Welcome to the first post in a series challenging the conventional wisdom of personal financial advice. Conventional wisdom and simple (often incomplete) rules of thumb work well enough but fall apart as things become more complicated and as you, hopefully, grow out of them.
We all know the common advice to earn extra money with a side hustle, or to have an emergency fund of 6–9 months of expenses, and to pay yourself first. Then there are the “rules” such as the 50/30/20 rule, or budget guidelines such as don’t spend more than 35% of your income on housing.
All good advice if your goal is mediocrity, if you aren’t capable of discipline and self-control.
Today’s topic was inspired by a personal finance tweet chat. One of the questions was, how do you avoid over spending? Many people gave the answer of not using credit cards, to only use cash. A very smart decision if you currently have credit card debt, or lack self-control.
My tough love answer, however, is to roll my eyes and tell you to, not man up, but adult up. Stop acting like a child who can’t pass the candy isle without throwing a tantrum. Not using credit cards because you’re afraid you’ll over spend is admitting that you are financially immature.
Instead of only using cash my advice is to only use credit cards. Dangerous advice in the wrong hands but so is a knife dangerous in the wrong hands but no one tells you to avoid knives because you can’t be trusted. Or do they?
The most glaring problem I see with using cash only is that cash is very difficult to keep track of, but really easy to access. Unless you write down every penny you spend and never visit an ATM, you’re just as likely to overspend using cash as using plastic. The problem isn’t in the medium, the problem is with you. Fix yourself and the money will take care of itself.
There are Rules
Let me start with the rules for using credit cards exclusively then tell you the benefits of this practice.
First you cannot have any credit card debt at all if you intend on using credit as your primary means of spending. If you don’t pay off your credit cards in full each month then don’t use them until you can. The goal is to never pay interest. In the past 10 years I’ve paid a total of $92.33 in credit card interest, less that $10 a year on average and I’m not happy about even that small amount.
The reason I know, to the penny, how much I’ve spent on interest is because I keep track of every penny I spend, a process made easier by only using credit cards. So the second rule of using credit exclusively is you have to track your spending, not just your credit card spending, not just the one card you use for Amazon, but all your spending. If you can’t do that then you’re not mature enough to use credit in this way.
The reason I use credit exclusively is because it automates the tracking of my spending. Instead of manually entering each transaction into Quicken (my chosen personal finance app) I simply download the transactions every morning and accept them. A process that takes less than one minute (I don’t have more than a couple of transactions a day).
Another benefit is if you use reward credit cards, all your spending is also earning you some reward in return. For example. I use airline reward cards and rarely pay for flights.
So the bottom line is that using credit cards isn’t the reason you overspend, your habits, discipline, and maturity is. Once you get those under control then using credit cards is actually more beneficial over cash.
To learn more about how to move past the conventional wisdom of personal finance check out EmbarkOnAPlan.com.