Saturday, October 22, 2011

Should you PAY CASH for everything?

Is paying CASH for everything a good idea for saving money?  Perhaps.

In Stephen Pollan's book Die Broke, he advances the notion that you should pay cash for everything, as a means of controlling your spending.  His theory is, if you make it a pain-in-the-ass to spend, you will think twice before spending.  It is an idea with some merit.

One way I have found it easier to save is to "squirrel" away money.  We had an account with a credit union, in another State, that I would mail deposit checks to every month, to set up a reserve savings fund.  Since we had no ATM card, I would have to drive an hour to the Credit Union if I wanted to make a withdrawal.  It worked pretty well, as I got out of the habit of thinking, "I'll just write a check or use my debit card, and transfer money from savings if I need it."

But using psychological tricks on yourself, while useful, is probably not a good long-term solution.  Training yourself to think about money carefully is probably a better idea.

Pollan's advice is from the era in which he wrote it - 1995 or thereabouts.  He criticizes ATM cards and online bill payment because of the fees banks charged for these services back then (and may charge again in the future).  But today, online bill payment is free, with no monthly service charges, and actually saves you the money and hassle of a stamp.

And let's face it, standing in line at the teller to cash a check made out to "cash" and they paying your utility bill in cash at the electric company counter - is that really saving you any money?  Not really.  There are some things that online bill payment makes easier, without increasing your spending.

Pollan recommends paying cash and then writing down all your purchases and logging them every month.  I've tried this and it works.  But an even easier idea is to use the debit card and log your purchases on Quickbooks.  Yes, it is tempting to "spend" with plastic, but on the other hand, it is also possible to budget with plastic as well.  And long-term, I think it is better to learn not to spend than to just making spending harder.

Probably the worst advice he gives is to pay off your credit cards (good advice) and then get an American Express card (bad advice) and a high-interest rate credit card (horrible advice) with no annual fee - for emergencies.  Today, low interest rate credit cards are available with no annual fee.  And if you really need to use a credit card "for emergencies" then you want to make sure it has an interest rate that you can realistically pay off over time.  You can do that with 7.15%, but 25% will swamp you.

And Amex is problematic as no one takes it, and you have to pay off the balance every month or see your credit rating destroyed.   As a means of paying for an emergency transmission repair, it sucks.

Paying cash for everything has its own disadvantages.  If you have cash in your wallet, you may be inclined to spend as easily as if you have plastic.  After all, a wallet full of twenty-dollar-bills seems like a "lot" of money.  And it is much easier, with cash, to not understand where the money is going.

I think Pollan has a lot of good advice.  But in the long-run, learning to live on less and spend less is more important than how you spend.  Paying cash for gasoline (as he suggests) is not going to automatically mean you will pay less for gas, it just means you will spend a lot of time in line at a cashier, waiting to pay for gas - and being tempted to make an impulse purchase at the same time.  A better approach is just to look for the gas station with lower gas prices, right?

But even then, are you really saving a lot or just creating the appearance of savings?  More on that later.

Financial discipline is HARD, to be sure.  We are all weak and we all like to spend, just as we all like candy, booze, sex, drugs, bad television, and anything else that titillates, pleasures, satisfies, or otherwise triggers a response in our brains.  Using psychological games can be a good way of altering embedded behaviors, but in the long run, I think "training your brain" is a better approach.

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