I’m sure you’ve all seen the commercials for Visa were the guy stops the progress of society by paying in cash…. Well, in my opinion that guy or gal is the smartest one in the room!

The dangers of credit cards…

The simple reason that I think cash is the best way to go is that it is tangible. When you pay in cash you know exactly what you are spending. That is not what happens when you use a credit card.

Credit cards are a lot like the chips you get in a casino. They are a representation of money, but not real money. You don’t have to give anything away when you pay with a credit card. It is almost as though you didn’t have to pay for something - that is of course until you get your statement.

Credit cards can be a great tool if you have the mental and financial discipline to pay them off each month and stay strictly within the confines of a rock solid budget. The problem is that the vast majority of people don’t have what it takes to use them responsibly, or don’t realize the hidden costs of using the card.

When you don’t pay off your Credit Card you pay interest. Many times, the rate is so high it is almost criminal and you end up paying double or triple the initial cost for items you buy. Not only do you pay more… but you are owned by the credit card company! That is a horrible feeling and can lead to horrible things. Read my post, Who owns you? for a quick discussion on that.

A story from my past…

I learned the pain of credit cards during my college years and then again after college as my spending got a little out of control.

During my time in college, I opened up a credit card with a major financial institution. It wasn’t a fancy airline card, or points card, just your basic Visa card. I used this card for make small purchases and to buy things that I thought were important - (beer, stereos, video games, and other essential items). Of course, none of these things were really important, but they were things I wanted and I had a credit card!

It took a little bit of time, but I somehow managed to rack up $10,000 in debt on this credit card. I had been making payments each month and it wasn’t really a big deal to me. I was living the high life, had a nice job that paid well on my off hours and wasn’t too worried. My credit limit on the card was also $10,000. That month, I paid my minimum payment and went on with life…

The next month, the bill came and I owed close to $10,250 but I hadn’t spent a penny that month on my card!?!? I was slapped with an over limit payment, interest fees and a host of other fees that came as a result of making my minimum payment! As you can imagine, I was furious. I called the bank to plead my case and got a few of the charges removed - not all of them.

At that point, I decided to focus my efforts on paying this card down as soon as possible. I wanted to get out of debt to this horrible company and never do business with them again… The problem of course was that I had racked up $10,000 in debt and I didn’t have that kind of money sitting around. I paid as much as I could and worked the balance down slowly while having to turn my high life off and live real life for a while.

That card was finally paid off a few years later. Instead of closing it, I started to use it again to swap debt. You know the drill - the low interest offer comes through and I’d swap debt from company A to company B. By this time I was married and my wife and I used credit cards to buy everything. We paid our primary card off each month with no problems, but continued to debt swap up the balance on other cards.

After a few years of doing this we had managed to rack up another $20,000 in credit card debt that was starting to become an annoying drain on our monthly cash flow. None of this $20,000 was big ticket items, it was just the accumulation of small crap over the years that we couldn’t afford that day so we swapped it off to a credit card - at low interest rates.

I was floored… How did we do this? We paid our card off each month and only once in a while did we have to roll stuff over… Or so I thought. After looking through our spending patterns I was appalled. We bought so much useless crap it was frightening. Neither one of us felt like we were spending out of control… however the numbers didn’t lie.

The first thing we did was go to back to the drawing board and get that debt paid down. We setup a big monthly payment to go against the primary debt and worked on getting our monthly spending down. This was a mostly beneficial plan and served to pay down the vast majority of the credit card debt - however we were still spending way too much - all of it on credit cards.

After about two years of trying to work down the debt we had accumulated and reign in our spending we made a fundamental shift that changed everything - we started to pay in cash.

Pay in cash

Paying is cash is deadly effective. When you setup your budge and decide that you have $100 to spend on a certain thing, it’s really hard to spend more than $100 - because you don’t have enough cash to go over budget!

Here is how it works.

1. Make a budget - This is a longer topic that I’ll cover later
2. Withdraw your allotment on a schedule from the bank. We do it every 4 weeks, you can do weekly, monthly or whatever works for you.
3. Pay in cash

It’s pretty simple.

When you only have $80 to spend at the grocery store, you can’t spend more than that without making a conscious decision to go over budget. You have to actually put your cash away and pull out the deadly credit card to screw up. If you make a commitment to not use the cards, or better yet leave them at home in the safe or something you simply cannot overspend. Stores generally don’t like to give you stuff that you can’t pay for.

It is amazing what this shift in behavior does. Finding value and sticking to a solid budget almost becomes a game. You find ways to ensure that you’re always getting the best bang for your buck and at the same time living in a world of increasing financial freedom as you’re no longer piling on debt!

Today we have zero credit card debt. We still have a card that is in use on a monthly basis, but it is used for fixed recurring and non-discretionary costs only. Things like our phone bill, gas for the cars and the like go on the card. Everything else that we take action to purchase is paid for in cash - period.

If anything else is to go on the card it is a discussion between Megan and I and we figure out were in the cash budget for this month we are going to cut, and then deposit that money back in the bank.

This system works wonders. Our monthly spending on things like food and clothing has dropped like a rock, while the quality of items and that we have has gone up. We don’t waste money on useless items, and are paying down our remaining consumer debt in leaps and bounds.

Cash is truly king… Give it a shot, you’ll like the results.

Categories: Personal Finance