photo credit 401(k)2012 via Flickr
Cash vs. credit. Pay only with cash and owe no one. Use credit to build up your credit score and increase your buying power. There are so many things we hear over and over about using both cash and credit. And, the truth is neither is necessarily bad. It’s just money. It is the meaning we give it, what we tell ourselves and the choices that we make when handling either that lead us to where we are today.
People assume that because I am a CPA (certified public accountant) and work in finance that I have it all figured out. The truth is I am human just like anyone else. Sometimes I want things I don’t have the cash to pay for and credit is tempting. Other times we have an emergency that overreaches our emergency fund and using credit seems like the only option. We have dealt with job lost, starting new business, unexpected home repairs, expensive kids activities, ailing parents needing care and kids nearing college age, just like many of you.
I have complied a list of what I wish I knew then about cash verses credit. Many of these things you and I both have heard over and over again, but these are some things I am either glad I embraced early or wish I would have really listened to when I was younger. Some traps I avoided and others I have fallen into from time to time. Probably just like most people.
- Cash is king for a reason. And not for its buying power alone. When you use credit, you are IN DEBT to someone else. That pressure can be overwhelming if you get into a situation where you cannot repay the money in a timey manner or quickly enough to avoid a lot of interest.
- If you wouldn’t part with your hard earned cash for it, don’t put it on credit. Sometimes I think we view credit as different than cash. There is something about counting out your $20 bills to hand over for a purchase that gives you pause and makes you realize what you are really doing. On the other hand, swipe the credit card, sign on the line and you don’t even have to look at the total of the sale if you don’t want to.
- You know that feeling in the pit of your stomach when you are doing something you should not be doing? Yeah, that sinking feeling of ‘I really should not be spending my money on this’. Listen to it. It is not too late to back out or even return the item. Think it over and wait until you are sure that is what you want to do. Whether you are spending cash or credit, although my guess is this happens to us a lot more often when we are using credit. Don’t get caught up in the moment only to regret your purchase later.
- “I will make more when I get my next raise, when I finish my degree, when I ….” I am here to tell you that yes, that might happen. And then again, it might not. Things happen, people have to leave school unexpectedly, a parent or child gets sick and you decide to cut your hours or take a lower paying but more flexible job. You don’t want to limit your options in the face of life’s challenges because you owe someone else for meals out or clothes in your closet that you rarely wear. It is just not worth it to stretch yourself that thin.
- That lovely couch/snowmobile/television is not $199 per month, it is $3,000. If you cannot pay for it in full, don’t gamble that you can afford the interest free payments that come with it each month. The default interest rate on those deals is highway robbery – avoid it.
- You can do a lot of things yourself. You can have a nice house, nicely decorated and it can cost you next to nothing. If you are willing to thrift, repaint and get your craft on, you can do it within nearly any (cash) budget. The world of DIY is at your fingertips, thanks to the Internet.
What lessons have you learned about cash vs. credit? You don’t even have to tell us if avoided the trap or fell into it! We just want to learn from you.