To Pay Cash of Not to Pay Cash: That is the Question

Is it better to pay cash than use credit cards? It depends.

Wikipedia Commons

To pay cash or not to pay cash: that is the question.
Whether ‘tis nobler to charge everything, to gain rebates and frequent flyer points, but to suffer:
The demand of paying balances in full: each and every Month.

Or to take up Arms against a Sea of debts
And by opposing, end them: to pay them in full, to sleep soundly and worry-free
No more shall we carry balances on our credit cards
We shall end the heart-ache of indebtedness.
‘Tis our consumption that must decline
For who should bear the Whips and Scorns of outrageous Interest?

(with my apologies to the Bard)

If Hamlet were amoungst us today, would he contemplate out loud whether to use credit cards or cash? He probably had bigger worries. But the best choice for you, dear readers, depends upon a number of factors.

Personally, I despise cash and use it only when I absolutely have to. For me, paying with cash means forgoing – at a minimum – a 1 ½% rebate, or as much as a 6% rebate on purchases. It’s the hassle factor finding a (fee-free) ATM and dealing with handfuls of left-over pennies, nickels and dimes. But most of all, cash expenditures are difficult and tedious to track. I try to keep meticulous records of our spending. Yet, at year-end, there is usually around $100 cash that I cannot account for!

However, if you carry a month-to-month balances on your credit cards and/or make impulse purchases, cash may be the way to go. Here are pros and cons of each:

Cash Pros:
  • Paying cash is a great method to limit spending – studies prove that paying cash reduces impulse purchases and spending overall
  • Unlike credit cards, if your cash gets lost or stolen, there’s no risk of identity theft (assuming your driver’s license or other documents did not disappear with the cash)
  • Some restaurants and retailers only accept cash
  • Some gas stations offer a cash discount
  • Cash is the ‘universal gift card’ – for tips and presents
Cash Cons:
  • If you lose cash, it’s …. gone.
  • Carrying around lots of cash could make you a target
  • The time and effort required to physically withdraw cash from an ATM or bank. Possible ATM fees
  • If you have lots of cash in your pocket, you may be inclined to spend it all (‘burning a hole in your pocket’)
  • Travel can be much more challenging to arrange: from booking hotel rooms and flights, renting cars, to getting cash in a local currency
  • Cash expenditures are difficult to track. An essential element of being Frugal and Wise is knowing where your money goes
Credit Card Pros:
  • Convenience – a credit card is always in your wallet. It can be used for faster transactions at gas pumps, kiosks and the like
  • Security –a lost or stolen credit card can easily be deactivated and replaced, with no financial loss
  • Rewards, whether cash back rebates (generally a statement credit) or travel points
  • Protection and the ability to dispute charges when in disagreement with a merchant
  • Perks such as extended warranties and rental car insurance
  • Ease of use when traveling abroad (just be sure your card that does not assess foreign transaction fees)
  • Statements that are a record of your expenditures
Credit Card Cons:
  • Very easy to spend too much or buy impulsively. Using credit cards requires considerable self-control
  • If you don’t pay the full monthly balance, you will be subject to interest charges that could really sap your finances
  • ‘Convenience fees’ are sometimes accessed for using a credit card. Example: property taxes, income taxes, vending machines. Be vigilant. A credit card is probably not worth using in these situations
  • The possibility of identity theft or unauthorized use. Regularly checking credit card activity and credit reports is a must do
Recommendations and Takeaways:
  • Although the role of cash is diminishing, it’s virtually impossible to use cash exclusively or credit cards exclusively. We all exist somewhere on a continuum (or blend) between the two
  • If you are faithful paying your credit card balances in full every month, go ahead and use credit cards for the advantages mentioned above. But be sure that you have credit cards that work hard for you. See recommendations in earlier FW&W postings: 31 Essential, Frugal and Wise Actions – 6, My Favorite Things Part I
  • If you currently carry credit card balances, cease using your credit cards until the debts are paid off. That should be one of your highest priorities.
  • Ditto if you are unhappy with your high spending levels and low saving rates.
  • If you do go with cash, utilize the ‘envelope’ method: split it your cash for the month into spending categories, both discretionary and necessary. Once all the cash in a given category – particularly a discretionary category — is spent, similar expenditures will just have to wait until next month

What are your experiences with cash or credit cards? Please let me know.

Cheers, Paul

© 2017 Paul J Reimold

1 thought on “To Pay Cash of Not to Pay Cash: That is the Question”

  1. You are spot on. As with almost anything, a blended approach is best.

    1)Keep some cash on hand in case of an emergency.

    2) Find a bank which refunds out of network ATM fees. USAA does.

    3) Make sure you are comfortable with how credit cards work before opening one. Don’t tempt yourself to fall into debt needlessly. Your mindset in opening a credit card should simply be that you are going to reap cashback.

    4) The best general purpose cashback credit cards are the Citi DoubleCash (2% cashback on all expenditures) and the CapitalOne QuickSilver (1.5% cashback on all expenditures, with a $150 bonus when you spend a certain amount of money in a certain amount of time after opening the account).

    The Citi card is better in my book, but it should be noted that you receive 1% cashback when you purchase and an additional 1% when you pay off the balance. Thus, you should always redeem your cashback instead of using accrued rewards to pay off your balance, since that money isn’t used to “pay off” your balance, but to reduce it. Also, with the Citi card, be aware that you will not receive your initial cashback for two billing cycles after opening the card.

    5) Some credit cards offer 5% cashback on rotating categories. Every quarter, the card will earn 5% back on some type of purchase, such as gas, movies, home improvement, Amazon, etc.

    The best is the Discover It card. It offers unlimited 1% cash back on any purchase and 5% cashback on rotation categories, up to $1500 a quarter. Additionally, when you open a new discover card, they will double all the cashback you earn in your first 365 days.

    Second is the Chase Freedom, which has similar rotating 5% categories and offers a $150 cash bonus when you spend a certain amount on the card within three months of opening it.

    6) for excess cash you don’t need immediate (<3 day) access to, check out ally bank's online savings account which offers 1% interest. There are no fees whatsoever and it is very easy to setup. 1% is not a lot but it is better than the .05% your bank is probably giving you, and you'll feel strangely conflicted when reporting your interest income to the IRS each February.

    All of the cards mentioned above have no annual fee. I personally use all of the cards mentioned aboveboard except for the capital one quicksilver.

    If you are comfortable and if your credit can handle it (go to creditkarma.com for a credit score estimation), opening a few of these cards can make a small but steady contribution to your overall financial health.

    If you want more details or want to explore the many credit card options out there, head over to nerdwallet.com which is a terrific research tool.

    Bonus tip: mint.com allows you to import virtually any financial account (checking, savings, credit card, HSA, IRA, money market, 401(k), etc) into one place. You can set budgets, bill reminders, track spending by time frame, category etc. I highly recommend this site. Also, see: personalcapital.com.

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