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, Overstock.com, 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. 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 Samurai 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)
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.