Articles and books on personal finance will provide as many tips as possible in an effort to make at least a couple of them stick. This approach may convince readers to save for emergencies and pay out less than they bring in, but in some cases you can say to much without explaining anything.
In this article we'll focus on just one technique to improve your finances - paying in cash. Here's how making cash-only purchases can help you to budget, save and invest.
A Plastic Paradise
With rapid increases in the use of plastic over hard currency, some people consider carrying cash old fashioned. To be fair, plastic is much sexier than a bit of coloured paper with a deceased president gazing into the great beyond. Some banks even allow you to customize the colour and graphics on your credit and debit cards.
Debit and credit cards also offer the advantage of security. With them, you need a signature and/or a PIN number to access your funds. Cash is only protected by your ability to defend it should someone want to take it from you.
Except for the odd country store, plastic is accepted in as many places as cash is. Yet cash is almost always the better choice for making a purchase. Here's why:
One of the drawbacks of credit and debit cards is that they encourage you to spend more than you intend to by giving you easy access to more capital. With cash, spending more than you intend requires going to a bank or ATM, then returning to the store to complete your purchase. This provides time to reconsider whether your budget can handle the extra strain.
Carrying only the cash you are prepared to spend on a given product can prevent you from ‘buying up’ and paying for features you don't need. This works for minor items, but buying a boat or pickup truck requires more cash than you may be comfortable carrying on you. If a cheque can't be used, a debit card is better than a credit card because you can only spend money you already have.
Cards won't just lead you to pay too much for single purchases, they also encourage you to buy more items than you mean to. Stores build displays to make their wares appealing so that you will purchase more. In some cases a checklist is insufficiet in preventing impulse buys.
People tend to spend more with credit cards than with cash. One study found that people spend up to 18% more when using credit cards, and McDonald's notes that average purchases rose from $4.50 to $7 when customers used plastic over cash.
Only carrying enough cash to buy the things on your list is the best way to shop within your budget. If you take the time, you can find sales or inexpensive alternatives to your regular brands to make your cash go further.
Cash Vs. Credit
For the purpose of this article, cash means money you have already earned. Using your Visa for a cash advance does not solve the problem of using high-interest debt to cover your expenses.
Cash has one clear advantage over credit cards: if you carry a balance on your card, or only make the minimum monthly payment, you will incur interest at a rate of 15% or more on your purchase. This means paying $15 or more for every $100 you spend. If you save enough cash for the same purchase, you give yourself the equivalent of a 15% discount by not using your card.
Cash Vs. Debit
If we just portrayed cash as a better alternative to credit cards, few would argue against us. In contrast, debit cards enjoy a protected status, despite ATM fees.
A debit card can also trivialize purchases. Being a square of plastic, it is difficult to tell how much money is spent through your debit card. It becomes a matter of $2 here, $6 there and so on until you give up tracking how much you spend. It's a shock when the monthly statement comes. With cash, you can monitor your funds as you spend.
Using a credit or debit card offers more security than cash in most cases. For large purchases, cash is often not an option and writing a check or getting a bank draft may be more trouble than it is worth. In addition, a properly used debit card can be a great alternative to cash.
A credit card can also be a convenient tool, but it's only a fair substitute for cash when your balance is paid in full at the end of each month. Otherwise, your reward for convenience is credit card problem debt .
If you tend to overspend, shopping with cash is one way to adhere to your budget and limit impulse buying.
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