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.
Should you have money in cash? ›
In addition to keeping funds in a bank account, you should also keep between $100 and $300 cash in your wallet and about $1,000 in a safe at home for unexpected expenses. Everything starts with your budget. If you don't budget correctly, you don't know how much you need to keep in your bank account.
Why should you always pay in cash? ›
Advantages of paying with cash
There are certain advantages to using cash, such as: you only spend what you have. you don't pay interest or fees. you may get a discount since merchants don't have to pay a fee to accept cash transactions.
What are the disadvantages of paying in 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.
“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.”
Why is a card better than cash? ›
Secure transactions
When you own credit or debit cards, you don't have to worry about carrying wads of cash in your wallet. Now with chip cards and pass codes, they offer secure transactions. So if someone steals your wallet or you lose it, all you have to do is call the bank and block the cards.
How much is too much cash? ›
There's no one-size-fits-all answer to the question of how much cash is too much. The ideal amount depends on your individual circ*mstances, financial goals and risk tolerance. Talk to your financial professional today to find just the right strategy to help make your retirement remarkable.
How much money should a person keep in cash? ›
While you're working, we recommend you set aside at least $1,000 for emergencies to start and then build up to an amount that can cover three to six months of expenses. When you've retired, consider a cash reserve that might help cover one to two years of spending needs.
How much cash can you keep at home legally in the US? ›
The government has no regulations on the amount of money you can legally keep in your house or even the amount of money you can legally own overall. Just, the problem with keeping so much money in one place (likely in the form of cash) — it's very vulnerable to being lost.
What is best to pay in cash? ›
Things people only pay for in cash could be common goods such as groceries, take out, and gas. Some go the extra mile and save vigorously and buy a car cash or even a house fully paid off. It's up to the individual how they spend their money and budget, whether it be cash, debit, credit, cheque etc.
"Paying in cash typically saves the small business owner between 2% and 3% of the transaction price in interchange fees. Interchange fees are the fees charged by the bank, the processing company and card network to process a credit or debit card transaction," Johnston said.
Why is cash not always a good option? ›
CARRYING CASH MAKES YOU A TARGET FOR THIEVES
If you're fully committed to the cash envelope system, one of the disadvantages of using cash means you'll always be toting around cash—and sometimes a lot of it, especially after payday. And while you might not walk around wearing a sign that says “Thieves, over here!
Why not to keep money in cash? ›
Plus, if you keep your money in cash rather than stocks or bonds over the long run, you could miss out on substantial returns. According to an analysis from Schwab, between 1970 and 2020, stocks, bonds, and cash offered an average annualized average return of 10.7%, 7.0%, and 4.6%, respectively.
What are the cons of cashless? ›
The downsides of going cashless include less privacy, greater exposure to hacking, technological dependency, magnifying economic inequality, and more. Credit and debit cards, electronic payment apps, mobile payment services, and virtual currencies in use today could pave the way to a fully cashless society.
What are the risks of cash? ›
However, holding too much cash beyond emergency funds or short-term needs may be dangerous. At the highest level, it could lead to significantly less wealth over time. Since 1928, U.S. Stocks have outperformed cash in 68% of the calendar years.
Is it better to get paid in cash? ›
As an employee, getting paid in check is better for you as it leaves a transaction trail. But if you prefer to get paid in cash, that's okay as long as your employer pays the right amount of taxes and covers insurance premiums for workers' compensation insurance.
Is cash the safest way to pay? ›
Some people prefer using cash over cards because they believe they may be conscious of their spending. However, using cash can be highly risky. Cash can be easily stolen or lost and difficult to trace. Cash also provides no warranties or purchase protection that some credit cards or other payment methods offer.
Should I put my money into cash? ›
If your money is in cash versus market-based investments that have the potential to generate higher returns, your savings may not cover your future cost of living. Holding cash in a bank chequing or savings account over time won't increase much in value. If it does, it rarely keeps up with inflation.
How much money should you keep in cash? ›
While you're working, we recommend you set aside at least $1,000 for emergencies to start and then build up to an amount that can cover three to six months of expenses. When you've retired, consider a cash reserve that might help cover one to two years of spending needs.
