My wife, Tracy, and I have posted a guestblog on Roy Moran's blog, Lost In Faith. It you are serious about giving more to causes you care deeply about, I encourage you to read it. This is a proven method of saving money that you can then devote to making the world a better place.

Cash vs Credit Cards, Which is best?

December 21st, 2008

A new weekly feature from several of my friends who live free because they pay attention to the pennies. Their advice is worth the listen!

Will the cash system save money, even if you pay off credit cards every month?

Guestbloggers: Richard & Tracy Potter

In 19+ years of marriage we have been through quite a few books, seminars, and group studies on household budgeting. We’re not sure when we first heard the adage that you will spend less if you use cash versus a credit card. It doesn’t really matter, because until recently we didn’t believe it. Tracy believed she could keep track of what we’d charged and therefore stick to our budget. Richard believed the benefits of an affinity card outweighed what we might overspend by charging everything (and we do mean everything) on a Southwest Airlines VISA or Marriott Rewards VISA. We were both deceived.

The biggest deception of all was that we believed we were better than everybody else. After all, we paid our credit card balances every month. That is until the 0% balance transfers proved too tempting to resist. For months we juggled car loans, a new central air conditioning system, and other purchases on such cards. We thought we were so clever because we weren’t paying interest. (We were stickin’ it to the man, man! Richard says.) And because we continued to pay the interest-charging credit card balances in full every month, our superiority complex remained in full force. But the truth is, we were not living within our means. We had no emergency savings put aside. If Richard had lost his job, our ship would have started sinking within a month.

About four years ago we went through the Crown Ministries Biblical Financial Study and decided to bite the bullet. We would see for ourselves if the cash system really works. Tracy set up cash envelopes for groceries, household items, and personal spending money. (See DaveRamsey.com.) For purchases like gasoline and situations where the cash envelopes are less convenient we use the debit card and immediately subtract the charge from the checking account balance. Tracy finds the envelope system especially helpful in keeping track of the food budget. “It’s easy to see when we’re getting low on cash,” she says. “That encourages us to consider what’s already in the cupboard to see how we can get by until the next paycheck.”

Does the cash system work? Absolutely. A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash. And McDonald’s found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash. (See “Sound Money Tips” guide to credit cards, www.soundmoneytips.com.)

It isn’t easy to determine exactly how much we saved by switching to the cash system. But our emergency account has climbed to 3 months of savings and we are working toward 6 months. In 2007 we paid cash for a 2002 Ford Taurus. When the $%#@ Taurus had to have the catalytic converters replaced last spring, we paid cash for that, too. And we never stopped tithing; in fact, we’re giving beyond 10% to support other charities we care deeply about.

We are convinced. When it comes to our family budget cash is king, second only to the King of Kings, Jesus Christ.

Copyright © 2008 Richard M. Potter. All Rights Reserved.