I heard the other day that people tend to spend more money when paying with plastic (debit or credit, and even if they pay if off every month). What's your opinion?
Lara, as you might have read before, the financial gurus will always tell you that the first step in your decision to increase savings and reduce debt is to go on a cash system. The reason is that consumers do tend to spend more -- often much more -- when using credit cards. Using a debit card where the money is directly transferred from your checking account is a step in the right directions; however, it still will increase spending.
Why is this true? Well, first the psychological aspect plays a huge role. I remember in my spendthrift days (yes, I was once quite the spendthrift!), I would think nothing of pulling out my credit card for a $120 purchase at Ann Taylor. I assure you that if I had to hand over six $20 bills, it would have been very hard to make that purchase. Using plastic allows us to separate ourselves from the money so much that it never seems real. When I pay with my debit card, I see columns of numbers in my head, represented on my bill-paying spreadsheet. It's very different imagery when I pay with cash.
The second reason is that it's ridiculously easy to go over your self-imposed limits when you use cards instead of cash. For example, if you had $100 in your checking account after paying bills, you might leave it there to cover gas for the week, a trip you plan to make to the drugstore, and a gift you need to buy. But then, two days later, while browsing the fabric store with a friend, you find a great deal on fabric that would be perfect for a project you have in mind. You pull out your card to make the purchase, thrilled with your discount. Of course, when it's time to buy that gift, the money is no longer there.
You might argue that if you know your limits and upcoming purchases, you would have enough self-discipline to pass up the sale at the fabric store. For some, this may be the case. But for most people, just carrying the debit or credit cards sets up a mentality that money is always available. You can always take advantage of great deals when you stumble upon them because the money is always in your wallet in plastic form.
Here's a personal example. At the beginning of this year, I decided that because I had finally established good credit, I wanted to take advantage of it with a "rewards" credit card. I made plans to use it responsibly. I would only use it for gas and groceries, items I would buy anyway regardless of plastic or cash. In fact, in order to stick to my budget, I planned to put in checks and balances for myself. Rather than pay for gas each time I purchased it, I would buy one gas card at the beginning of the month on the credit card, receive the rewards, then pay it off the next week. At the grocery store, I could buy a gift card on the credit card as soon as I walked in the door to receive the rewards but still stay in budget.
Three months later, I discovered the major problem with my plan. I am about as organized as any mother, which means that getting out the door to begin with is a fiasco and adding in more things to remember to bring would increase the already stressful situation. Because I make weekly grocery trips, and at least one gas purchase a month, I had to keep my credit card in my wallet all the time so I didn't forget it and lose my "rewards." What resulted was that I never broke the habit of having money always available. That made it way too easy to charge a dinner out because I "really needed the break" or to charge that great deal at the fabric store.
In the end, of course, the rewards were never worth it. I spent at least 10 times the amount I earned on purchases that were mostly impulsive. Now, the credit card has retired into a drawer and it never graces the inside of my wallet.
It takes a lot of guts to go to a cash-only system. It's a great plan to use when you need to save money or reduce debt quickly. In today's society, it would be hard to maintain a cash system permanently, and for most people, to maintain it long-term would definitely require a complete shift in our modern, fast-paced consumer habits. It is, however, an admirable goal to pursue.
Thanks for writing, Lara! Every Thursday The Tightwad Trainer will answer one of your questions. Email me at tightwad_trainer@fuse.net and I will do my best to solve your dilemma. Sign your name if it's OK for me to include it!
Annoying but necessary disclaimer: All information contained herein express my opinions only and are based on my health status & location. Each person's situation, health, and local laws & ordinances are different. By all means, use your own common sense & don't do anything you see here if someone more important than me (like your doctor, your local police, your own conscience) would disagree. If you're easily persuaded by everything you read, and you think I might cause you to hurt yourself or break the law, quit reading my site, please.
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