Credit Cards or Cash: A Costly Tradeoff

Where do you stand in the tradeoff between cash and credit cards?

There’s an ongoing debate on the preferred and recommended method of payment for routine, everyday expenses and purchases. Is paying cash better, and more financially sound, than paying with credit cards? Maybe it should be the other way around with credit cards being a more convenient method of payment?

The trade off between cash and credit cards – It doesn’t end with convenience

Many people recommend handling a monthly expense budget on a cash-basis. This recommendation is sound as it essentially contains two important principles:

1. Increasing the tangibility of money – Cash spending is the most tangible form of spending. When we pay cash we see the money literally leaving our wallet and hand and watch it slowly moving away from us and into the seller’s register making harder to spend.

2. Following budget constraints – Cash just runs out. Credit doesn’t. When the cash we allowed for this month is over it’s over (forcing us to carefully reconsider expenses).

However, the problem arises when we try to account and budget for these expenses. Keeping track of the cash that leaves our wallet is hard and requires constant bookkeeping (either by hand or by an electronic wallet of some sort).

Unless we know exactly what we paid cash for we would have a very hard time keeping a monthly budget of our expenses and of their dispersion and behavior (more information on why we need to do that is detailed in this post “How to better analyze your budget”). This information is crucial to correct financial planning.

If we choose to pay with credit cards monthly statements will provide us with every detail we need to know about our purchases and expenses in a specific month. However, we would have an easier time both spending money and exceeding the budget we set ourselves.

Which means of payment is better: Cash or credit card?

I believe the answer, as many others, is not a definitive one. It depends greatly on the sort of person you are. The more disciplined you are the more I’d recommend using credit cards more often in order to have the best data available for budgetary planning and review.

Unfortunately, the less disciplined have a hard time here as well. Obviously using cash as the preferred payment method is recommended. Unfortunately, it carries a price. The data about expenses and purchases would most likely be unavailable as discipline is also required to keep manual track on all that cash.

I personally prefer credit cards as they are more convenient and provide us with the data we need. I believe that with small behavioral adjustments we can actually create a sort of tangibility to credit card payments as well. More on increasing the tangibility of credit card payments later this week.

Image by: Joe Shlabotnik