If you rely on debit or credit cards and tend to keep little or no cash in your wallet, the benefits of spending cash might surprise you. Yes, it might seem old-fashioned compared to plunking down an exclusive credit card or using a smartphone wallet app.
But the strategic use of cash can be a wise way to achieve various financial goals, such as staying on budget, saving for emergencies and investing for the future. Consider these 7 benefits you get from sticking to cash.
1. Reducing impulse purchases
For many people, spending cash feels more difficult or painful than making purchases with a debit or credit card. Seeing and feeling paper bills in your hand may trigger a reluctance to part with them that doesn’t occur when you pay with a card.
This psychological benefit of using cash can be a powerful motivator to spend less or to skip impulse purchases when you’re shopping in a brick-and-mortar store. Even when you have a shopping list, it can be tempting to pick up extra items that may not be necessities.
So, if you tend to value the price of an item more when paying with cash, consider using it more frequently to cut spending or stop making impulse buys.
2. Staying on a budget
When you’re on a budget, sticking to cash can help you avoid overspending. A popular budgeting method known as the envelope system involves labeling multiple envelopes with various spending categories, such as housing, food and transportation. The idea is to allocate a certain amount of cash to each envelope per month. When you run out of money in one envelope, you can’t spend any more in that category unless you reallocate funds from a different envelope.
Another strategy is to carry cash only when you’re prone to overspend, such as during holiday shopping or vacation. If you run out of cash, the hassle of finding a bank or ATM to withdraw more may make you reconsider an unplanned purchase that would derail your budget.
3. Preventing credit card debt
If you want to avoid racking up credit card balances, paying with cash is a great way to make sure you only spend money you have. While certain cards offer rewards for purchases, if you don’t pay off your balance in full each month, you incur interest that can erase those benefits.
Buying an item on credit and making just the minimum payment each month can double or triple its or original cost, depending on how long it takes you to pay off. Saving up enough cash to purchase the same item helps you pay as little as possible.
4. Shopping at smaller stores
There are still some small businesses and venues — such as family-owned restaurants, bars, gift shops and farmer’s markets — that only take cash. They may not want to pay fees or deal with point-of-sale terminals required to process debit and credit cards. Having a cash-only system may make a merchant’s business run smoother or be more profitable.
5. Making small purchases
Just like some businesses are cash-only, some may not accept debit or credit cards for purchases under $5 or $10. If you don’t have any cash but want to purchase a bottle of water or a pack of gum, you’ll have to spend more to reach the merchant’s threshold.
6. Paying gratuities
For many services, you can only pay gratuities in cash. If you want to say “thanks” to a valet, bellhop or airport skycap, you’ll need to have some bills on hand. Also, there are certain professionals, such as hair stylists, cosmetologists and masseuses, who likely take credit cards but would prefer to receive tips in cash.
7. Getting discounts
While carrying cash may not be as convenient as using a debit or credit card, it can help you pay less. Some locally owned and operated businesses, such as furniture or floor covering stores, may offer a discount for cash if you ask for one. Small stores that sell high-ticket items may be the most likely to negotiate price and terms with potential customers.
To be fair, credit cards come with many benefits. They give you convenience for online or in-store purchases, rewards, and purchase protections. Plus, if your card is lost, stolen or compromised by a cybercriminal, your liability is typically limited to $50. (Debit cards only offer this protection if you report an unauthorized charge right away.)
If you use a debit card or pay off credit card balances in full each month, they’re suitable cash replacements. However, if you allow debt balances to carry over from month to month, they can be devastating to your finances and future security.