’s a bit higher than usual even for back then, but I see Feb. 2009 and April 2009 bills are all around $2,000. In contrast, our March 2011 credit card bill was $382.

The drastic difference is due to our cash allowance budget. We budget $200 per week for discretionary spending and try to use cash for as many things as we can. Basically, if we pay in person, we almost always use cash. We are much more conscious with the cash in our wallets. If we run low on the cash allowance then we put off purchases until next week. Studies have shown that people spend more when they use credit card v.s. cash. (see footnote) That’s definitely true for me. I can tell you I have $19 left in my wallet right now and that’s the most I’ll spend until I get my next allowance on Saturday. How much is on my credit card right now? I’m not sure, probably around $400. We still use the credit card, but mostly for online purchases, which are rare.

Of course if you are super disciplined and are great at keeping track of your budget, then credit card might be the way to go. Make sure you get the credit card deal by sticking with reward cards and avoid annual fee.ย To keep it simple, just use one main card that fits your spending style. Chase Freedom is a good choice because of the simple cash back reward and NO annual fee.

  • Financial Samuraiย paid off a $35,000 credit card bill in one payment and earned 1% money back. I think this is great since he is making good money and he can handle it.
  • Suba wrote at Broke Professionals about using 10+ credit cards to maximize the rewards. That’s just nutty. There is no way I can keep track of all those cards in my head. I have way too many things to worry about already.

Oh yeah, if you pay cash/check for big purchases, go ahead and ask for a discount. We got 3% off from our new window blinds that way. The economy is still not great so vendors will give you a break if they can. That 3% was just going to the credit card company if we charged it.

What about you? Have you tried using more cash? If so, are you spending less with cash? If not, why don’t you try for 6 months and see how it goes? I realize everyone has their own approach and what works for us might not work for you.

See my KISS Credit Card Strategy

(Journal of Experimental Psychology: Applied, published by the American Psychological Association. September 2008)

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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31 thoughts on “Cash Or Credit?”

  1. I try to encourage people all the time to use a credit card if they can be responsible. If you can control your spending, then mathematically, the credit card is a hands down favorite over cash. You get rewarded for spending money you were going to spend anyways.

    • I feel we are responsible with money, but we still spend more with credit card. It’s too easy to lose track of how much you spent already. ๐Ÿ™‚

  2. Hmm, they say the proof is in the pudding, so I believe that you are correct and cash works best.

    I don’t know if I will switch or not… but I’m sure you are right and going the only cash route works well more many!

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  4. We only have one card, and it doesn’t get used much. Lately, we’ve been trending more towards cash. I record all expenses in a spreadsheet anyway, so everything is accounted for.

    • We have been doing really well with the credit card lately. We kept the charges under control and the cash system is working great. In my excel, I have a column for cash allowance. ๐Ÿ™‚

  5. While, I agree it is not for everyone – I buy almost everything using my credit cards. I do this for 2 primary reasons. The first and primary reason is for tracking. I have used Microsoft Money and Quicken religiously for almost 15 years now – I love seeing exactly where my money goes. What gets measured gets improved.

    The second is points and rewards – everything is inflated in price because of credit cards and if you aren’t getting something back you are missing out.

    Having said that – I also never carry a balance. EVER. The only exception are for special deal cards like Home Depot 0% for 18 months or something like that.

    • I tried Money and Quicken, but just couldn’t stick with it. I am using Mint now and it’s a bit easier because it’s mostly automatic. I’m not detailed oriented so having a cash allowance is easier for me. I just need to figure out how much is reasonable and once it’s gong, it’s gone.
      We still use one credit card and never carry a balance. Why pay that exuberant interest rate?

  6. We have an electronic envelope system to do our budget each month. I break down each paycheck in an Excel spread sheet by category (gas, groceries, utilities, fun, mortgage, retirement, etc). As I make a purchase its deducted from its category. Once the amount equals zero, that category is done for the month.

    Groceries are $50 a week or less no matter what. As we put items in the cart i write down their price on my list and before we get to the counter we add it up. If we are over, we swap things out. If we are under we either check out, or we will stock up on a good pantry or freezer sale. For purchases like this we use our Credit Card and get 2% cash back because we would spend the same amount with cash or credit. We also put gas, and other one time bills on the cards… We try and use cash for our fun money so we can’t go over or worry about something getting debited out at the wrong time and hit with bank fees.

    I think for some people, having cold hard cash for everything doesn’t allow them to really track what they are spending their money on… but I think a combination of the two is a good balance, especially if you give yourself a set amount for each category.

    • That sounds like a lot of work to keep track of. How long have you been using this system? There is no way we can keep up with the tracking because I’m not detail oriented. I use Mint to help with budgeting and the things I put on the credit card is tracked. For Cash, we just call it an allowance and spend it anyway we want. It’s easier for us.

      • Its the only way I ever started budgeting. Each week I look at my spending and subtract it from its category. If I’m out of money in a category I need to make do or borrow from another one if its a necessity (like getting to work– not I want to eat steak for dinner). Here’s a sample budget.

        Paycheck One: $1,271.54
        —-Mortgage, MIP, & Prop tax $808.18
        —-Emergency Fund $86.36
        —-Church giving $127.00
        —-HOA $250
        Paycheck Two: $1271.54
        —-Groceries $250.00 ($50 every week)
        —-Gasoline/Car Maint $292.54
        —-Bills (Electric, 2 Cell phones, & Internet) $200.00
        —-Roth IRA $200.00
        —-Fun $55.00
        —-Insurance Premiums (Auto, Earthquake, Home) $147
        —-Church Giving $127.00
        —-Christmas Savings account $50.00

        When I spend something from the category, I subtract how much I have left. I reconcile the accounts every few days and sometimes I keep a paper in my wallet saying how much I have left to spend on things so I don’t forget. I’ll put my purchases on the CC so I don’t have to worry that the grocery money from the first two weeks is really coming from my second paycheck (but I also keep $1,000.00 in that savings account to cover the charges in case the bill comes before the paycheck.)

        Only when i’m grocery shopping will i write down the prices as they go into our cart because we could easily blow much more on “wants” and end up wasting a lot of food that way.

  7. Since we will be taking out a new mortgage, not using our cc too much. Use the debit card to keep track of expenses. (My personal opinion, any purchase at Ikea is a good idea ๐Ÿ™‚ !

  8. I use credit cards primarily for the points.

    At first it was easy to keep track, because I just had one mastercard.

    Now I have an Amex, a mastercard, and a joint Visa with boyfriend.

    So far its working out still, but more work to keep things on track.

    The asking for a discount thing by paying cash is great! Saved lots of money on our renovations that way.

  9. Cash is king.
    It’s not hard to track expenses using cash. Divide cash into actual cash – figure out how much you need each week and what you need to use it for. Those expenses are pretty constant. For us it is gasoline, garage saling and an occasional lunch out. Use checking accounts for the rest and USE THE REGISTER to record what you spent.

  10. I tried cash at the beginning of the year and it was really hard for me to keep track of. It’s so much easier for me to use my debit card (which is still using cash, but from my bank account!) and tracking it on an every-other-day method. Since I use Quickbooks, it makes me much more anal tracking my expenses and income. I also like the colorful pie charts and bar graphs, then I can compare with previous years and see how we’re progressing.

  11. I use cash. The only time money is left in checking is if I’m paying a bill online, or leave gas money in there for the hubby. He refuses to use cash to pay gas.

    For my family of 3, I have about $75 of discretionary funds. If we really have emergency, then we can dip into our emergency fund.

  12. I used to use Credit Cards for everything but once I got married, I gave a card to my wife and it became too hard to mentally track how much she spent. Since then, the strategy is a mix. Big ticket items and all utility bill (where possible) are on credit, but day-t0-day expenses are cash (bank card).

    Note that my credit cards are ALWAYS paid off on time. Never do I pay interest on it.

  13. I used to put everything on my card but then realized paying interest for lunches was about the dumbest financial decision I could make. I now take out a set amount a cash a the beginning of each week for meals (it also keeps me cognizant of when I’m going to too many fancier places)

    • You must have done some kind of budgeting with cash. I can see that would take a lot of efforts. We just spend the allowance and don’t really keep track of it. Once it’s gone, it’s gone. ๐Ÿ™‚

  14. I like to be able to trace my spending, so I prefer a credit card. However, if you’re one of those people who doesn’t care where the money goes as long as you don’t spend above a certain amount, then I can see the cash thing working very well. ENvelope systems, etc. are just too complex.

  15. It is incredibly easy to spend money using credit. We use a debit card and can see it being subtracted out of the check book each time it is used. That helps keep a lid on spending since when it is gone, you don’t spend any more.


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