Cash Only: One Route Out of Debt
There are more than a few ways to deal with credit card debt, as well as other financial crunches. More than a few financial gurus recommend making the switch to a cash-only lifestyle: getting rid of credit cards and using only the cash in your wallet to make purchases. There’s a reason that the cash-only approach is so popular. If you stick to only cash, it’s virtually impossible to add to debt. But there are some drawbacks worth looking at before you jump on the cash-only lifestyle.
Managing Savings
Taking a pure cash-only stance is difficult, if only because saving up a lot of cash on your own is impractical. Even if you have a safe place to store your cash, it won’t be insured, like it would be in a bank. You also won’t earn any interest on your savings — while we may be talking about pennies, it’s important to remember that pennies add up. So, for most people, a cash only lifestyle still involves a bank. It doesn’t necessarily involve a debit card, however. Because one of the benefits of cash only is the fact that making it harder to spend your own money usually translates to less spending, a debit card is out. If you’re planning to make a large purchase (and you’ve got the cash in the bank), checks are generally considered a good compromise.
Using Checks
You can use a credit card virtually anywhere, but it’s much harder to use a check. In some cases, it can actually be harder to use cash, rather than a credit card, as well. Want to rent a car? You’ll be asked for a credit card. Offering cash will only flummox the guy behind the counter. You’ll find yourself jumping through some hoops to spend your own money if you switch to using only cash.
There’s an argument that because it’s so much harder these days to use checks, you’ll be less inclined to go out and spend money. That may be true, but for some people, the ease of renting a car and making other payments is far more important than sticking to a cash only approach. That’s not a reproach on such individuals’ approaches to money: it’s a fact of doing business in the modern world. It’s a more than reasonable objection to the cash only system.
Building Credit
Credit reports are crucial for a lot more than getting a new credit card these days. Employers look at the credit reports of prospective employees, landlords look at the credit reports of prospective tenants and even utility companies look at credit reports before deciding to connect someone’s electricity. And that’s assuming that you don’t want to buy a house — while mortgage may not be a bad kind of debt, it’s hard to get one with no credit history whatsoever. If you go cash only and eliminate your credit cards, it’s much harder to build a solid credit history.
It’s not impossible: you can take out a loan that you have the money for and pay it off quickly or take a similarly roundabout route. You can also point those individuals who would otherwise check your credit score to the FICO Expansion service — essentially a credit score for those individuals who use cash only. You can also use services like PRBC, which reports your bills that you pay on time (such as telephone) that aren’t reported on your credit report, to build up your credit. There are fees involved in using such services, however.
A Credit-Based World
The simple fact is that living a cash-only lifestyle these days is a rarity. Many companies just aren’t set up to help anyone planning to pay cash with the process. If you walk into a car dealership and try to pay cash for a new car, for instance, you’ll have a much harder time completing the transaction than if you finance it. It’s not because car dealers don’t want your money: it’s because that situation is so unusual that a dealership’s staff really doesn’t know how to handle it.
Sticking to cash for all your transactions can end up costing you more time than you might expect. If you feel that your time is more valuable than the money you can save by using only cash, that approach just may not work for you.
Pros and Cons of Cash Only
There are definitely plenty of drawbacks — as well as benefits — to living a cash-only lifestyle. But the thing about personal finances is that they’re personal. Using only cash works really well for a lot of people. But it doesn’t work perfectly for everyone. You may find that a complete conversion to cash only doesn’t work for you, but a modified approach — like limiting your eating out budget to the cash in your wallet — works out great. It is worth at least checking out the cash only approach and seeing if it can at least save you some credit card fees.
If you have gone cash only, successful or not, please comment on your experiences. What worked? What didn’t? What tips can you offer to someone thinking about going cash only? I know what my experiences have been, but I’m always interested in seeing why someone else has an easier or harder time with relying more on cash and less on credit.
WRITER'S BIOGRAPHY
Thursday Bram
Thursday Bram blogs about a variety of topics, from personal finance to small business. She is the author of an upcoming book on the tools and tricks you need to build a career you can take with you during long-term travel. More information about Thursday and her book, Working Your Way Around the World, is available on her personal site, ThursdayBram.com.
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Comments
andyg8180 says on February 3rd, 2009 at 9:37 am
More cash in my hand means im eager to spend it faster…esp when that last $20 bill is broken… I think a good approach is to have a debit card with no credit cards…If you go to subway, you spend $5.50 on a sandwich, $5.50 comes out of your aaccount… But if you gave them a $20, I’ll put $100 on it that says you will hit the vending machine with those loose dollar bills or 50 cents…
Great article btw…
Elevated Sky says on February 3rd, 2009 at 9:59 am
Can someone forward this to Mr. Obama?
Grant Baldwin says on February 3rd, 2009 at 11:49 am
I think this is on the right track, but I don’t know how realistic (or smart) it would be to live with JUST cash. My wife and I use cash for the obvious things such as gas, groceries, clothes, eating out, etc. But we pay all of our bills online and I carry a debit card for when I travel (hotels, car rental, etc). Some combination of cash and a debit card is a healthy mix.
Jim says on February 3rd, 2009 at 1:44 pm
@andyg8180 – I found debit cards are too easy to spend a little more than I would with cash.
Quick Service Restaurants (QSR) had a study that found by paying with plastic you are likely to spend more.“QSR Customers using ATM or Debit Cards spend an average of 75% more than those paying with cash.”
You can see more about his at http://changejarsavings.com/?p=14
Yes, But Still... says on February 3rd, 2009 at 7:51 pm
Because I meticulously track finances, I’ve found that using debit-card only is the best way for me.
This is the case because I’m deterred from making small purchases [like I would if I carried cash] if I know that I’ll have to update a spreadsheet later with the total.
Perry says on February 3rd, 2009 at 9:42 pm
We went cash-only a couple of years ago and it has worked out great! And to be clear, by cash, I mean cash money and a debit card. The key is no credit cards! We mostly follow the advice of financial guy Dave Ramsey who has a multi-step plan that gets you out of debt, money in the bank, and living on what you make. And it’s not magic, it’s just getting focused on paying off what debts you may have and then not taking on any new ones.
We have no credit cards, no car loans, no debt at all other other than our mortgage, and if we can’t afford something we don’t buy it, or we save up until we can buy it.
I think if more people — and business — worked this way, we wouldn’t have this financial crisis now.
Jane says on February 3rd, 2009 at 9:44 pm
My household has been cash/debit card only for almost 5 years now. It’s been such a mental relief.
Yes, we still have mortgage, utility bills, student loan and 1 car payment but over all – it’s helped. We don’t want for anything – would we like to buy more fluff – sure but we’ve learned to prioritize “what we need” vs “what would be fun”.
Gordon says on February 3rd, 2009 at 10:54 pm
To get the best of both worlds, I’ve started using Mint.com to track my finances, credit cards, accounts, etc. The website is extremely easy to set up and track your online accounts (much simpler than Quicken) and has the added benefit of not allowing you to forecast. In using quicken, I’ve got budgeted amounts set up and am frequently forecasting out an extra month to see how much I can spend on my credit cards…it never fails that I spend more than I’d like! With Mint, I set up a separate account for credit card expenses only (taking out house payment and other monthly bills and putting into a different account) and then check account balances on my iPod touch before making a purchase. The rule that I follow is that the credit card balance can never exceed the amount I have available in the account. In this way, I’ll never spend money that I don’t have.
I use credit cards for all my purchases and pay my balance in full each month. Cash never works for me since I always lose track of where I spent my money…another added benefit of Mint is that it easily imports all your transactions, categorizes them (you can customize too) and set a budget and you can pretty much real-time see how much available money you have left. Highly recommend some kind of online solution.
Nerdly says on February 4th, 2009 at 12:01 am
One benefit for my wife and I to using a debit card is to categorize where our non-bill money goes. Every so many months we sit down and look to see if we’re dining out too much or wasting money on categories of items that we really don’t need.
It would be almost impossible to know where that $30 went that was in my wallet at the end of a week.
So if you’re interested in tracking where your money goes, then something with a bit of a paper trail is the better way to go.
Nerdly says on February 4th, 2009 at 12:04 am
Here is a sub-question: When tipping using cash, do you find you tip more or less than you would if used a credit/debit card? (Wondering if there is a pattern in that?)
JonatsGonats says on February 4th, 2009 at 12:37 am
Cash is good. You get to think before you act in purchasing anything. But one CON for this is in purchasing something that cost a lot of money. If you use cash principle then you pay for it in an “all-in” scenario. Using credit cards would be better especially at 0% interest because you’ll get that investment at a lower cost wherein you can use your money to invest and earn more to pay for the later bills. Just DO NOT delay paying your credit card bills.
I say use CREDIT for large purchases. Avoid paying the whole chunk wherein you can use the money to further invest in other things.
I say use CASH for everything else. Say STARBUCKS, if you pay in CASH, you will feel immediately the wasted money. Then you’d go why not make your own coffee anyway. Putting the “Latte Factor” into practice.
Let me know your thoughts… is my mindset logical? Thats how I treat expenditures.
Vincent says on February 4th, 2009 at 12:57 am
Hi Bram,
By having cash in our hand it is harder for us to splurge on products that are more expensive but having cash on hand is a great lure for us to spend that amount too.
Cheers
Vincent
Personal Development Blogger
Siva says on February 4th, 2009 at 4:59 am
Hi Bram,
Very good article. I donno how iz it in the western world. You can use your debit card(Card linked to your checking account) everywhere Credit Card is used in ASIA. Hence, your approach on Cash can be better applied here with a combination of Cash/Debit Card.
Cheers
Siva
Scott says on February 4th, 2009 at 9:09 am
Everyone has the thing that works for them. I tend agree with several others here. I would call my lifestyle “no credit cards” rather than “cash only”. If I have cash, I burn through it without any clue as to where it went. Therefore, I never carry cash and use Mint (I used to use Quicken Online) to categorize all of my spending. Using this insight into my spending habits, I will have paid off significant credit card debt and be debt free one year from now. I’m very excited about that!!
Jaap says on February 4th, 2009 at 9:26 am
“Quick Service Restaurants (QSR) had a study that found by paying with plastic you are likely to spend more.“QSR Customers using ATM or Debit Cards spend an average of 75% more than those paying with cash.”
Although this may sound interesting, you need to keep in mind that most people pay with plastic for the simple reason they don’t have that amounht of cash in their wallets. I have never paid anything of over 200€ with cash, just don’t feel safe carrying that amount of money around…
Jon Hartman says on February 5th, 2009 at 1:37 am
Good call on the pro-cash sentiments. I’ve adopted many of the same tactics, yet I have to reject your assertion that you NEED credit just as much as reject the FICO score as an absolute indicator of financial stability. This dependancy on FICO only lending instead of manual underwriting was a contributor toward the sub-prime fiasco and now we’re supposed to let people judge our marketplace value by it? I don’t think so.
DivaLion says on February 6th, 2009 at 12:03 pm
When I got out of high school, I got a couple of credit cards. As soon as I moved out on my own, predictably, my balances started hovering at the limit and I struggled to manage debt.
Fortunately, my balances were small compared to what happens to a lot of kids, but it still took me a couple of years of really strict budgeting and reform before I paid them off. Once I did, that was it. No more cards for me.
Living cash-only was a headache for a while because debit cards weren’t an option yet. But since I never made enough money to afford anything big-ticket, it was only an occasional inconvenience. Once I got a debit card, pretty much all my needs were covered. And I agree with the poster above, having a debit card makes tracking your spending habits a LOT easier.
I found that the difference in my spending (excessive/wasteful vs. responsible) didn’t really come down to cash/plastic so much as how much of a priority I made it to manage my resources.
I’ve lived effectively cash-only (with a debit card) for probably about 10 years now. I have no student loans, no car loans, no credit card debt. I would happily stay that way too, but I’m starting to plan towards owning land, so I realize I’m going to probably have to get a credit card or two and start building some good credit. If/when I do, my plan is to only charge regular budgeted items like groceries or gas, or things I’ve already saved the money for. I’ve been through the nightmare of creditors calling every day– learned that lesson young and I am NOT going back down that path!!
Dee Langdon - BloggerNewbie says on February 7th, 2009 at 2:02 pm
Cash only is harder because it requires more discipline. I carry a certain amount of cash and when it’s gone it’s gone until the next refill, my husband is great, he hoards his. My “allowance” for the week is usually gone by Tuesday!
Jason says on February 14th, 2009 at 2:00 pm
In full disclosure I worked on the American Express advertising campaigns. Amex charge cards (not credit cards) offer the ease of credit but with the responsibility of cash as the monthly balance needs to be paid off.
james says on June 24th, 2009 at 4:50 pm
I’m in my late 40’s and I have zero debt. I comepletely stopped banking in 1991. I have never apllied for a credit card or loan. I have paid cash only and will continue to til death. The main reason I stopped banking and never applied for a credit card or loan is “I READ THE TERMS AND CONDITIONS AND THE FINE PRINT” and didn’t agree! I repeat, “I READ THE TERMS AND CONDITIONS AND FINE PRINT AND DIDN’T AGREE!” That was back in the late 80’s and early 90’s. I know credit card and loan agreements have only gotten worse and I wouldn’t waste my time to read them.
Here are a few items I enjoy that you don’t!
1. I get lmost zero juck mail! Well… except for Dish and DirectTV
2. I don’t waste my time on hold dealing with the mistakes Banks make!
3. I don’t waste my time on hold doing the Bank and Credit Card Companies jobs to correct my accounts!
4. I don’t get sold-out by the Banks and Credit Card Companies to Marketers!
5. I don’t get daily mail from Banks or Credit Card Companies.
6. I don’t spend hours every month reading the fine print of every flyer or ad looking for hidden changes in terms or account fee’s the Banks or Credit Card Companies send.
7. I don’t have to deal with jerk-off Bank Tellers.
8. I have almost zero stress!
9. I purchase my autos pre-owned and pay cash.
10. I don’t deal with Auto Sales People or play the Auto Dealers Games!
11. I decided to living in a modest house and now save $$$ on Taxes!
12. I have enough cash to NOT waste money on Home Insurance! That alone will save me lots of grief in filing a claim in the future! Being about to afford to kick the Insurance Money off my back feels great! Insurance thieves be damned! I call the shots and it feels great!
13. No Courtesy Calls from Anyone!
14. I have a go phone, no land line so no Telephone Company BS to deal with!
15. No Bank account and debit card means no place holders on purchases! When I leave the gas pump I’m paid in full! The past stays behind me! The gas purchase is paid, no bill for later or the possiblity of account shortages due to place holders on a debit card.
16. No payment on demand at Bank!
17. No one stands between my money and me. I have cash and live with cash!
19. I don’t sign contracts or agreements I don’t edit. I also don’t play the Arbitration Game!
20. I call the shots, I’m 100% in control of my life. I owe nothing to anyone and I feel great. If I could only get Big Brother out of my life, I would be in Heaven!
Dee says on June 28th, 2009 at 5:53 pm
Wow, James is truly walking the talk! I think I’m about average: Some credit card debt, but will be paid in full by the end of the month, one car payment almost done- just 4 more payments, a mortgage that is comfortable, some home repairs needed, typical. I’m trying to live cash/debit card only and using these online forums and blogspots for continued motivation. Thanks for the article. Very well written.
Karen says on July 22nd, 2009 at 5:44 pm
A combination of credit card, cash & debit card would work, if you manage them well. To continue maintaining & building your credit score, schedule your monthly bills to be paid automatically from one credit card. Then lock that credit card up far, far away to be use in case of emergency only. Have your payroll department direct-deposit enough money to cover your bills into a designated bank account – use this to pay your monthly bills via the one credit card. You can also put additional money for savings here. Keep another bank account for a designated cash to spend. Use ATM or debit card to access it.
This helps you
1) stick to a budget for discretionary spending
2) keep track of your cash balance
3) continue to maintain & build your credit score
4) put away money for savings
5) stay out of debt!