Counting My Pennies

Cash, Credit, or Debit?

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When you go to the store, you’re often asked what your payment method will be.  Cash, credit, or debit?  And people are very opinionated about which method is their favorite.  Let’s take a look at the good and bad of each method of spending.

Cash

Good

Well, you can’t overspend.  You either have the money to spend or you don’t.
I know a lot of people really like the envelope method of budgeting.  You have $X to spend each month on all the various expense categories. You make an envelope for each category, and divide the money up between the envelopes.  Not sure if you have money to eat out this week?  Check the envelope.  No need to worry about keeping track of receipts or budget categories, just make sure you’re always spending out of the right envelope.  Easy peasy, right?

Bad

You lose one of those envelopes, you’re out of luck.  Not good at all.
Cash also isn’t the best method for long term savings.  You aren’t earning interest on a box of cash shoved under your bed.  Plus again, it could get stolen or lost or accidentally thrown away.
Finally, some expenses are hard to pay with cash.  While I could go to the power company’s office every month and hand over some cash, I couldn’t do that with my mortgage company, which doesn’t have a local office.
But that leads us to…

Debit

Good

Debit cards are sort of a step up from cash.  It’s still hard to spend money you don’t have.  Some banks will let you “bounce” a debit transaction, others won’t.
Debit cards are also a much safer method of handling your cash.  If you lose your card, you can immediately call and have the card cancelled so there’s less of a chance of someone pulling money out of your account.

Bad

Unfortunately, debit cards aren’t theft proof.  You can still have someone use it without your permission.  Often, the banks will work with you, but the expense can end up frozen until you can prove it wasn’t your expense.  That can make it hard to pay your rent or mortgage if you find your account is frozen.
Being able to just withdraw money from your account at any time can make it exceedingly easy to go over budget.

Credit

Good

Credit cards offer a lot of protections.  If you find an unauthorized charge on your account, you’re not liable for it.  You don’t have to worry about paying for the charge and then getting refunded.  It just gets frozen and then taken off your account.
Credit cards also have rewards programs.  Getting something for spending money?  Awesome.
If you always pay off your account on time, you won’t pay any interest.

Bad

Credit cards are a very easy way to get into financial trouble.  Instead of being limited by the amount of cash in your envelope or the amount of money in your account, you’re only limited by your credit limit, which in my experience tends to be way higher than it should be.  It’s very easy to spend too much and then end up paying only the minimum so you are continually accruing interest on your purchases.

The cards with the best benefits also tend to have the highest interest rates.

Conclusion

So is one of these the best option?  It depends on you.  Personally, I’m a majority credit spender.  It makes the most sense for me because my expenses are easy to track.  I joke that cash just grows wings and flies out of my wallet and I have no idea what I spent it on.  But I am also very careful to keep my spending in check and the card gets paid off every single month.
I have friends who have been very successful with the cash envelope system to get them out of tough situations who have then transitioned to primarily debit card usage.
You can use a combination of all three methods, but it’s all about finding out what works best for you, your financial habits, and your budgeting preferences.  Don’t just do what some random financial adviser on the internet tells you.  Do the research and decide what works best for you.
cash credit debit

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