Written by Abigail T. Pons, MBA, CFP®

Does anyone remember getting that first debit card in the early 90’s?  It seemed like such a wonderful and convenient thing!  You swipe just like a credit card, but the money comes right out of your checking account, “just like cash.”  How clever!  Fast-forward 15 years or so, and widespread use of credit and debit cards doesn’t seem very clever at all.  We are a nation of hyper-swipers, and it’s hurting us.

Most people understand the inherent danger in overusing credit cards and spending borrowed money.  But I think it’s also dangerous to believe using debit cards instead solves the problem.  Using either kind of “plastic” to pay for absolutely everything has quietly created a damaging disconnect between individuals and the reality of their resources.  Even less perceptible to consumers is the burden on businesses to pay transaction fees every time you use your credit or debit card.  In the end, it’s really just banks and financial institutions that have been clever.

In reality, there are major differences between debit cards and honest-to-goodness cash.  Businesses don’t have to pay a fee when you hand over cash, and if you are trying to support local business and our local economy, that’s a compelling difference.  However, I see the most impactful difference from a personal finance standpoint; it is the difference in the experience you have when spending cash instead of using plastic.

We tend to overspend with debit cards because we aren’t really keeping track of what’s going out of our bank account.  If we aren’t doing the math along the way, it’s far too easy to get to the end of the month and have no idea where your money went.  Yes, technology is great and you can download your transactions from your bank to have an objective look at where your money goes, but that is AFTER the money is already gone.  By all means, track where your money is going, but what are we going to do about the behavior of overspending in the first place?

Go back to using trusty old CASH. (or the PLENTY)  I’m not joking…  if you’ve been feeling like you don’t have a handle on where your money is going, start using cash for purchases of anything that you can easily overspend on.   At my house, these things include groceries, clothes, personal care, dining, entertainment, and household items.  Budgeting with cash works because the deliberate withdrawal of your money from the bank and handing over the physical currency brings consciousness back to your spending.  You may find that you are a bit slower to part with your cash.  You’ll have to experience this yourself to understand, but there is comfort in knowing exactly how much you have to spend, and knowing that you won’t be puzzled by a zero account balance at the end of the month.

There are a few things that should go without saying about switching to a cash diet, but I’ll say them anyway.  Don’t keep a big wad of cash in your pocket, bag, or car!   And when the cash you’ve withdrawn runs out, stop spending!  Period.  No cheat-swiping with plastic either – if the tally at the register is more than your cash on hand, put stuff back on the shelf.  Seriously, back on the shelf.  That is sustainable personal finance.  Try it, local businesses will love you for your cash and you might be amazed at how quickly your personal financial picture changes.

Some statistics to put Credit Card Fees & Interest into perspective

Chatham Marketplace, our local cooperative grocery spends 1.4% of ALL transactions totalling  $42,500 a year in credit card processing fees. That would pay someone a very decent salary or be a great savings for all shoppers.

The General Store Cafe reports that 70% of all their business is paid by Credit Card and about 3-4% per transaction is paid in fees. This works out to be around $2,000 a month. When asked how he would feel about people converting to a cash diet, Vance responded “Man, what a savings that would be… I love Cash.”

The average outstanding credit card debt for households that have a credit card was $10,679 at the end of 2008. One year earlier, that average was $10,637. (Source: Nilson Report, April 2009) The average rate for credit cards offering rewards increased to 15.39%, up from 15.32% in July 2009 according to Credit Card Monitor. Say you have average debt of $10,679 @ 15.39%. Even with no additional charges and aggressive payments to pay off  in 3 years, you will still pay $1,419 in interest the first year & $3170 over the 3 years it takes to pay off. That’s a vacation.

Moral of the story: STOP using your credit cards, start aggressively paying them off, examine your spending habits, stop buying what you don’t need and USE CASH!

Get more information on credit card facts & figures and check out this payoff debt calculator.