With the proliferation of plastic and digital alternatives to hard currency, many people consider carrying cash a throwback to an earlier age. In the modern age, it's all about fast transactions provided by credit cards. Cash may be king, but "buy now, pay later" reigns supreme.
While there are many benefits to purchasing with a debit or credit card, sticking to cold hard cash for your routine daily transactions may ultimately help your wallet. Let's take a close look at how using cash instead of plastic can contribute to your ability to budget your money better, save more, and invest more.
- While there are many benefits to purchasing with a debit or credit card, sticking to cold hard cash for your routine daily transactions may ultimately help your wallet.
- Using a credit card encourages people to buy more and spend more. Multiple studies have found that people will spend more when they use a credit card compared to cash.
- Paying in credit cards does offer an enviable convenience to "buy now and pay later," but individuals must be careful to monitor their spending carefully at risk of carrying heavy debts.
The Benefits of Cash
Diminishing the Chance to Overpay
One drawback of credit and debit cards is that they encourage you to spend more than you should do, and more than you intend to, by giving you easy access to capital. It simply doesn't feel like you're spending more money when you're using credit cards since you can't feel the money leaving your wallet.
Just as cards encourage overpaying for one item, they allow you to buy more things than you mean to. Stores are designed to display products appealingly and encourage impulse buying. Multiple studies have found that people will spend more when they use a credit card compared to cash. For example, an MIT study from its Sloan School of Management found that individuals may spend up to 100% more when shopping with a credit card, as opposed to cash. Another study published in the Journal of Applied Psychology found that diners tipped an average of 4.29% more when using a credit card.
What can you do to avoid this? Generally speaking, only carrying the cash you are prepared to pay for a given product will prevent you from buying the next level up and paying for features you don't need. That's the best way to keep shopping within your budget. If you are motivated, you will find discounts or cheaper alternatives to your regular brands to make that cash go further and maybe earn yourself a luxury item with the cash leftover.
Fewer Security Risks
There is also a practical security advantage with cash. Although debit and credit cards often have personal identification numbers (PIN) and chips for extra security, there is less risk of identity theft or your information getting stolen online when using cash. Cash is only protected by your ability to defend it should someone try to take it from you.
Cash vs. Credit Cards
Cash has one very clear advantage over using a credit card: if you use credit and end up carrying a balance, you will incur interest on your purchase. According to the Federal Reserve, the overall credit card interest rate in Q3 of 2020 was 14.58%.
If you save up enough cash for the same purchase, you are giving yourself the equivalent of a huge discount by not using your card. Before you sign up for a card, make sure you know what you're getting into by carefully examining the credit card agreement.
A credit card is only a good alternative to cash if you promise yourself you'll pay it off in full every month, and you do. If managed well, credit cards (even secured credit cards) help you build credit to buy a home or another large purchase in the future.
Cash vs. Debit Cards
A debit card used responsibly can be the best substitute for cash, as long as you know there's money in the bank. By using a debit card, you're not incurring any new high-interest debt. As long as you are not incurring any overdraft fees, or withdrawing money impulsively from ATMs that charge high fees, debit cards can be a straightforward way to make purchases.
That being said, the biggest drawback of a debit card is that spenders don't get to build their credit. But like a credit card, a debit card trivializes purchases since they're harder to keep track of than counting the cash in your wallet. If you carry cash, you'll know how much you're spending from day to day. You might even put the brakes on if you're spending too much.
With a debit card, many who don't check their account balances until the end of the month, when the bill arrives, will be surprised to find they incurred so many charges that they completely forgot about.
The Bottom Line
Ultimately, individuals use a mix of both cash and credit cards for different kinds of purchases. While paying in cash will most likely help you save money and make fewer impulse purchases, paying in credit cards does offer an enviable convenience and allow you to afford larger items—given you monitor your spending carefully and make sure to pay off your balance each month.
With cash, your spending is straightforward and there is less risk of identity theft. Ultimately, it's up to each individual to make the best decisions based on their financial health, what they are purchasing, and the risks they are willing to incur.