Thursday, September 4, 2008

Will A Cash-Only Lifestyle Really Save Money?

There's been quite a buzz in the blogs and the media about how a cash-only lifestyle will save people tons of money. I'm convinced that a cash-only lifestyle will only help those people who do not budget, since the cash-only policy will force these people to live within their means; the cash-only lifestyle will not save much (if any) money to someone who already lives on a budget.

Here are some proponents of the cash-only lifestyle:

• In Total Money Makeover, Dave Ramsey advocates a cash-only lifestyle (but allows the use of debit cards) and instructs his readers to eliminate all use of credit cards. Mr. Ramsey cites a Dunn and Bradstreet study that "showed that credit-card users spend 12 to 18 % more when using credit instead of cash." Mr. Ramsey further cautions that, "When you play with snakes, you will get bit."

• As an experiment, the couple in this Good Morning America video clip agreed to live one month without using credit cards (or even a debit card) and found that a cash-only lifestyle saved them 24%. The couple decided to continue to use cash only (with the exception at the gas pump).

• Financial columnist MP Dunleavy concludes that people spend more using credit cards because credit cards make spending seem painless. (The same reason why casinos use colorful chips versus cash in all of their table games.) Ms. Dunleavy points out that:
"[R]elying on credit can create a carelessness about your personal finances, a blind spot the size of a barn, that paves the way for overspending and ultimately a lifestyle anchored by debt.” (Italics mine.)
So there appears to be plenty of studies and anecdotal evidence that show that credit card use causes people to spend more than they otherwise would. My own credit card balance clearly supports this as well.

But isn’t it the carelessness and apathy that causes people to over-spend, not the credit card itself? Isn’t this analogous to an obese person complaining about how fast-food restaurants are making him/her fat? Where does individual responsibility come into play here?

For the record, I take full responsibility for the fact that I’m currently $13,000 in credit card debt. I’m in this hole because, until very recently, I didn’t care that I was going into debt.

I used to feel hopeless that I could never dig myself out of my student loan debts so I didn’t care about going deeper into debt through credit cards. I bought expensive clothes, shoes, jewelry (collectively known as junk) and took expensive vacations that I clearly couldn’t afford. Instant gratification took priority over debt avoidance.

Is it really the credit card company’s fault that I, as an adult, didn’t exercise restraint from spending money I didn’t have?

The wife in the GMA video clip said, “I think I’ll definitely pay attention now, ‘Do I have enough cash to go check out?’” Later, the wife said, “I don’t have enough money in my purse to go buy this dress or this new shirt that I want, so you don’t even step foot into the store because you don’t have the money.” This made me wonder whether this couple previously lived on a budget? (Doesn’t seem like it.)

Without a budget and without a list of items to purchase, I can see how someone can carelessly make spur-of-the-moment purchases using credit cards. But I suspect that if someone lives on a budget with a strict commitment to pay off the credit card balance every month, any savings from a cash-only lifestyle will evaporate.

Anecdotally, I’ve now set myself a $500/month budget on my American Express for groceries, toiletries and any other irregular purchases. I carefully track my spending on a weekly basis and I’ve found that I normally come under budget every month. For example, I only spent $369.29 in August for groceries, entertainment and other miscellaneous spending.

I doubt I would do much better living on a cash-only basis. Thus, the inconvenience of the cash-only lifestyle would seriously outweigh any purported savings that I would see living a cash-only lifestyle. I've decided that I will continue to live on a budget and use my credit card judiciously.

I’d like to hear about other people’s opinions and experiences.


MoneyBeagle said...

I think that this ultimately boils down to each individual finding what works for them. There's no 'one right answer' that is best for everybody.

I think avoiding credit cards is good for people that are just starting off when it comes to managing their money, or who get overwhelmed keeping track of too many things. Keeping it simple might be the best way, because it can avoid surprises.

But, for people that are further along in the process or who can juggle a little bit better, the use of credit cards may not be a bad thing. In fact, it might be a good thing if you find a credit card with rewards, and use it wisely. Why not get rewarded for something that you're going to buy anyways? For this, just make sure to track your credit card every day and make sure to pay it off every month (more often if you can).

I think every person needs to find the spot that works best for them.

Great post.

Shtinkykat said...

Couldn't have said it better!

livingpaychecktopaycheck said...

I think that I probably spend more with my credit card when I'm grocery shopping, maybe, but it's my fault for not budgeting when I do that. It's not because I'm using the credit card as a crutch.

I recently read Dave Ramsey's book, too, and I don't think that a cash back rewards credit card is a bad thing for me as long as I stick closely to my budget.

So I say that you're right on with your thinking.

Escape Brooklyn said...

Although I use my debit card for automatic, fixed monthly expenditures (like Netflix and my student loan payments), I do try and use cash for groceries and other discretionary spending. I find that using cash forces me to be more careful with how much I spend, especially at restaurants and clothing stores.

Donna Freedman said...

I'm with moneybeagle -- there's no one-size-fits-all strategy. Although I often write about the perils of overspending on stuff that won't make us happy, and although I believe that credit cards make that sort of thing easier...I use a credit card instead of cash almost all the time. I get frequent-flier miles that way and am able to make *really* cheap trips to visit family and friends.
But the only time I ever carried a balance was when I was paying a divorce lawyer. Money well spent!
That said, I implore everyone: Question each purchase, whether it's cash or credit. Do you really need/want it or have you been programmed to want it?

Dee Kellan said...

Hi, I love your blog. You're doing great and I hope you keep it up. I paid off (or will have paid off) $27,000 in debt this year. I took a deployment to do it- wouldn't recommend it to everyone but having tax free income helped me, plus I couldn't spend very easily. Anyhoo, I wanted to congratulate you. Your blog is a joy to read. Oh I also wanted to toss in my ten cents- it's awesome that you have the self-discipline to pay off your credit cards every month, and also that I think with some people (myself included) using plastic to pay is the same as using plastic poker chips to gamble with in Vegas: it's not "real" money in a lot of peoples' minds so they tend to spend a bit more frivolously than they might if they had to fork over a wad of cash. That's all I wanted to say. Nice blog!

Kyle said...

I get the savings using cash only. I just don't understand the attachment to the credit card use once you have started using a budget and cash.
I don't buy the convenience thing of credit cards at all. I think there is an underlying attachment or struggle to keep the credit line.
They have debit cards, prepay visa's with no fees, pay-pal and so on for the convenience. Also cash is just as convenient if you take it out each payday to get you through till next payday.
Why keep the credit line and open yourself up to fraudulent charges, a mistake that gets you a late fee or any possibility that do not exist with cash.
Very good blog and information.
I simply cannot buy into any reason whatsoever to keep the credit cards and credit line given the information and logic applied in this blog.