With the proliferation of plastic and digital alternatives to hard currency, many people consider carrying cash a throwback to an earlier age. Maybe it is, but if there was just one thing you could do to improve your personal financial situation, it would be sticking to cold hard cash for your routine daily transactions.
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.
The Lure of Plastic
To be fair, plastic is sexier than a piece of colored paper decorated with a dead president staring vaguely into the distance. Some banks even allow you to customize the graphics that appear on your credit card or debit card, choosing from a range of designs and colors the company is marketing.
- Using cash for routine daily purchases keeps you aware of your spending habits and helps you control them.
- Using a debit card instead of a credit card for web purchases helps you stay out of the high-interest-debt trap.
- Using a credit card encourages people to buy more and spend more.
There is also a practical security advantage with debit and credit cards. Debit cards are protected by your personal identification number (PIN) and credit cards by a chip, your signature, and, for some cards, a PIN number as well. Cash is only protected by your ability to defend it should someone try to take it from you.
The threat of identity theft should not be discounted. But it is not a threat to your physical safety, and at any rate liability for transactions on stolen cards is limited.
Plastic is just too easy to use. Tap-to-pay technology takes that ease of use to a whole new level.
Moreover, cards and payment apps are now nearly as widely accepted as cash in the U.S. and many other countries. Very small transactions at very small stores can be exceptions.
And yet, from a personal finance view, cash is almost always the better choice for making a purchase. Here are some reasons why.
The Temptation 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.
Tap-to-pay technology carries that to a whole new level.
When you use cash, spending more than you intended requires going to a bank or ATM to get more money and then going back to the store to complete the purchase. While some businesses have in-store ATMs, most charge fees in addition to the fees your bank charges. For most people, these factors will cause them to reconsider whether their budgets can handle the strain.
Using a credit card allows you to spend now and worry later. That's not a good thing.
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.
Of course, this works for smaller-scale purchases. Buying a computer or a car requires more cash than most of us like to carry around. If a check can't be used, a debit card is better than a credit card because you are spending money you have rather than money you haven't even earned yet.
The Over-Shopping Trap
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.
Sometimes a shopping list isn't enough to protect you from impulse buys. Studies have found that people will spend more when they use a credit card compared to cash.
What can you do to avoid this? Only carry enough cash to buy the things on your list. 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 left over.
Cash vs. Credit Cards
Cash is defined strictly here as the money you have already earned that is sitting there for you to use. Using a credit card to take a cash advance and then carrying the cash with you will not solve the problem.
In fact, that's the worst alternative. You've just added a fat fee for a cash advance to the high-interest loan you're using to cover your expenses.
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. In mid-2020, the average interest rate on a new credit card was just over 19%.
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.
Cash vs. Debit Cards
A debit card used responsibly can be the best substitute for cash. It's the best alternative for purchases on websites.
By using a debit card, you're not incurring any new high-interest debt. You can only spend as much as you've got in the account. (The ATM fees are not trivial unless you're careful to minimize your withdrawals.)
But the biggest drawback of a debit card is that it trivializes purchases. Purchases made via a square of plastic are harder to keep track of than many pictures of George Washington flowing through your hands.
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. If you use a debit card, you could get a shock a month down the road.