Posted by Robert on August 29, 2011
This is a guest post by Robert, who lives in Calgary and
works as a financial adviserretired at 34. He is married, has three kids. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
I think that a big part of the problem is credit cards. Fifty or more years ago, credit cards were very rare. Some people used charge cards, for convenience, but credit was extended by banks based on a relationship with the bank manager. These days, everyone uses credit cards (often multiple) for the convenience, for the rewards and, in some cases, for the credit. Without getting into the system-wide costs of everyone using cards for transactions, there are negative impacts on individual spending decisions.
According to psychological research, spending cash incurs a certain pain. It’s the feeling of giving something up, the same feeling that comes from losing money, since your wallet now has less. Credit cards have been shown to remove that psychological pain, since we give up nothing. We hand over our card, it’s swiped and returned to us. Using cash instead of a credit card would cause most people to be more reluctant to spend.
Credit cards don’t display a balance. When we spend money using a credit card, we don’t immediately see how it affects our bank account. We can’t get a sense of how quickly we are moving toward spending the money that’s available in our account. In fact, with a credit card (and good credit), there’s no indication when we have spent all the money in our account and more. With most cards, the only indication that a person must stop spending is when the maximum amount of credit has been reached. By that point, the consumer is already carrying a balance (likely) and spending additional amounts on (high) interest charges.
Using a cash budgeting system, on the other hand, gives immediate feedback on the rate of spending and on the amount still available. Suppose, for example, that after my regular bills, I give myself $250 per week for groceries, gas, entertainment and incidentals. As I spend money, my wallet gets thinner. If I take out $50, I can immediately see that I have $200 left, and I get a sense that I’ve used one fifth and that at this rate, I will exhaust my weekly amount after four more similar purchases.
Using cash instead of cards for almost all purchases would give most people increased control of their spending. In many parts of the world, including Taiwan where I lived for two years, credit card acceptance is still not widespread. I found that using cash for all of our spending helped us to develop good spending habits. We could withdraw the amount of money we expected to spend, immediately see how spending choices affected the amount left and realize when we had spent all the money we had allocated for the week or month.
Have you experienced benefits from using cash? Do you have another way to stay aware of spending and your bank balance?