Cash vs. Card: When Should Each Be Used?

Lately I have been posing a question to friends and family:

“If you could only spend cash or swipe a card (debit or credit) for the rest of your life, which method would save you the most money?”

The overwhelming response was that they would save more by spending with cash. I tend to agree. You see, there’s an emotional attachment to cash when it is all that you have to spend.

Obviously, spending only cash becomes highly inconvenient when buying a home or paying the electric bill. Likewise, only using a card will result in overspending because of the feeling that you aren’t giving something away when you get the piece of plastic back from the cashier. If these things are true, what is a good compromise?

My wife and I have found it beneficial to break up our expenses into two categories: Mandatory and Discretionary.

At this point the question begs to be answered:

“What type of expenses are mandatory and which are discretionary?”

It’s not always clearcut. I can tell you that the longer you actually do a budget and stick to it, the more you’ll be able to distinguish between what you want and what you need.

Here are some questions to ask yourself to determine if an expense is discretionary:

• Do I tend to overspend in this area?
• Can I easily change how much I am spending on this area by sticking to a budget?
• Could I survive without this expense?

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Groceries Example:

• Do I tend to overspend in this area? Yes. I tend to pick up Oreos and soft drinks on the end-cap displays.
• Can I easily change how much I am spending on this area by sticking to a budget? Yes. I would be forced to stick with the essentials.
• Could I survive without this expense? No. I need food to survive.

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If you answer “yes” more than “no,” you should most likely deem the expense as being discretionary. In the groceries example above, we have determined that groceries tend to have more of a discretionary nature than mandatory.

Once you have found a category to be discretionary, you should probably spend with cash if one or more of the following criteria are met:

1. It is not an online store (kind of hard to pay in cash electronically).
2. It is a place you go often (twice a month or more).
3. It is a place where you can negotiate price.

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Groceries Example:

1. It is not an online store. Check. We buy groceries at a physical store.
2. It is a place you go often. Check. We go approximately twice a month.
3. It is a place where you can negotiate price. Not so much.

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Again, in the groceries example above, because one or more (two in this case) criteria were met, it has been determined that spending cash would probably save us more money. I can tell you from experience that it has!

If a certain type of expenditure doesn’t past these tests, you can probably consider it mandatory. In that case, use a debit (not credit) card.

For us, this test puts most expenses on a debit card and a select few to be bought with cash. After working with a budget for quite awhile, it has become clear that we can overspend in the categories of Grocery and Fun Money. Therefore, we always use cash in those areas.

Your budget will look different from ours. These guidelines are, well, guidelines. They are not flawless, they are a starting point to get you thinking. Only you can truly determine when you should spend with cash vs. card. If you’re giving it thought, you’re light years ahead of most, and you will save money when you put your new plan into action!