Great Savings 34 – Cash Is King

 

Cash vs credit: Which is best?

Hey, I thought I was king!

Banks count on us to use their debit and credit cards. They make money on every transaction and then interest on top of it. Is it any wonder they’re attempting to turn smart phones into the next credit cards with fancy new apps? Never doubt they’re invested in making buying convenient—not when their ability to profit is at stake.

 

Banks are invested in making buying convenient.

Your bank loves you when you use their debit and credit cards.

So is convenience all bad if it means we can carry around less cash, even out bumps in income or expenses, and still buy the things we need?

 

It’s hard to argue against anything that seems to make life simpler on the surface. We humans prefer simple and easy over complex and more difficult. And it’s true credit cards offer certain advantages. For example, we receive a monthly summary of all our expenses and get cash back or earn awards. However, all this “convenience” comes with a huge hidden cost—one that shows up big time as we struggle with debt.

 

Let’s imagine a scenario to prove the point. Say you go out to a restaurant with your significant other and enjoy a wonderful meal. When the bill comes you’re a little surprised that the cost is one hundred bucks. Still, you had a nice bottle of wine and the entrees were excellent. It’s not so bad, you think. Unfortunately, if you pay with cash you’ll be short the rest of the month. Thus, you pull out your credit card, paste on a smile, and say, “Charge it, please!”

 

Though you had every intention of paying off that bill when the next statement came around, your car had an unexpected flat and you needed to buy a whole new set of tires. The tires are also outside of your budget so now you have a $500 balance. Still, you’re expecting a bonus at work and think you can pay it all off next month.

 

Buy with cash, not credit.

You can save more than interest by paying with cash. Never be afraid to ask for a cash discount. If nothing else, a retailer should cut the price by the 1.5 to 3% they pay to swipe a credit card.

Next month rolls around and your mother-in-law calls to say she’s been ill. Your sweetie thinks it’s important you both go to visit her. Mom is getting up there and it’s been awhile since you’ve seen her. You decide you better not wait and charge two $600 cross-country airplane tickets.

 

As the months pass and your credit card statements come and go you soon realize you’ve somehow managed to accumulate a $5000 debt. In fact, you’re bumping up against your credit limit. How did this happen, you wonder?

 

A chart showing interest charges accumulating over two years.

How much did that dinner really cost? It depends on when you pay it off. Click to expand. Use your browser to come back.

The trouble with this example is it’s all too common and you still haven’t paid off that dinner that started everything. Of course, by now the bank loves you, because they’ve been accumulating interest the entire time. In fact, if you look at the chart to the left you can see how a $100 balance on a credit card account quickly balloons. Let it ride two years and something you thought cost $100 actually costs about $167. That’s two-thirds more!

 

Think about paying two-thirds more for everything you buy with credit. Talk about inflation! That’s two-thirds more you choose to pay the bank. In a way, you could think of it like paying a voluntary tax. Can you imagine volunteering to pay Uncle Sam two-thirds more on your income  tax bill every year? Then why agree to voluntarily give that much to a bank? Now, in truth our example assumes your credit card carries an annual interest rate of 26% and you tend to pay the monthly minimum on the account. You may get a better rate and pay more than the minimum. Nevertheless, the following point holds true:

 

Any time you buy with a credit card and have to carry a balance, the price you actually pay for goods and services goes up—sometimes way up. 

 

What’s the bottom line? Relying on credit cards to pay bills and expenses mean you ultimately end up with less money to buy other things you need or to put away for college or retirement.

 

 

But Wait! What about hidden fees?

 

Great Savings 34 - Cash is King is a Great Savings Tip from Javabird.com.

Banks are all too happy to take government bailouts, but they don’t survive on them. They survive by charging their customers exorbitant interest on the loans they make while paying only a paltry rate on the savings they hold. In addition, they make an extra 1.5 to 3% from merchants every time you swipe your credit card which makes the cost of everything that much more expensive from the get-go. Remember, those merchants have to pass that cost along.  To be fair, whatever a bank brings in has to be more than it pays out or it couldn’t stay in business. Still, and this is important, you do have a say over what you pay your bank every time you buy—that is if you pay with cash.

 

Cash Is King

 

As we just learned, buying with credit has huge hidden costs. To avoid those costs all you need to do is change your current buying habits and start using cash. With cash:

 

(1) You avoid paying interest charges.

(2) You vote with your pocketbook and tell banks “No!” when it comes to hidden credit card swipe fees.

(3) You truly own what you buy right away and you won’t miss sleep over accumulating debts.

(4) You can often negotiate a discount if you’re willing to dicker over the purchase price. That can ultimately end up saving thousands.

 

Have you been playing a sad song of too much debt?

Is it time to change up the tune?

There is another important reason to avoid using credit in favor of cash: When we use credit cards we lose our sense of value and unconsciously train our brains that it’s okay to buy more than we can afford. For more on this topic be sure to read our post, “Danger Ahead: The Credit Card Disconnect.”

 

Action Item: Want to get control over the cost of living? Then commit to using an all cash-based method for buying goods and services. You can start right now. Go get your purse or wallet and take out all the card credits you have. Now, cut them up or lock them away so you’re not tempted to use them when you go out shopping. Next figure out how much cash you’ll need on a weekly basis. Take a week’s worth of cash out of the bank and place it in several envelopes. For example, one for groceries, another for gas, etc. If you’re afraid to use cash because you fear it may be stolen, use checks instead. However, to make checks work for you, it’s critical to keep a running balance. If you don’t know how see our post, “Checkbook Tricks: Keeping A Tight Rein On Cash.”

 

If you find managing cash is still a struggle try reading “This Napkin Is My Personal Financial Planner.” In it, you’ll learn a super simple, easy, and proven method to track cash and insure there’s always enough money on hand  to pay off those bills.

 

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