Cold, Hard, Cash

Living a life of financial freedom is not about having lots of money, it's about spending what you do have wisely.  That means, far and above anything else you'll ever hear, always pay with cash.

Repeat after me:

Always Pay With Cash.

Sheepish note:  Cash doesn't always refer to greenbacks. It might mean your debit card or a check or a money order or electronic funds transfer from your checking or savings account.  What it really means is don't use credit.

Using cash does three things for you:

  1. Forces you to not spend what you do not have.
  2. Prevents you from increasing your debt load.
  3. Helps you stick to your budget by being "in the moment." (More on this later...)

I suppose there is a fourth thing that using cash might do:  reduce the cost of some goods and services because companies often give a cash discount.  You should ask for one, since you'll always be paying with cash.  Most service-based companies that do physical labor will often give a discount for cash (tree trimmers, pool cleaner, yard guy). And don't think that that $999.99 price tag for that couch that you've had your eye on is as low as it goes.  You don't need to negotiate, per se, but always ask for a cash discount.  Most businesses love cash. It helps them stay in business longer.

So let's look at that first reason:

Paying with cash forces you to not spend what you do not have.

I think this is pretty straightforward.  If you only have $10.00 in your pocket, you can't buy anything that costs more than $10.00. If you have $1000.00 in your pocket, you can buy a lot of $10.00 stuff, but only one $501 or more thing.  Paying with cash includes your monthly bills too.  Don't put the phone bill on a credit card, use your debit card (most act like credit cards anyway) or set up direct billing right out of your checking account.  A check is the mail equivalent of cash, since most places will not take cash in the mail.  When you write a check, you are paying cash and this should be noted in your records (checkbook, computer program, or your little notebook) just after the check is written.  When you walk out the door, leave your checkbook (and your credit cards, if you haven't cut them up yet) behind.  That cash that's in your wallet is the most you can possibly spend tonight.

Number 2.

Paying with cash prevents you from increasing your debt load.

Rule number one implies rule number 2.  If you only pay with cash, you're not spending what you do not have.  Credit is exactly that:  Money that you do not have.  Any time you put something on a credit card, or pay for it with a home equity line of credit check, or (God forbid) one of those convenience checks from your credit card company, you are buying with credit.  This includes mortgage, car loans, student loans, personal loans, and anytime someone gives you money and charges you interest. That interest (in conjunction with any fees they may assess) is how they make their money.  They loan a dollar, and get back a dollar and ten cents.  In most cases, with credit card companys, they loan a dollar and get back two.  That's because people don't pay off the balances, and a $1000 purchase ends up costing $2000 in interest and total payments. Don't do this.

Don't ever increase your debt load.  Unless you have to.  If you have no other means, then a credit card should be the last choice to pay for true emergencies and things like a furnace that blows up in January. Survival takes precedence over financial freedom for most people.

Buying something on credit is like saying, "if you'll loan me $100, I'll give you the $100 right back in exchange for that new DVD player. In addition, for the next 12 months, I'll send you $5.00 per month so that after a year, I will have paid you an extra $60.00 for the honor and privilege of having borrowed money from you." Don't forget that those stamps cost you another $5.28 (at 44 cents a stamp).  And the envelopes probably weren't free.  See?  Once you start probing, that $100 DVD player turns into a $175 purchase, just because you have to have it now.  If you follow rule number 1, rule number 2 should happen automatically.

Which brings us to rule number 3.

Be in the moment.

I'm not talking existentially here, or about getting in touch with your inner accountant.  I'm talking about watching that dollar bill or that one hundred dollar bill leave your hand and go into the hands of someone else can be a real in your face kind of event.  It's not your dollar anymore.  It's their's.  You've given it away.  You'll never get it back (at least, the odds are slim that you'll ever see it again). The tactile, physical, sensual act of paying with dollars and cents (aka cash) for something is a real, now, happening thing. Paying with a credit card is like saying, "I'll get around to cleaning out the basement next weekend.  This weekend, I'm going to watch my new plasma screen TV with surround sound."

Being in the moment means that you are there, consciously aware of what you are doing.  You are spending money.  You have a chance to change your mind, buy fewer of whatever they are, negotiate a cash discount (or a deeper one!), or go ahead with the purchase.  And then you hand the money over and get your new whatever.  You made the decision. You watched the money leave your hands.  You were in control.  It was your money that you were spending in concordance with your budget on your terms, and you feel goooooooooood!

Being in the moment is the secret weapon in the world against debt. Paying with plastic is a swipe and (maybe) a scribble.  Then you get to keep the yellow copy.  Eventually, you'll get a bill that only asks for part of what you just spent, so it's easy to lose track or forget (or be in denial) about what you're spending on your credit card.  Paying with cash is an in-your-face, here-and-now, in the moment event that causes you to at least partially stop and think about what you're doing and choose accordingly.

To sum up.  Always pay with cash. Oh, and cut up all of your credit cards.  You're allowed to keep one, if you'd like, for true emergencies, and I'll leave the discussion of what makes a good credit card for another day.  If you do keep one, get a Cool Whip container, or something like it, and fill it half full of water.  Put the credit card on top face-down (it will float) and stick it in the freezer.  After a day or two, when it's solid, fill the container with water and freeze again. You now have a block of ice with your credit card in it and numbers that you cannot see.  You'll have a mandatory "cooling off period" (or is that a warming up period?) when you want to use your card, since you either have to chip away at the ice, or let it melt.  In the meantime, think about why you're stabbing at a Cool Whip container with a nut pick and ask yourself, "self, do I really need that new DVD player now?"

-Eric Loyd

Note:  Though I am not a licensed financial advisor, I am a smart guy.  And I know how to use Excel.  Your mileage may vary, and all numbers and calculations are figurative only, but I think you get my point.