I was perusing through the July issue of Money Magazine the other day and came across an interesting article that stated that using credit is a “threat to thrift”. The author states (as do many others) that individuals who use cash for their purchases often dwell more on the cost and therefore, make more sound decisions. The theory is that the thought of spending physical dollars (from in your wallet) hurts more than just swiping a piece of plastic.
Who Are These Crazy Credit Spenders?
As I was reading the article, I kept thinking to myself, who are these individuals? Are there really people out there who just head to the local electronics store and stick 10-20% more goods in their cart just because they are using credit? Are they just buying things on a whim? People cannot be that moronic, right?
Well as it turns out, I think I was one of those individuals and I have a good feeling that you may have been one too.
A few years back when I was a naive college student, I did not place much thought into my purchases. If I saw a friend with the latest gadget, I figured that I would just go out and buy it. I may not have had the cash on hand but I knew that if I charged it, I would have the gratification of owning the product today. I even threw in the accessories. Why not!
So, I spent money on the product itself plus the accessories. If I just would have gone home to mull it over, I may not have even bought the product. However, if I still wanted to purchase the product I may have found a less expensive alternative somewhere else (Amazon.com anyone?). So in reality, I probably spent way too much for the product.
Most of the time I did not even have the cash in my account to pay it off right away. I knew that I would have the money when the bill came but that was still several weeks away. If I was forced to wait until I had the cash, I may have talked myself out of the purchase.
So, how can one combat this “credit card increased spending problem”? Here are my thoughts:
Go Cold Turkey On Credit Card Use
If you find yourself in the same predicament that I was in, it may be a good idea to just stop using credit. By ending your relationship with that piece of plastic, you will be forced to really examine your spending. By knowing how every penny is being spent, you should find yourself making more sound financial decisions.
I’m not saying that you need to cut up your cards in dramatic fashion and cancel all of your accounts. All I am suggesting is placing the cards in a locked cabinet or your freezer. Just do not use them. Show some self-control.
Personally, I went cold turkey on credit cards several years ago after I realized that I was spending recklessly. It was not pretty, but it truly forced me to analyze my spending habits.
Make and Stick to a Budget
I’ve already preached about preparing a budget so I’m not going to get into the specifics. The main point should be that by tracking your spending and staying within prescribed limits, you should begin to appreciate your money and you will become more cautious on how it is spent.
This process helped me out immensely. By tracking my spending and constantly monitoring it, I wanted to keep more of it. Crazy huh?
Easing Back In To Credit Cards
This may be controversial as many people feel that if you have had issues using credit cards in the past, it is bound to happen again. I do agree that there are some people out there that should not use credit cards ever again. However, I feel that if you can truly understand your spending by creating a budget, you can always use a credit card again. I mean they do provide additional benefits such as:
- Categorized statements
- Various rewards (cash, travel, merchandise)
- No-cost extended warranties
- No-cost travel insurance
Personally, my wife and I recently went back to using a credit card after about 3 years without one. During those three years, we truly grasped our income and expenses. We feel very confident that we are still within our budget because guess what, we still budget! As I mentioned in a previous post, my wife and I utilize Mvelopes.com as our budgeting software. Mvelopes links up with our credit cards and we automatically move money from our envelopes straight into another envelope called “credit card payment”. So, when the time comes to pay off the card in full, we just use the money in that credit card payment envelope. Pretty easy!
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So, is using your credit card really a threat to thriftiness? Well, that depends on what stage of your financial journey you are on. If you are living paycheck to paycheck and spending as there is no tomorrow, I would have to give you a resounding YES. However, if you have been budgeting for years and really know your financial picture, I just do not see what the problem is.
What do you think?