Financial Discipline - Pay Cash, Use Debt, or Use Credit (or Write Checks)?
Is paying cash the best way to go? Or using a debit card? Or getting "miles" from your credit card? Which?
Early on in this blog, I opined that when you get into credit card trouble - or any sort of debt trouble, you have to have strict financial discipline. Using a credit card to "charge" things can cause untold troubles, as you don't feel you are spending "real" money, and at the end of the month, you end up with this horrific balance that you cannot pay off in a lump sum. So interest is due, often at 15-25% or more, and you end up in intractable credit card debt.
Some financial sites and authors suggest paying cash for everything as a means of enforcing financial discipline. And it is true, if you pay cash for everything, you can't spend money you don't have. But at least with me, I found that tactic not to work, at least in terms of cutting back on spending. When I was younger, money in my wallet was money to be spent, and if I had a buck in my wallet, I would spend it, often on totally unnecessary things, like a soda pop or candy bar - which certainly didn't help my health much, either. My spending habits have improved - money sits in my wallet for months now - but mostly that is because everyone uses cards these days.
Some folks still write checks - and argue that the "hassle" of writing a check acts as an inducement not to spend. Plus, you can't spend more than is in your account. Well, actually you can - and run up bounce fees in short order, as I did, as a youngster, buying beer at the local corner store and paying by check (and not entering the charges in the register because there were people in line behind me). Of course, today, checks are pretty antiquated, and handing someone a check is no more secure than using a credit or debit card - you are giving out the bank routing number and account number to everyone you write a check to. I'm not sure that writing checks is an answer to financial discipline problems - you have to be financially disciplined to use a checking account properly. As the old saying in the South goes, "That's more messed up than a [poor person's] checkbook!"
The same author who recommends paying cash, says you should save all your receipts and then log them into a ledger or financial accounting program. This is good advice. As it turns out, what you pay with is less important than tracking your payments - although if you are hopelessly in credit card debt, spending more on the card is a bad idea - it keeps that revolving interest, revolving. A debit card or paying cash could be a vehicle to use until you get those cards paid off, and cutting up all but one or two is a good idea.
I recounted before the "dangers" of using a debit card - dangers that are overstated by the credit card industry who hates debit cards. Debit cards charge the merchant a flat fee - less than a dollar - for each transaction. Credit cards charge a percentage of the transaction - often on the order of 5% or more (for rewards cards). So merchants like debit cards, credit card companies hate them. And credit card companies hate "chip and pin" cards - that also charge merchants low fees - which is why the technology - long available in Europe and Canada is blocked in the US by credit card companies who prefer to live with massive fraud, but massive profits as well.
Simply stated, the "dangers" of using a debit card are that "holds" placed on the card could tie up money in your checking account, causing checks to bounce. You can fix this problem by using a separate account for important payments (mortgage, utilities, car payment, whatever) and a designated account for debit card spending. The other danger is that if your card data is stolen, you may be liable for $50 in damages, if you report the theft right away, or $500 if you don't. You may have to file a police report as well. My experience was that the bank waived any charges, as I reported it within an hour of the theft - not hard to do in this day of online banking, where you can have reminders sent to your phone of your daily balance and every credit card or debit card or check transaction made.
Oh, and you should do that - but it requires you to log onto your banking site and turn "on" these notifications. They can be a PITA, as you get multiples of them, but it is better to know what is going on in your finances in real-time. It is handy, too, as if you make a reservation somewhere, you get a "confirmation" of the charge almost right away from your bank. Often, when making a purchase, my phone will "ding" withing a minute or so of my swiping my card. Good feedback to have!
But getting back to payment types, I think unless you are mired in debt, it really doesn't matter which type you use, with several caveats. First, if you do decide to use a credit card, make sure you pay off the balance daily. And by daily, I mean daily. You cannot end up with an "unexpected" credit card bill at the end of the month, if you've been tracking it for 30 days.
When I was younger, I spend on a credit card and when I got paid, I realized I could not pay off the balance. No problem, I thought, I would wait until the end of the month and next payday to pay it. But by the end of the month, the amount due was greater than my paycheck, so I paid a nominal amount and let it ride - often at 15% interest or more. You know how the rest works - if you have been alive in America for more than a few decades, you've probably done this yourself.
I had too many cards and wasn't paying attention to the interest rates on them, much less the closing dates, payment due dates, annual fees, or anything else. For a "paycheck-to-paycheck" slob, I should have sought out the lowest rate cards (7% or so - and they exist) and then had only one, maybe two of them, with low limits of a few thousand dollars or so (as opposed to $15,000 or so). Hard to get in trouble that way - you can't charge much, and if you do, you have a realistic way of paying it off. But back then, I was chasing "miles" and "bonus points" and falling for faux financial acumen.
By the way, if you do use a credit card, beware when your bank offers you the "convenience" of "overdraft protection." Anytime a bank offers you something "convenient" it is likely convenient to them, not you. The way these programs work is, if you go over your limit on your credit card, they will honor the charge and then zing you with a $35 fee. It is not convenient at all. If you are going over your limit, you should stop charging. But then again, if you have financial discipline and check your balance daily - and pay the balance daily - you never get close to your limit to begin with.
Logging your spending every single day and paying off the balance on credit cards every single day is critical to getting out from the "paycheck-to-paycheck" mentality. If you live P2P like that, eventually, you will drive your car off a cliff, as you rack up more and more debt, and end up taking out "equity" in your house (read: borrowing yet more money) to pay off those credit cards and live the lifestyle you want rather than what you need.
It took me a long time to see this, but once I started logging spending (I use Quickbooks 2000 - yes, I am that stingy to use 19-year-old software). But you could use something else - there are many out there, many are free. So long as you can balance-and-reconcile accounts, enter charges, checks, and other transactions, whatever software you use should work. Spending sites like Mint or the stupid pie charts that Bank of America provides are not helpful as they only tell you what happened last month. Imagine driving your car by looking out the back window - you'd get into a wreck.
Once I started logging everything, I realized we were spending more than we were making. So I started cutting spending. What did I cut? Everything. I started with unnecessary subscription services, such as cable TV (no, it is not necessary, and if your spouse says this is a deal-breaker, find a new spouse). We cut restaurant meal spending and clothing spending and other discretionary purchases. We shopped at Walmart instead of the upscale "gourmet" store that Mark ran (whose groceries were so expensive that he often came home with a negative paycheck!). We started nibbling away at the edges at first, and it helped.
But then I killed some sacred cows - the hobby cars, boats, vacation home, and whatnot. Fun things to have - for a while. What I realized is that these are things you might have at one time in your life, if you are lucky, but not things you have for a lifetime. In retrospect, we could have had many of those things, but much more cheaply. But it all went away and then, suddenly, we were no longer "paycheck to paycheck" but actually living within our means. Funny how that works.
Now, if you are making $8 an hour at McDonald's, telling you to sell your vacation home is probably useless information. This blog wasn't aimed at you. It was aimed at the millions of Americans who are making well over six-figure salaries and yet claiming to be "put upon" or "barely getting by" what with the $24,000 a year they have to spend on preschool. That's probably a sacred cow right there, I'll bet.
But even on a smaller scale, these ideas have merit. If you are working a shitty minimum-wage job, maybe it is good time to examine your drug habits. Or maybe buying a set of bling rims is not a smart use of the pitiful amount of money you earn. Can you really afford tattoos and piercings? After all, the only purpose of such gaudy trinkets is to impress others, and who the hell are you impressing in your neighborhood?
Yet, I know people - such as myself - living in poverty, for whom not doing drugs was a non-starter. That can't be the cause of my financial difficulties, can it? Yet within five years of giving up pot, I finished my Engineering degree and started on a law degree. Withing 10 years, I had started my own practice and my net worth was over a million. Yes, change can come that quickly, once you stop dragging cinder blocks around behind you, and you stop thinking that all your problems are someone else's fault. But I digress, but not by much.
As I noted in another posting, don't get all riled-up and feel sorry for the "working class" who have a part-time job at Walmart with no benefits. Between Obamacare, Obamaphones, Section-8 housing, TANF, WIC, SNAP, and other programs, many "poor" people have an income equivalent to the median, at least, in the United States. A lot of money passes through the hands of the poor - and that is why they are poor, the money passes through their hands and little of it stays for very long (and what little that stays is often lost to con artists and scams).
Getting back to our main point, using psychology on yourself to control spending can work, but it is not an answer to anything. As I noted in an earlier posting, we used to have a savings account with the Maryland Teachers Credit Union (which Mark had through one of his jobs), and I would mail off deposits every month of $100 or so, to build up a rainy-day fund. Since the nearest branch was in Maryland, and we didn't have a debit card or checking account, the only way to access this cash was to drive to Maryland to get it. It worked - after a year or so, we had a few thousand in savings, which doesn't sound like much, but was a few thousand more than we had before.
Today, I hardly use cash. We brought some on our trip, which we keep in a safe in the camper. When we need some pocket cash, we take it out of the safe. Since almost every store these days takes credit cards, we use those - it is easier to track the spending, as each morning I go on the Bank website and look at the charges and check to make sure they are legit and then log them and reconcile the account and then pay off the balance. I then log all the "pending" charges and then reconcile the account again (temporarily) which makes it easier for me the next day to reconcile things. With cash, I have to enter receipts, which I do get and keep in my back pocket (which is NOT a good place to keep your wallet - pickpockets!).
Since I pay off the balance every single damn day, I can tell if my spending is getting out of hand. I can also take advantage of these "rewards" cards - the only "reward" worth getting is, of course, cold hard cash. Anything else - bonus points, airline miles - is just a distraction. I can do this now because after 10 years of blogging, I finally got my shit together - or so I hope, anyway.
But in writing this, I realize that over time, I have once again let those naughty banks raise my credit lines, to the point where I have far more credit available to me than I could ever possibly need. So maybe Monday morning, I will call them and ask them to dial it back a bit - and stop raising it automatically (which I already asked them to do, and they promised to do, but broke their promise - big surprise there).
Financial discipline is a never-ending thing!