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Cash Only vs. Credit Only: Which Saves You More Money?

  By May 6, 2013

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For those looking to save money, some personal finance experts recommend a strict cash-only spending strategy, sometimes referred to as an “envelope system.” Others extol the virtues of credit cards — used responsibly of course.

So, which is better? I’ve used both. When my husband was in grad school, at the height of the recession, we used the envelope system. Now, we’re experimenting with putting all of our expenses on a rewards card to get airline miles. I’ve learned that each method has its pros and cons:

Cash Only (aka the envelope system)
I have really good memories of the few years we spent using the envelope system. This method of managing money involves creating a budget, taking cash out of the bank and dividing it into envelopes for each expense category. For example, if you’ve allotted $100 a week for food, you’d put that much cash in an envelope labeled “groceries.” You might have another envelope for toiletries and yet another for clothes. Here’s what I liked about this system:

  • You can’t overspend. You’re forced to live within your means, and this provides peace of mind. You don’t wake up at 3 a.m. wondering if you forgot to log a debit card purchase and got an overdraft fee. You can’t spend money you don’t have.
  • You’re forced to get creative. You can’t just throw money at a problem. Say you forgot a friend’s birthday. Instead of feeling like you have to shell out $50 you don’t have to grab a gift card, you’ll have to brainstorm. Maybe you already have all the ingredients to bake the perfect birthday cake.
  • Money is more tangible. Being vague about money (“Oh, I think I have about $500 in my checking account.”) will get you in trouble every time. The envelope system doesn’t allow you to be iffy. You count and handle your money every time you part with it. You can see exactly how much is left.

And here are a few minuses:

  • You might feel awkward. When we used this system, I felt uncomfortably old school as I pulled a crumpled envelope out of my purse and counted out pennies while someone clutching a credit card waited behind me in the checkout line.
  • It lacks flexibility. You get paid tomorrow but want to splurge on a nice evening with your significant other tonight? Sorry! You’ll have to dig for spare change and hope you find enough coins to buy a $3 bottle of red from Aldi. The flipside: you’ll be really thrilled when you do — maybe happier than if you just plunked down your credit card for a nice bottle of Bordeaux.
  • It doesn’t work for everything. There are just some purchases where you must use plastic. For example, when you order plane tickets or rent a car.

If you’re interested in trying the envelope system, WiseBread.com has a good guide to getting started.

The credit-only system
Here are the pros of the credit-only system:

  • Extreme convenience. It’s so easy to just pull out plastic and swipe. There are no bills to be counted and, as long as you’re not near your credit limit, no wondering if you have enough money on you.
  • You can build up rewards. It’s nice to know that you’re building up cash back or airline miles every time you make a routine purchase. It gives even the worst expenses — think paying the plumber to unstop your toilet — a silver lining.
  • You feel more affluent and secure. OK, this is both a plus and a minus. I definitely feel richer when I swipe a card. On the other hand, that’s exactly what can get consumers into trouble and lead to overspending.

With that in mind, here are the minuses of living a credit-only life:

  • Record keeping can be a hassle. With the envelope system, you just open an envelope and count the cash. Simple. With credit, you’re spending money you should pay off at the end of the month, and it’s essential to keep track and record purchases while making sure you have enough money in the bank to cover your bill at the end of the month.
  • It can lead to debt. When you pay with plastic, you’re essentially spending your money in advance. It takes vigilance to make sure you spend only what you can pay off in full.

The upshot: The credit-only system can be good for consumers who are already on very solid ground financially. As Get Rich Slowly points out, you should think about using rewards cards for your expenses only if you have a good credit score and no high-interest debt.


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