Cash Is King (Why My Wife And I Just Cut Up All Our Credit Cards)

So pretty - just makes you want to spend doesn't it? Photo: ptmoney.com

So pretty – just makes you want to spend doesn’t it?
Photo credit: PT Money

 

The idea of credit has been around for ages, but the convenience of having a little piece of plastic by your side for quick and easy loans is a fairly new concept, starting around the time of the Diner’s Club card in the 1940’s.  Nowadays credit cards are everywhere you turn – when I graduated from college and Mrs. Mase and I moved into our new apartment, I got letters almost weekly from American Express trying to offer me special deals.  It was tempting – I mean the rewards looked really nice – but I already owned a credit card at the time and I already got a couple rewards from that one.  No need to switch or add to the pile, it just seemed like a hassle I didn’t need in my life.

I actually was semi-late to the credit card scene – I didn’t get one until I was a senior in college.  My then fiancé and I knew we would want to buy property within a few years from graduation, after we had been married for a bit, and figured building our credit right out of school would help us get a loan when we wanted it.  It turns out, we were right about this – even with less than a year of job history in the city we moved to, with both of our records of always paying our cards off we were able to get a loan for the condo when the time was right.

Now, this makes it seem like I’m a huge fan of credit cards.  Quite the contrary.  I now despise them.  The only thing I think they’re useful for is building credit so that you can get a loan on your first house.  That’s it.  Not for anything else.  Nada.  Everything else in your life, in my opinion, should be paid for in cash.  Now, it is possible to get a mortgage without credit history (a process called manual underwriting), but this process is being practiced less and less by banks around the country.  Having a decent credit score for that one big loan in your life helps make the process easier.  Anything else though, to me, is just s-t-u-p-i-d!

“But credit cards are so convenient,” you might say.  Or, “Are you kidding me?  It would be foolish to get rid of those rewards points.”  Well, the truth is, it is very convenient.  In fact, it is soo very convenient, the average American household owes $7,000 on their credit cards (data as of October 2013).  With 25% interest rates galore, being late on the payment just one month can be costly.  The negative amortization on these things is just poisonous.  Think about credit cards from a risk/reward perspective.  If there is a major catastrophe in your life and you don’t have the cash to cover your expenses, are those airline miles that you earned really worth the 25% interest you’re paying? (40% of airline miles never get redeemed, by the way).

“But Old Man Mase, I’m a responsible adult.  I pay my bills every single month.  In fact, I have more than sufficient income and assets to fund my debt payments.”

Sure, I’m not saying that borrowing on credit cards will inevitably lead to disaster for you.  I’m simply saying that for most folks, the risk is not worth the reward, especially when debit cards exist.

Now I, someone who responsibly paid off his credit card each and every month, someone who was never charged interest and who redeemed cash rewards, cut up his credit card.  What the heck was I thinking!  Well, for me I realized that it’s about more than money.  Like many things in life, there are multiple dimensions that need to be examined here:

1)   Psychology

2)   Peace of Mind

3)   Simplicity

First, it’s been proven that when you pay with credit cards, you spend more.  In an MIT study, two groups of similar participants were asked to bid on Boston Celtics tickets in a silent auction.  One group was told they could only pay in cash, while the other group was only allowed to pay via credit card.  Those in the credit card group ended up bidding much more than those in the cash group.  Also, although unproven in this specific study, it was suggested that there is an association bias that occurs when consumers are simply exposed to a credit card company’s logo that makes them want to spend more.  It’s just so easy to spend someone else’s money, isn’t it!

Another reason why psychology plays an important role is the physicality of cash.  When you pull out a fan of good ol’ Uncle Jacksons and hand it over to the cashier, those little guys are gone.  You physically remove them from your wallet and hand them over, never to be seen again.  On the other hand, when you pay with a credit card, you actually get to keep the card.  It’s handed back to you and placed right back in your wallet or purse.  Now, this is also of course true with debit cards, which is why I try to use them more sparingly than cold hard cash.  However, the point is that when you pay with cash, your brain registers the pain.  With a card, it’s almost as if nothing has happened, because there was no relinquishment of a physical item.  The bottom line is, cash helps curb your spending because it feels more real.

Peace of mind is a huge one for me.  I used to have the thought of my credit card statement in the back of my head.  How much did I borrow this month?  I wonder how much of my paycheck is going to be eaten up as soon as I pay this off?  The thing is, I don’t have thoughts like this anymore, because we just don’t borrow money.  We budget what we spend, no need to worry about paying anyone back.

The last point I’d like to make is that not having credit cards just leads to a simpler life.  There are no rewards points I have to keep track of, no fine print I have to read about interest rates and fees.  I have found that the simpler I make different areas of my life, the more focused and fulfilled I can be in these areas.  Personal finance is no different.

My grandpa, the original Old Man Mase, doesn’t need credit cards.  Some of my other older family members have never needed credit cards and are financially thriving.  So, why should I use credit and borrow money?  To me, the risks outweigh the rewards, both from a quantitative and qualitative perspective.  That’s why we cut up our cards and threw them away.  To me, Cash is King.

Status Symbols Are Deceptive

Stylin'.  Photo: NRMA Motoring and Services

Stylin’. Photo: NRMA Motoring and Services

Several months ago, I met a guy through a friend of a friend.  We’ll call him Aaron.  This particular guy, his girlfriend, and my wife and I started hanging out on several occasions, and we all started getting to know each other.  They invited us to Aaron’s trendy condo building, which was well furnished and filled with interesting décor, and had a nice view of the city to boot.  Our social interactions typically involved high-end wine, nice restaurants, and the occasional fancy talk about world events and the like.

Now, Aaron is a nice guy.  I never held his luxury SUV or his taste for fine wine against him.  He had an MBA from a top 20 university and seemed like pretty smart, educated guy.  So when he talked about his small business that he owned and operated, it wasn’t hard for me to trust his words.  After all, I firmly believe that those who work hard in our society and provide value through their skills should be justly compensated.

However, Aaron started acting a little shady when it came to money.  Even after proposing to his girlfriend and becoming engaged, he wouldn’t disclose his earnings to her or show her his place of work.  He’d flip through pages of supposed million dollar account statements, but wouldn’t let her read them in detail or talk about how his money was invested.

Well, it turns out Aaron wasn’t so well off after all.  His ‘business’ wasn’t really owned by him – he was just an employee who had been hired to act as a manager for several clients and their accounts.  On top of this, it eventually came to light that he stole large sums of money from the true owners of the business and spent it on his personal expenses.  He even tried to hide some of his assets by purchasing a new luxury vehicle and not registering it through the proper channels.

Needless to say, his once fiancé has dipped out and is now living a much more happy and fulfilled life.  It just goes to show you that true wealth is not so easily recognized.  All of the ‘things’ that seemingly indicate a high level of status don’t necessarily mean there is real money behind the scenes.

Watch out for people like this, and be careful with whom you associate.  It just goes to show you – it’s so important to build true wealth before spending lots of money on strippers and candy.  It just works out better that way.

Book Review: The Automatic Millionaire

The Automatic Millionaire by David Bach. This is the book that started my wife and I on our journey toward financial freedom.

Ok, this is what started it all for me.

I was a junior in college, and I was back in my hometown to visit family over the holiday break.  One day while my sister and I, after becoming a little bored sitting around the house, decided we would take a quick trip to the half-price bookstore a few minutes away.

Now, my sister has always loved reading, but I myself had lost the passion for it long ago.  Nonetheless, I figured I would tag along with her in the car.  As we got to the huge, warehouse-like store, we split up to browse through all the vast shelves and categories of books.  And then, like that, a thought popped into my head, “Hmm, I’m getting close to graduating from college…I don’t really know anything about personal finance.  That seems important…let me go look.”

Once I got to the section, I scanned the shelves for something that looked interesting.  I came across a blue book with gold-colored embossed letters to form the title on the spine, The Automatic Millionaire.  Ooh, how intriguing.  It seemed cheesy, but it was enough to get me flipping through it and ultimately deciding to buy the book. Little did I know, that $3.00 purchase of a used personal finance book would completely change my mindset forever and the way that I view money.

The book is definitely tailored toward personal finance beginners and does a great job about reiterating that making saving a priority is essential for building any long term wealth.  I gobbled this book up within several hours; it’s a fairly quick read.  I called my then-girlfriend excitedly, “You have to read this book!  It’s got a really cheesy title but it makes sense!”  We were still in college then, and we didn’t have any real sources of income, other than the occasional side job I would do on campus for some spending money.  However, when we graduated and started our careers in the summer of 2012, making automatic saving a priority via 401(k)s and Roth IRAs was a no-brainer.  After only about 16 months of saving, we’ve already amassed a nice little stack of capital, just by making a single decision to sign up for automatic withdrawals from our paychecks.

Nowadays, The Automatic Millionaire just seems like basic financial advice, but it was so great for me at the time because the information was new to me and it helped me start to think long term about my life and my finances.  It also set me on a new path to wisdom – I began reading voraciously.  All of a sudden it was like a whole new world was open to me.  You can learn sooo much simply by taking the time to sit down and read what somebody else has to say who’s done it already.

If you’re an absolute beginner in the personal finance world, I would suggest The Automatic Millionaire.  It’s a quick read that hits all the basic points of getting out of debt, saving, and the power of compound interest.