Cash or Credit?

Dear Carrie: I’m trying to rein in our family’s spending and wondering whether my husband and I rely too much on credit cards. We pay off our balance every month, but somehow I think that credit cards make it too easy to buy things we don’t really need. Am I being old-fashioned? — A Reader 

Dear Reader: Rather than old-fashioned, I think your question is right on target. Especially with the new one-touch payment methods, such as Apple Pay, it’s easier than ever to rely on credit cards.

Add to that the allure of rewards — whether they be points, miles or cash back — and a lot of people choose to basically charge all their expenses. This can create some problems because though today’s technology makes it easy and seemingly practical to use our credit cards for everything, when it comes to paying the bill, it still takes money. And that’s where it may pay to be a bit old-fashioned.

Don’t get me wrong. Credit cards are convenient and pretty much a necessity for a lot of things we do. The main concern, which is often cited by behavioral economists, is that it seems to be human nature to buy more freely when paying with credit. So you’re right. By relying on credit cards, you may be likelier to either buy things you don’t need or pay more for a particular item.

Interestingly, a colleague of mine was recently recounting how she and her husband decided to go on a cash-only diet to get a handle on their expenses. It was an eye-opening and successful experiment for them — and one that I think might work for you, as well. It would certainly help you focus on where your money is going. Here are some ideas for how to go about it.

Dust Off Your Budget

One of the first things to fall by the wayside when we rely on credit cards is a budget. So start there. Using an online budget calculator, such as the one on Schwab MoneyWise, sit down with your husband and make a list of all your expenses — essential and discretionary, fixed and variable. Examine what you believe you’ll need to spend each month and how you intend to pay for each expense.

Next, write down everything you buy for a couple of months, noting whether you pay with cash or credit. If you find you regularly spend more each month than you anticipated, your credit card may be the culprit.

Put Only Fixed Expenses on Your Credit Cards

The next step is to decide what’s more practical to buy with credit and what should be purchased with cash.

Fixed expenses — such as insurance, utilities, cable and cellphone bills, even school tuition or regular charitable donations — could reasonably be kept on your credit card. There shouldn’t be any surprises with these expenses. And using a card makes it easy to keep on top of those bills and pay them on time.

Withdraw Cash Monthly to Cover Your Out-of-Pocket Expenses

Now make the decision to pay for everything else with cash — groceries, gas, entertainment, restaurants, clothes, haircuts, manicures, gifts — all those everyday purchases for which you ordinarily pull out the plastic.

Going back to your budget, determine how much you normally spend on these types of expenses, and withdraw that dollar figure in cash at the beginning of the month. You and your husband could each take a certain amount, or you could keep this monthly money in a central location and each draw on it as necessary.

Make a commitment to each other that as the end of the month draws near, instead of pulling out a credit card to cover any shortfall, you’ll stick to your cash allotment and postpone or rethink any purchases that would push you over your budget.

Evaluate Your Results

With a heightened awareness of each expenditure, you may quite naturally make better spending decisions. My colleague found that in the very first month of their cash-only experiment, she and her husband came in under budget. And not only were they more in control of their spending but also they were able to refocus on their financial goals and increase their savings.

No matter how you choose to pay for your monthly expenses, the most important point is this: Controlling your spending now will allow you to plan ahead and save for your future security — while also enjoying the day to day.

So give it a try. You might find that a few months of paying with cash will give you a savings bonus that is even more rewarding than all those credit card perks.