Should You Pay in Cash?

Articles and books on personal finance generally pack in as many tips as possible in an effort to make at least a couple essential ones stick. This shotgun approach is worth it if it helps readers learn to pay themselves first, spend less than they make, and so on, but saying too much sometimes means explaining too little.

In this article we’ll focus on just one technique to improve your finances, by taking a close at how making purchases with cash can contribute to your ability to budget, save and invest.

There is also the security advantage with debit and credit cards. Debit cards are protected by your personal identification number (PIN) and credit cards by your signature (and for some cards, a PIN number too). Cash is only protected by your ability to defend it should someone else want to take it from you.

Moreover, cards are as widely accepted as cash – with the exception of a few mom and pop shops. And yet, from a personal finance view, cash is almost always the better choice for making a purchase. Here’s why:

Overpaying

One of the drawbacks of credit and debit cards is that they encourage you to spend more than you intend to by giving you easy access to more capital. With cash, spending more than you intended requires going to a bank or ATM to get more and then going back to the store to complete the purchase. While some businesses have in-store ATMs, all charge fees, in addition to whatever fees your bank charges. For most people, these factors will cause them to reconsider whether their budgets can handle any extra strain.

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. This works for small-scale purchases, but buying a computer or a car can involve large amounts of cash that probably shouldn’t be carried 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 don’t.

Over-Shopping

Just as cards encourage overpaying for one item, they also allow you to buy more items than you mean to. Stores are set up to make products appealing in order to persuade shoppers to buy more. Sometimes a shopping list isn’t enough to protect you from impulse buys.

According to the article “Cards Encourage You to Overspend” on Soundmoneytips.com, people will spend more with a credit card compared to cash. In fact, a Dunn & Bradstreet study found that people spend 12% to 18% more when using credit cards than when using cash. And McDonald’s found that the average transaction rose from $4.50 to $7 when customers used plastic instead of cash.

So what can you do to avoid this? Only carrying enough cash to buy the things on your list can limit the damage. This is 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.

Cash Vs. Credit Cards

Cash, for the purposes of this article, is strictly limited to money you have already earned and is sitting there for you to use. Using your Visa to take a cash advance and then carrying the cash with you will not solve the essential problem of using high-interest debt to cover your expenses.

Cash has one very clear advantage over using a credit card: If you buy something on your credit card and end up carrying a balance, or only make the minimum payment each month, you will incur interest at a rate of 15% or more of your purchase (which can have you paying $15 or more for every $100 you spend). If you save up enough cash for the same purchase, you are giving yourself the equivalent of a 15% discount by not using your card. Before you even sign up for a card, make sure you know what you’re getting into.