Do Your Debit and Credit Cards Encourage Budget Mistakes

Do Your Debit and Credit Cards Encourage Budget Mistakes

Do you ever wonder how your co-workers, neighbors, or friends manage to own the latest mobile devices, drive late-model cars, and have dinner out several times a week? Some of them may be wizards of financial management, have different household situations (no kids), or a source of income you don’t know about. But there’s a good chance they have those nice things because they’re eyebrow-deep in debt.

The Federal Reserve’s Household Debt and Credit Report for the last quarter of 2013 shows just how much debt Americans have. Outstanding household debt increased $241 billion from the previous quarter – the biggest jump since the third quarter of 2007. Mortgages are the largest component of household debt, but during the fourth quarter of 2013, Americans took on $18 billion in car loan balances and $11 billion in credit card balances. Most people need a car, but the “need” for credit cards is largely based on convenience.

How Credit Cards Make it Easier to Spend

No one denies how convenient credit cards are. And it’s nice to track purchases on one monthly statement, so theoretically, using credit cards exclusively lets you see where you’re spending money. But although your credit card statement shows you spent $67.43 at Target, it doesn’t tell you what items you purchased, and if you don’t have your receipt, you’ve probably forgotten.

People tend to spend more when they use credit cards. Swiping a card is psychologically easier than handing over cash. One study found that spending differences between frugal and non-frugal spenders were smaller when they were required to make purchases with credit cards rather than cash, so even tightwads loosen up when they pay with plastic.

Furthermore, research has shown that credit cards’ mere presence stimulates the desire to spend. One study found that willingness to pay was significantly higher when credit card logos were visible during shopping. This 1980s experiment was replicated two decades later, indicating that credit card logos stimulate consumption, similarly to how the smell of baking bread stimulates visiting the supermarket’s bakery section.

Start now: Get budgeting software from Mint and start tracking spending right now. Click to get started.

Debit cards are safer than credit cards, because they immediately deduct money from your bank account. But even debit cards anesthetize the pain of paying to some degree. The truth is, there’s nothing like handing over cold, hard cash for helping you examine your spending. And when you only carry cash on shopping trips, you’re forced to stick within limits.

Here’s What Happens When You Start Using Cash

When you pay cash, you are forced to consider the purchase price as well as sales taxes, and you have to compare that to your immediate resources – the cash in your wallet. With credit, you may fully intend to pay off your monthly balance (and some people have the discipline to do this), but you still have that option of paying over time if you need to.

The sting of paying cash can help even more with big ticket items. That gorgeous stainless steel refrigerator is less seductive when you know you’ll be handing over $2,000 in cash for it. You might decide your current model will do just fine until it wears out. At worst, when you pay cash for a big ticket item, you may remember that sting of purchase when you use the item, but that can help you appreciate it and your hard-earned money.

The best thing about paying in cash, however, is that it helps you stay out of debt. Debt can snowball easily, and carrying credit cards helps you overspend with little forethought. It’s hard to pass up that flat screen television that’s on sale for a great price, but when you do, you have more money for your mortgage, your children’s educational funds, and consumer debt (like credit card bills) hanging over your head. There’s no substitute for the great feeling of making that final car payment, or paying off a credit card at long last.

Tracking Your Spending

If you want to try using cash for your day-to-day spending, track spending for a month and determine a reasonable weekly “allowance.” Tracking spending is easy with a budgeting app like Mint, which links your accounts to your home computer and your smartphone, so you take your budget with you wherever you are.

You may have to adjust your weekly allowance at first, but once you’re used to paying cash, it almost becomes a game of seeing how much you can have left over at the end of the week. And that money can be put toward debt, or rolled over for next week. Either way, you’ll be chipping away at debt and making your financial future brighter.

Start now: Get budgeting software from Mint and start tracking spending right now. Click to get started.