Why You Should Never Pay By Cash

At first it seems like good advice; pay cash for what you need and you’ll never get into financial problems. A slew of TV shows, like Till Debt Do Us Part and Maxed Out, feature people who got themselves into a financial mess because they let their credit card debt get out of control. One of the first things the host does to help these people is to put them on an all cash budget, no more credit cards. That is good advice for the people on the show but is it good advice for the financially responsible person? The answer is a big fat no.

If you are someone who lives below you means – you don’t spend more than you make – then you should never pay for purchases with cash. Instead, you should be using a cash back or rewards credit card. For example, my TD Gold Elite Visa gives me 1% cash back on everything I charge. The money is paid out at the end of the year – it’s like getting a rebate.

Many people think 1% isn’t much but if you add up all the money you spend in a year to live, it can add up to a decent amount. Last February, I received a check for $1,036.43 from TD Visa for my 2005 charges. That’s almost enough to pay for dinner at Lumière! Had I paid cash for those purchases I would have made nothing. Remember, the little things add up. That’s how this blog makes money – with a 25 cent click here and a 30 cent click there. All those small clicks add up to a decent income.

The problem with credit cards is many people abuse them. They don’t keep track of how much they’re charging and next thing they know, they’re in over their heads and have fallen into the credit card trap. And I guess this is one reason why many financial planners (and parents) tell their clients to stick with cash. However, the same problem people have with credit cards they can have with cash. How many people here keep track of every cash purchases? Unless you write it down, as Gail recommends on Till Debt Do Us part, cash is not track able. A financially responsible person would know their credit card balance at all time. And if they don’t know it, they can easily log into their account online to get it (and see some of the stupid things they bought).

Cash back credit cards only work if you pay off the full balance every month. If you run a balance, you will incur interest charges and those charges will kill any cash back you earn. Paying interest on a credit card is just plain stupid because the interest is extremely high and not tax deductible in most cases. You want to avoid interest charges as much as possible.

The smart use of credit is a very powerful thing. Whenever possible, I charge all my purchases to my Visa card. Sure, I can pay cash but why would I if I can get 1% cash back? There is no extra effort involved. Instead of handing over cash, I hand over my TD Visa.

The only downside to my Visa card is it cost $100 a year. CIBIC has a 1% cash back Visa with no annual fees. I went with the TD Visa card because it offered additional features that I wanted, like Trip Interruption Insurance and free TD Auto Club membership.

The final reason for using a cash back credit card instead of cash is the money you get back at the end of the year is not taxable. The money is not income. It’s just a return of money you already spent.


25 thoughts on “Why You Should Never Pay By Cash”

  1. Walter Vos says:

    Hmm, I thought ‘yeah, getting a cash back card seem like a smart idea’, but to earn back the $100 it costs, you’d need to charge $10000 to the Visa.

    I don’t even know if these kind of cards exist in The Netherlands btw.

  2. This is something I completely agree with and follow myself. As you mention, it does require the ability and commitment to paying off the bill in full every month. But I do this with our regular purchases and have most of my monthly bills charged to my cash-back card as well.

    In addition, I travel a good distance to/from work and take advantage of a specific gas company credit card that offers a more significant rebate for gas purchased at their locations.

    One caution that I often see is that some people feel they will spend more when not paying with cash as it is far easier to pull out the plastic. But when you mention living below your means, this should not be a problem.

    As with most things in life, this is not for everyone but those that can work it correctly can receive a nice reward for doing so.

  3. I use my credit card for AA mileage. That´s pretty good for class upgrade. And something you didn´t cover is that carrying cash is not safe, when I travel abroad in the best case I travel with U$200 bucks. If I get robbed, I wont cry 🙂

  4. Matt $ says:

    My dream is to manage all my money down to the cent and to be utilizing my money in the best way possible 100% of the time. It may sound easy to many people but it takes a lot of discipline I think. I am far from being where I want to be. 🙁

  5. Paul says:

    Sorry if this is a silly question, but how do cash-back credit cards make money? I presume they just hope that you fall into debt and have to lose money on everyone else?

  6. Matt $ says:

    Also John I have a question for you. Browsing you site right now I notice that your feed burner stats are lower than usual for the last week or so. What exactly does that feed burner track? Is it people that have their rss reader open and could be viewing your site? Or is it people that are strictly reading your site now, or maybe even total rss readers to your site online or off line? I have just started using rss in firefox to view your site because you were pushing it a while ago. I am not sure if I get it 100% yet but I am trying. From your prospective what is the benefits of having users subscribe to you? Do you make money off rss or is it strictly for the people to stay up to date with your site and to not forget to check it everyday? I am an extremely avid computer user but an rss rookie and I think that there are a lot of people out there like me too. Maybe you could write a post about what rss means to you?

    -matt

  7. Happy Mind says:

    Great Advice and excellent insight! I really liked when you mentioned, “Remember, the little things add up.” That’s the key right there! Little things do add up, its just like taking small steps to make a journey easier.

    Ed

  8. Pedro Pais says:

    If I spent over $100K a year and over $1300 on a single meal I wouldn’t notice $1,036.43, although money is never too much.

    John, to be honest I understand you and clearly see the benefits on paying at least one month later AND receiving a 1% cashback.

    But small merchants really get a *hit* by credit card companies (2%-4,5% in my country), so I try to pay by cash.

  9. We do this, though our checks aren’t that high… I meant to comment when I first saw your Lumiere bill that I really enjoyed your post, even though it was far off your normal topic. As I’m in VA (and cheap) I’m sure I’ll never dine there and I enjoyed living vicariously through you.

  10. John,

    There are PLENTY of Canadian credit cards out there that pay out 1% or greater WITHOUT the annual fee. The credit card that I always recommend that people use (in Canada) is the MBNA SPG Credit card. This card gets you points towards hotel stays with Starwood Properties. After all the bonuses that the SPG card gives you, it will work out to be at least a 3-4% return on your money. With the platinum card, you get SPG points, car rental/purchase insurance and warranty, along with no annual fee.

    Joe
    http://www.StingyFinance.com

  11. Gdog says:

    I agree with Joe. I was using the “CIBIC” Dividend but switched to the MBNA SPG Mastercard. It pays you more in the long run.

  12. John Chow says:

    Paul – Credit card company make money two ways. The first is by charging interest on unpaid balance. The other is by charging the merchant that accepts your credit card. All credit card merchant must pay a monthly rental fee for the credit card terminal that authorizes the charge. In addition, the credit card company takes a percentage of the charge as their fee – this is call the discount. The discount percentage can be as low as 0.25% for a big merchant like Wal-Mart to as high as 4.5% for a local mom & pop store.

    Matt – The FeedBurner RSS tracks how many people check their RSS and look at the blog yesterday. It doesn’t show many people have the blog in their RSS. This is why the number goes up and down everyday. The reason the number goes up so much after a Digg or Slashdot is because of people adding the blog to their RSS. That counts as a check.

    Joe – You’re correct but I want pure cash back, not rewards. I’ve tried to find cards that pay more than 1% cash back the those place a limit on how much you can get back. For example, CIBC has a Visa that will give 2% but cap your cash back to $750 a year. The TD Visa is unlimited. TD has a travel card as well and a no fee GM card that will give you 3% towards the cost of a new GM car. I have no use for that. 🙂

  13. weirdoux says:

    yup..

    different country has it’s own charge. so be alert of this “tiny” games by the bank.

    anyway, good post john.

  14. dacholo says:

    as someone else pointed out, Visa+mileage plan is great. although the mileage earned doesn’t give you status, it can be used for free airline tix.

    down in U.S., there is also Starwood AMEX (American Express) which lets you earn Starwood points. Starwood is a group of hotels including: W, Westin, Sheraton and other hotels. That’s another great card to have.

  15. Dave says:

    Good point, I always do the same thing as well. Although I use American Express Blue. There are rarely any places that do not accept Amex.

    I don’t pay any annual fee, and as long as you spend over $6,500/year you get 5% cashback in drugstores, grocery stores, and gas stations, and 1.5% cashback on all other purchases.

    I usually get about $250-$400 back in the year.

    For my ActiveTuning (www.activetuning.com) business, we just finally got our first credit card. I was using a debit card the whole time, but that was a big mistake. We spend over $100k a year, so much of that can go into rewards like miles, etc.

  16. TOFUmonkey says:

    you know,

    i love credit cards.
    different cards have different promo with different merchants.

    I had the standard chartered gold card. they were having a promo and i ended paying $30 for a $100 massage.

    That’s great savings there, since I’m already planning for a massage.

    As for dividend cards, i don’t spend that much to have that type of returns, so I go for the freebies and the promos… hehehehe… 🙂

  17. Credit card usage is increasing here in India too and a lot of youngsters are getting into the debt trap. Credit card advice is always welcome!

  18. Nomar says:

    I don’t have a credit card, but im still a student and dont make/have alot of money 🙂

    cash for me now

  19. Lawrence says:

    MBNA no longer exists – they were bought by B of A.

  20. anon says:

    hey finally a good post! nice one john 😛

  21. Jason says:

    Yes, but what about factoring in risk? Is it really worth it to risk LOSING money when the credit card company screws you when the slightest thing goes wrong ( forget a payment, a day late, etc, etc –any number of the things those snakes will do to take your money ). You can say, “Ill just be really responsible” .. well, maybe, but remember, the credit card companies spend their entire working lives figuring out creative ways to take your money. If you pay in cash, you don’t have to worry about this.
    For me, I’d rather spend my energy making money elsewhere and enjoy the peace of mind of keeping the credit card companies out of my life entirely.

  22. John Chow says:

    Jason – You can do that and there is nothing wrong with it. I see it this way; if you can get back from of the money you spent and you don’t take advantage of it, you’re leaving money on the table that you don’t have to.

    As for the risk factor, it’s near zero. The only way they can charge interest on you is if miss the due date and if you do that, then it’s your own fault.

    People may think TD Visa doesn’t like me because they don’t make money off me but that is completely false. They may not make any interest money off me but they make tons on the merchants that I use my Visa with. The average Visa discount is 3.5%. On $100K of charges, they make $3,500 from merchants and kickback $1,000 to me. They still come out ahead.

    anon – You still here? Thanks! 🙂

  23. cash back credit card enthusiast says:

    BTW, you can do a lot better than 1% back. There are lots of cards that pay as much as 6% back in various categories (in addition to the standard 1% back on everything else). There’s a Fidelity card that pays 1.5% back on all spending.

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