Would Paying for Everything with Cash Work for You?

by Hank Coleman

Would Living the Cash Only Lifestyle Work for You?According to a new Gallup poll published in July 2016, just 24% of Americans reportedly use cash for all or most of their purchases, which is a significant drop from the 36% figure reported for the all/most category in 2011. In this survey, just 10% of Americans reported in 2016 that they lived the cash only lifestyle using cash for all of their purchases, while that figure was 19% five years ago.

These statistics suggest that Americans are relying less on cash now more than ever, but this isn’t necessarily a good change. Just look at the March 2016 The New York Times story about how credit cards encourage extra spending as the cash habit fades away. Not only are credit cards more costly for the average American – those transaction fees, interest payments, and missed payment penalties add up, after all – but we’ve become so reliant on credit that 66% of us don’t even have the cash to cover a $1,000 unexpected bill.

According to @Gallup poll, only 24% of Americans use cash for all or most of their purchases.Click To Tweet

Although online retail sales only account for 7.7% of total retail sales, many of us mistakenly believe we’d be cut off from a world of shopping opportunities if we made the switch to a cash only lifestyle. In reality, this would only happen if you switched 100% to cold, hard cash, instead of balancing debit cards, checks, and cash in your new financial approach (none of these methods use credit, after all).

Would Living the Cash Only Lifestyle Work for You?

There’s nothing wrong with swimming against the current in a world obsessed with credit and drowning in debt. If you’ve considered adopting a cash only approach to your finances, here are a few things to consider before fully committing:

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Who Would Benefit from Switching to Cash?

If you’re the type of person who treats their credit card just like a debit or charge card – by paying off the statement balance every month – and you don’t have impulsive spending habits, then there’s not much of a need to only use cash. That’s how my wife and I budget using an American Express card.

This isn’t to say that switching to cash is only useful for people with bad or poor credit, impulse shopping problems, and seemingly insurmountable debt burdens. If you encounter these difficulties with your own personal financial management, then you could very well benefit from only using cash, temporarily or permanently. It’s up to you – but there are many financially-savvy people who also opt for cash over cards as well.

Switching to a cash only lifestyle forces you to account for every dollar you spend, so some degree of organization and self-motivation is required. These skills are necessary for money management throughout your life, but the cash only method might not work as well for twenty-somethings.

Many parents encourage their kids to spend within their means by only using cash, but this financial management method might do more harm than good for young adults because their credit history will barely exist and they won’t get in a pattern of making payments (which could be useful later when they have long-term debts, like a mortgage or student loans).

Advantages of the Cash Only Lifestyle

If you eventually decide the cash only approach would benefit you, then you’ll notice some cool benefits after you make the switch. First and foremost, relying on cash means you never have to worry about making a payment on time or going over your limit (unless you use a debit card, then watch out for overdraft fees).

This also means you don’t have to pay interest because you’re not borrowing money from anyone; you’re simply using funds already sitting in your bank account or wallet, which guarantees you’ll live within your means.

Psychology Today also points out that paying in cash reduces the number of impulse purchases you’re likely to make. This is due to the fact that cash leaving your wallet at checkout is a visual representation of loss to your brain, while swiping a credit card lets you forget about the expense until later when you see it show up on your statement balance.

Paying with cash and debit cards not only forces you to live within your means and avoid impulse purchases, but it also encourages you to become more mindful of your spending habits and regularly monitor your budget instead of shrugging off instances of overspending with “Oh well, it’s still within my credit limit.”

Credit cards have inadvertently taught us it’s okay to be lazy with our money as long as we make minimum payments and don’t go over our monthly limits. Transitioning to only cash will revamp your approach to personal finance.

Downsides to Ditching Credit Cards

Sure, credit card companies are in the business of making a profit off of their customers, but owning a credit card (or several) can still be a win-win for you. Credit cards offer the best legal protection against fraudulent purchases (usually $0 liability for you), but if someone steals your cash, then it’s basically gone for good.

There are also several reasons why you shouldn’t pay for purchases with a debit card. For instance, debit card fraud could leave you liable for up to $50 (if you notify your bank within 48 hours of noticing the fraudulent charge on your account) or even the entire fraudulent purchase if you wait too long to tell your debit card provider. HowStuffWorks also points out that shopping online with a debit card is generally a bad idea, but if you don’t have any credit cards, then how else can you buy anything on the internet?

Also, if you’re already pretty responsible when it comes to managing your finances, then why would you want to give up the opportunity to earn rewards with a credit card? You can earn points for gift cards, merchandise, and other cool stuff, miles for discounted travel, and cash back (usually in the form of an account credit).

And, if you pay off your statement balance every month, then there’s almost no downside to using a rewards credit card (assuming $0 annual fee).

What about building credit? If your credit isn’t in the best shape, or you’re still in the process of building your credit history, then giving up on credit altogether won’t solve your problems. A good credit score is important to securing lower interest rates on loans and demonstrating a track record of responsible financial management, but refraining from credit usage completely is not the best way to build your credit history.

The Envelope System

If you decide the pros of only using cash outweigh the cons, then the most popular method for budgeting, spending, and saving with cash is the envelope system. This is done by writing the names of your expense categories on the front of envelopes and allocating a set amount of cash each month to these envelopes, based on what you’ve budgeted for. Dave Ramsey is a big proponent of using the envelope system to budget.

The Envelope System is an extremely effective management method for many people because it forces you to get creative if the funds dwindle before the next deposit of cash comes in. However, the cash only envelope system can be problematic if prices suddenly skyrocket (gas, for instance), if your income is unstable/sporadic, or if an unexpected cost rears its ugly head one month and you need to pay for it ASAP.

Alternatives to Only Using Cash

Using only cash for everyday purchases isn’t the best method for everybody. If you still want to use cash as your primary method of payment without experiencing the downsides, you might want to consider getting a charge card.

This is similar to a credit card except you have to pay off the entire balance each month. And, you can even find one that offers rewards. This way you won’t risk leaving your credit history to stagnate, but you also won’t risk spending more money than you make each month.

Having a credit card for emergencies and the occasional online purchase is also a great alternative. This way, you don’t have to worry about a surprise expense disrupting your budget. And, you don’t have to risk exposing your debit card information to online hackers.

What approach – or a mix of approaches – you ultimately decide on depends on your lifestyle and spending habits. But, despite it’s decreasing popularity among American consumers, cash is still king when it comes to responsible financial management.

What about you? Would living the cash only lifestyle work for you? Do you use cash only?

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 593 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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