With the proliferation of plastic and digital alternatives to hard currency, many people consider carrying cash a throwback to an earlier age. In the modern age, it's all about fast transactions provided by credit cards. Cash may be king, but "buy now, pay later" reigns supreme.
While there are many benefits to purchasing with a debit or credit card, sticking to cold hard cash for your routine daily transactions may ultimately help your wallet. Let's take a close look at how using cash instead of plastic can contribute to your ability to budget your money better, save more, and invest more.
Key Takeaways
- While there are many benefits to purchasing with a debit or credit card, sticking to cold hard cash for your routine daily transactions may ultimately help your wallet.
- Using a credit card encourages people to buy more and spend more. Multiple studies have found that people will spend more when they use a credit card compared to cash.
- Paying in credit cards does offer an enviable convenience to "buy now and pay later," but individuals must be careful to monitor their spending carefully at risk of carrying heavy debts.
The Benefits of Cash
Diminishing the Chance to Overpay
One drawback of credit and debit cards is that they encourage you to spend more than you should do, and more than you intend to, by giving you easy access to capital. It simply doesn't feel like you're spending more money when you're using credit cards since you can't feel the money leaving your wallet.
Just as cards encourage overpaying for one item, they allow you to buy more things than you mean to. Stores are designed to display products appealingly and encourage impulse buying. Multiple studies have found that people will spend more when they use a credit card compared to cash. For example, an MIT study from its Sloan School of Management found that individuals may spend up to 100% more when shopping with a credit card, as opposed to cash. Another study published in the Journal of Applied Psychology found that diners tipped an average of 4.29% more when using a credit card.
What can you do to avoid this? Generally speaking, only carrying the cash you are prepared to pay for a given product will prevent you from buying the next level up and paying for features you don't need. That's the best way to keep shopping within your budget. If you are motivated, you will find discounts or cheaper alternatives to your regular brands to make that cash go further and maybe earn yourself a luxury item with the cash leftover.
Fewer Security Risks
There is also a practical security advantage with cash. Although debit and credit cards often have personal identification numbers (PIN) and chips for extra security, there is less risk of identity theft or your information getting stolen online when using cash. Cash is only protected by your ability to defend it should someone try to take it from you.
Cash vs. Credit Cards
Cash has one very clear advantage over using a credit card: if you use credit and end up carrying a balance, you will incur interest on your purchase. According to the Federal Reserve, the overall credit card interest rate in Q1 of 2021 was 14.75%.
If you save up enough cash for the same purchase, you are giving yourself the equivalent of ahuge discount by not using your card. Before you sign up for a card, make sure you know what you're getting into by carefully examining the credit card agreement.
A credit card is only a good alternative to cash if you promise yourself you'll pay it off in full every month, and you do. If managed well, credit cards (even secured credit cards) help you build credit to buy a home or another large purchase in the future.
Cash vs. Debit Cards
A debit card used responsibly can be the best substitute for cash, as long as you know there's money in the bank. By using a debit card, you're not incurring any new high-interest debt. As long as you are not incurring any overdraft fees, or withdrawing money impulsively from ATMs that charge high fees, debit cards can be a straightforward way to make purchases.
That being said, the biggest drawback of a debit card is that spenders don't get to build their credit. But like a credit card, a debit card trivializes purchases since they're harder to keep track of than counting the cash in your wallet. If you carry cash, you'll know how much you're spending from day to day. You might even put the brakes on if you're spending too much.
With a debit card, many who don't check their account balances until the end of the month, when the bill arrives, will be surprised to find they incurred so many charges that they completely forgot about.
The Bottom Line
Ultimately, individuals use a mix of both cash and credit cards for different kinds of purchases. While paying in cash will most likely help you save money and make fewer impulse purchases, paying in credit cards does offer an enviable convenience and allow you to afford larger items—given you monitor your spending carefully and make sure to pay off your balance each month.
With cash, your spending is straightforward and there is less risk of identity theft. Ultimately, it's up to each individual to make the best decisions based on their financial health, what they are purchasing, and the risks they are willing to incur.
FAQs
Paying with cash vs. credit helps you keep your debt in check. It can be easy to get into debt, and not so easy to get out of it. In addition to paying more in total for purchases over time, you're also accumulating more debt if you don't pay your bills off from month to month.
Is it better to pay with cash? ›
Paying with cash keeps you from spending money you don't have—which means you don't owe anyone. And unlike credit, when you buy those new shoes with cash, you don't have to worry about making payments on them or the interest coming back to bite you.
What should you not pay with cash? ›
“Basically any electronic purchase should be done with a credit card,” she said. “Not only will you have some purchase protection by doing this, rather than paying with cash, but many credit cards offer extra warranties on top of what a product may come with or what a store will offer.”
Is it smart to pay cash for everything? ›
Using only cash has a big advantage, as Manktelow-Pimm pointed out: “When you use cash, you don't have to worry about interest charges on credit cards or loans. This can save you a lot of money in the long run.”
What are the disadvantages of paying with cash? ›
The disadvantages of cash:
- Hygiene concerns. Coins and banknotes exchange hands often. ...
- Risk of loss. Cash can be lost or stolen fairly easily. ...
- Less convenience. ...
- More complicated currency exchanges. ...
- Undeclared money and counterfeiting.
Paying with cash vs. credit helps you keep your debt in check. It can be easy to get into debt, and not so easy to get out of it. In addition to paying more in total for purchases over time, you're also accumulating more debt if you don't pay your bills off from month to month.
Why do people still use cash? ›
Some people still prefer to use cash, perhaps because they like the tactile nature of physical currency or because it provides confidentiality in transactions. But digital payments, made with the swipe of a card or a few taps on a cellphone, are fast becoming the norm.
Is paying in cash suspicious? ›
Cash is Often Used By Criminals
Due to the far lower traceability of cash, it's no wonder that it is the primary form of transaction used by criminal organizations.
How much money should you keep in cash? ›
Most financial experts suggest you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000. Personal finance guru Suze Orman advises an eight-month emergency fund because that's about how long it takes the average person to find a job.
What are some pros and cons of paying with cash? ›
Pros and Cons of Cash
Most people are willing to spend more on their plastic than in cash. Paying cash also avoids the interest charges on credit cards. If you can't pay your statement balance in full each cycle, you'll accrue interest charges. Some downsides to cash include the risk of loss, theft, and hygiene.
No matter how you answer, there could be an impact on your credit limit, Howard said. Lenders can cut your credit line at any time whether or not you respond to update requests.
Do people still pay with cash? ›
Cash is the most commonly used form of payment, with 67% of respondents favoring it, demonstrating its enduring appeal for physical transactions. Debit cards (42% using chip and 35% swipe) and credit cards (35% using chip and 26% swipe) also remain popular.
Why do people want cash only? ›
Sometimes, sellers just want to sell the home quickly and they don't want anything to hold it up. Sellers that found their dream home or need to move fast for other reasons don't want to be tied down by a buyer with mortgage financing who could experience delays in the buying process.
Why are some people cash only? ›
An exclusively cash lifestyle may help you follow your budget, sidestep overspending, and avoid the high cost of overdraft, interest, and other fees that can be incurred when you pay by check, debit, and/or credit card.
Should I go cash only? ›
While you may pay the same price for a product or service, whether you are paying cash or credit, with a cash only purchase, you won't have to pay the additional charges often associated with credit cards. They could be fees issued by the merchant or charges and interest levied by your bank or card provider.
Is it better to pay cash or use a credit card? ›
Neither is better than the other 100% of the time, so knowing when to use cash vs. credit is key to spending less and earning more. Generally speaking, cash is widely accepted and carries zero debt risk. However, credit cards are more secure and convenient.
Is paying cash better than card? ›
By paying for purchases with cash, you avoid interest charges on those new purchases. Additionally, if you have triggered a penalty APR on your credit card, it may be wise to pay with cash as new charges could accrue nearly 30% in interest charges.
Is it smarter to finance or pay cash? ›
Cash purchases can help you avoid debt, but you miss out on the potential benefits of buying now and paying later. You may consider using finance options such as credit cards, payment plans or loans when making a large purchase like a home or car, or when you need some time to pay off a purchase.
Is it safer to pay with cash? ›
Security
In any time of crisis such as the one we're currently in, cash guarantees a level of security and privacy that cards simply cannot. Unfortunately, a global crisis is a time when some people will try to take advantage by stealing credit card numbers and hacking personal data.
