The Times Are Changing
The world is phasing out paper currencies for digital, plastic forms. Credit, debit, and secured cards are increasingly occupying wallets. Despite recent declines in the 18 to 21-year-old demographic (due to the CARD Act), 78 percent of Americans have credit cards (Link). We have voted against the greenback, and replaced it with digitized numbers that represent the possibility to spend. But, this is placing us at risk for increased debt and instability.
Various financial counselors recommend cutting up your beloved cards to control spending. These advocates argue for a cash-based budgeting system. Usually, a series of envelopes represents the different domains of life (rent, car payment, groceries, etc.).
Dave Ramsey is the largest proponent of “cash flow” systems to managing your debt and money:
Grandma’s way to handle money still works. People used to always use cash envelopes to control their monthly spending, but very few do in today’s card-swiping culture. (Link)
Scientific research supports this system:
Credit helps to anesthetize the pain of paying, and it caused tightwads to nearly catch up to the spending levels of spendthrifts. (Link)
Their study found that subjects paid more when they were instructed to use a credit card rather than cash. In fact, they found that they were willing to spend up to 100% more with plastic. (Link)
Carefree & Cashless
The reality is that cash is slowly being phased out. Even if cash currencies still exist, the availability and acceptability may shrink. Businesses and consumers generally prefer the streamlined approach to cashless transactions.
Starbucks is a perfect example. Whether you have a credit or gift card, Starbucks’ iPhone app allows you to store your card information for purchases. All you have to do is swipe your phone and that steaming beverage is yours.
The ease of the cashless world is both tantalizing and horrifying. We can minimally travel, without bulky cash filling our pockets. A thin card gives us all the purchasing power we need. But we also risk spending more, going into debt, and suffering usury interest rates as punishment (try 25% or more penalty rates).
Unfortunately, the current financial gurus may be behind the technological times. The younger generations demand fungible, diverse transaction assistance (e.g., Bitcoin to PayPal to the iPhone’s Passbook). As noted, cash is dying. The old advice is dying. The conflation could be destructive to us all.
What’s The Solution?
Opinions are cheap; mine included. But, as a Millennial, credit card user, and cashless-cabin-aficionado, I believe we need to begin searching for viable solutions. As the masses segue to destructive spending patterns and digitized spending that distances us from the dollars depleting, we will suffer.
Forced spending control and scheduled punishments for poor purchases may be the last viable solution. Whatever happens, I hope we act before this bubble bursts.
I agree that self-discipline is a legitimate option, but who’s going to consistently enforce these punishments? The consumers? Through their fiscal irresponsibility many people have shown that the problem is their inability to monitor their spending behavior…so doesn’t it seem unrealistic to expect consumers – already hopeless spendthrifts – to somehow shift that tendency? I see a catch-22.
You’re right, consistent enforcement of punishment schedules is a difficult conundrum. Monitoring the behavior appears to be half the battle. By learning and watching where money is spent, consumers can begin to see patterned spending. But, the real growth occurs after control. That requires a different level, in my opinion. That’s where behavioral modification strategies appear to be so important.
Thanks for your comment and question… I, too, believe this may be more complicated than it appears.
Bob @ Cubicle Sherpa says
I don’t think cash is going away any time soon. We millennials tend to suffer from a case of selection bias because we’re surrounded by younger, tech savvy people all the time.
We think that because none of our friends use cash that no one does. In reality, I still see people paying with cash all the time. And I don’t expect this to change any time soon.
That said, our tech savvy, credit card wielding friends do need to be more aware of their spending habits. It’s way too easy to go overboard with a CC if you’re not tracking it properly.
Thanks for your comment. I think cash has got some life ahead of it, as well. But, eventually, it seems like it will be replaced by the more efficient forms. Perhaps it is selection bias among the tech savvy Millennials. I don’t think so, though. Nearly everyone I know has a debit or credit card – often more than one. These cards didn’t really exist before Amex, Visa, and MasterCard popularized this payment process.
It wasn’t until the 1940s that credit cards really came into existence. I believe we still have a lot to learn.
All the best,
Emily @ evolvingPF says
I don’t know why becoming a cashless society needs to be gloom and doom! I believe that the studies the show how much more it hurts us to pay with cash over plastic are aging out. Those of us who have always used debit or credit won’t have that same “free money!!” feeling when using a card that people who were accustomed to cash had. I know for myself whenever I have cash I have a “get rid of it get rid of it” feeling, whereas I am very judicious typically (when I use a card).
Thanks for commenting on this article. It seems to have caused quite a stir!
Cashless, as stated, does have advantages (minimal wallet, purchasing power, and easy spending).
It’s an interesting hypothesis about the dying out of the “free money” concept. I look forward to continuing research in this domain.
All the best,
Whether it’s a debit/credit card, Paypal, Bitcoin or Cash–In the end, it’s all money. Focus on growing your net-worth and you’ll be fine. A penny in your pocket or a penny in the bank is immaterial in my book.
Thanks for your comment, today. Of course! They’re all monetary systems. These are real, digital currencies. There may be nothing concrete or tangible about them, but their buying capabilities count just as much as cash.
My worry surrounds the desensitization and dissociation from the tangible components. The research tends to support this concern, as well.
Time will tell,
Not only are more people using plastic for purchases in person, more people are making more of their purchases online. It’s cheaper to buy parts for my computer online, even with shipping, than it is at BestBuy. In the Seattle area, you can even buy groceries on Amazon! My understanding is that they are even price competitive with stores like Trader Joes.
This is a really good point! Should’ve shared that developing part of consumer culture: Online shopping. Alas, for a future article, perhaps. 🙂
I have long been an Amazon Prime member, but I think I’ll let that expire this year. Don’t really need the super-fast shipping anymore. It’s pretty much always cheaper to buy in stores.
Thanks for the comment!
I don’t see a real problem in using plastic over cash; one has to be responsible and careful with his spending no matter which form of payment is preferred. I believe the main reasons for the Credit card craze are convenience, ease and security, that is ALL. If your CC is stolen or lost purchases can be stopped, your cash on the other hand is long gone.
I’m abroad right now and glad to own the thin plastic devices as I always have the correct currency and appropriate amount on hands. No worries, no hassles. I’m lucky if I have $10 – now 10 Euros – for a fresh crusty baguette!
This is called progress, why the need for cellphones while we managed very well without them before, why a Kindle when one can buy, borrow, rent books, why a GPS when we can purchase a much cheaper map or Google directions ahead. Progress, convenience, laziness, needs to follow the trend….
Thank you so much for following along and commenting on this article! It’s much appreciated.
I think credit cards are convenient and easy – just like you said. But, those adjectives are scary when it comes to spending. Now, it’s easy to spend (too much).
Traveling internationally with a credit card is a smart currency conversion decision. If you have a card with zero conversion fees, you’re getting the best rate possible, and possibly some cash back on your purchases.
You’re right about this progressive, evolutionary change. I completely agree that this is where we are headed. But, to that point, can we better prepare ourselves for the mental test that results from that thin card in our wallets?
All the best,
I’m a millennial and I use DR’s plan. He doesn’t tell us to cut up our debit cards, just that if we want to get out of debt we need to eliminate the tool that keeps us on the revolving wheel.
I think that’s a fair point. I guess I noted that a major piece of Ramsey’s advice seems to center on the use of cash and envelopes. I just wanted to address that piece of the puzzle. In the end, if people switched to using debit cards more often we still have less debt and better budgeting.
Thanks for voicing your opinion,
I’m a Millennial and following Dave’s plan has meant that I can now think about and pursue retirement by 35. I think that promoting more use of cash will actually help Millennials counteract their tendencies toward instant gratification.
I find I have the opposite problem. Cash just disappears without any knowledge as to why. Any card transactions are categorized on my bank statements and also captured in Mint. Every time I have to swipe I know how this will be affecting my budget. With cash, the money is already out and accounted for. It vaporizes in a fury of small transactions.
Mel @ brokeGIRLrich says
I think that you’re right about us needing to develop a new method for keeping accountable with plastic. Personally, I love the rewards aspect to my card and find it relatively easy to keep to a budget because I keep mostly paying off my card as the expenses occur rather than once a month, so I watch my account balance drop, which keeps me more cautious.
I must admit it requires a lot of self control to handle credit cards today. I myself always considered myself savvy in using it and yet I slipped and let the debt go over my head. Now I fight it hard paying it off with all available cash and basically stopped using credit cards returning back to good old envelopes.
The old school method will always work. Millennial’s need to simply do it.
I think the basic principals of the spending beyond your ability to pay (whether using cash or debit) will work and is timeless. The method may change, but it doesn’t change the concept of living beyond your means – for any age group. Each generation always thinks they know better, until they hit the same road blocks. Hopefully millennials are smarter than those who have gone before and heed the financial wisdom available. 🙂 Good discussion though.
Never want to be a naysayer on “studies”, but I personally think the whole cash vs card argument is an excuse. People want a reason why they are ill-disciplined with money and therefore if they can blame it on something (like the fact that the item going over the till is made of plastic instead of paper (or cotton, or whatever $s are made from)) then they will!
Uh, paying with cash does not have to be literal. Dave teaches to live on a budget, within your means and not to use debt (a form of slavery). He does OK a morgage if it is 15 yr or less, fixed rate and not more than (I think) 25% of your income. Using a debit card or Apple Pay can still be within his plan… However, realize that studies show that using actual cash causes you to spend less… Probably because you “feel” the transaction more than swiping a card. Dave’s plan is timeless.