My wife and I are going on 3 years debt free except our mortgage, and I have to tell you, it's a great feeling.
I still remember sending in that last student loan payment, just having a feeling of a weight lifting off of my shoulders, and not having to worry about that obligation any longer.
There was a new found sense of freedom we found by paying off our last debt. We would now be more free to save, invest and give!
In our 3 years of debt freedom we've started to get back to the personal finance basics, doing things like living below our means, paying ourselves first, and planning for unplanned emergencies. We've started keeping a family budget, and making sure we know where our money is going. We've made a lot of big changes!
One of the major changes that we've implemented is that we're now starting to forgo the use of credit cards and finance plans, even on the biggest of purchases. We're not longer financing our cars, or our furniture. Instead we're saving up and paying cash. If the money ain't in the bank and we can’t pay cash, we don’t buy it.
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Paying Cash Can Be Done For Most Purchases
Saving cash to purchase most things isn't that hard if you plan ahead. Last year we were finding that our old 5-6 year old desktop computer that we'd been using for years was starting to get slower, and our ability to upgrade the old machine was just about maxed out. It was time for the old computer to move on, and time for us to upgrade.
In the past, as soon as we had decided to replace something, we would have gone out and purchased it on one of our credit cards, or signed up for a financing plan, so that we could get the item right away. Things are different now because we only pay cash. So instead of having instant gratification we saved up for a month or two and got together enough cash to buy a nice refurbished Dell computer. We upgraded the desktop, but kept our old monitor. No need to upgrade everything if we don't have to! In the end we researched and found the best deal, and only spent $300 or so to replace our old machine. Much less than we might have spent in the past!
Paying Cash For A Used Car
We also bought a used car about two years ago. Now you might think that paying cash for a car wouldn't be do-able, after all a new or used car costs thousands of dollars! But our last two cars have been paid for in cash. It just requires that you have some discipline. We used a plan similar to the “Drive Free Cars And Retire Rich” plan espoused by Dave Ramsey. Basically you start out by buying a relatively cheap $1500 or so car with cash. Then, over the ensuing years you drive that car and you pay yourself a car payment. When the time is right to buy a new car, you have enough cash to pay for it outright! We've done it twice now, and we're starting to search a for a mini-van or SUV since we just had our first child. We'll pay cash for this car as well!
Plan Ahead And Save For Bigger Expenses
If you want to do the same as we have and start paying cash, just start a budget, and include high ticket items (and smaller items) as a savings goal! When you plan ahead for big expenses, both emergency expenses and planned expenses like a new car, you'll be much further ahead when the time comes to pay for those expenses.
I will grant that some bigger expenses, like buying a house are much more difficult to do, and not everyone will choose to save up and pay cash for those. We didn't. But if you're really motivated, that can be done as well.
Benefits Of Paying Cash
There are tons of benefits to paying cash for the things you buy. Among them:
- No need to worry about missed payments or raised rates: If you don't have any payments to make, you don't have to worry about whether or not you made a payment on time or not. You also don't have to worry about whether or not your bank will raise your rates on your credit card arbitrarily. That means less bill paying stress at the end of the month!
- You can build wealth faster with no debt: When you have debt, it's much harder to save and build wealth. Shun debt and you'll be better off!
- Paying cash means you spend less: Studies have shown that people who spend cash just end up spending less money. Using plastic means you'll spend 12-18% more according to a Dunn and Bradstreet study. It hurts more to pay with cash that you have now, than it does to pay slowly over time with money you hope to have in the future.
- You can get a cash discount: Some retailers will give you a discount if you pay cash. The reason? You're saving them the interchange and processing fees charged to them when you use a credit card. Don't forget to ask if there is a cash only discount!
- Having less debt means less risk in a down economy: When you have less debt you don't have as much risk when it comes to a job loss or other unplanned negative event. When you have no debts, you don't have payments to make at the end of the month!
For me and my family the benefits of saving up and paying cash far outweigh the negatives, and we'll continue doing it for the foreseeable future.
Have you tried paying cash for the things you want, instead of using a credit card or financing plan? Did you end up spending less, and did you feel more free by paying cash? Tell us your thoughts in the comments!
I won’t launch into the points/miles/rebate discussion. It’s old, I know.
I’ll offer one thought – my cards will double the manufacturer’s warranty, up to an extra year, but more important, it covers damage that the manufacturer won’t touch. Drop the iPad? It’s covered. This coverage is worth far more than any other rebate or reward.
Of course, only buy what you have the cash for, and pay the card when that bill comes in.
I agree that in some cases using a credit card for a purchase may not be a bad idea. In fact we actually use one for some high ticket purchases, mainly because of the reasons you state. Of course, we always pay the balance off as soon as it appears on the account online.
For some people, however, doing it that way is an invitation to creating more debt, especially if they’re not as disciplined in their financial lives as you and I are. Thanks for commenting!
Congratulations! It’s a wonderful feeling that cannot be understood until it is experienced. Have you actually gone to green backs yet? Although some precautions have to made using real cash instead of a check makes it real. At one point I was waitressing and when I would come home and pull the tips out of my pocket the kids would come around while I counted. Even if it was only $20 we felt rich! And when you actually pay cash for a purchase especially a larger one people don’t know how to handle it. They look at you like you might be a drug dealer. It’s pretty crazy to have that kind of freedom, everyone thinks you’re up to something.
I desperately need to follow this. I never carry cash, and I always find it hard to manage my finances. I think I’ll start only carry around a certain amount of cash and can only use my debit card to pay for my bills, especially since I’m paying down debt.
DISAGREE!
I would say always pay your credit card balance in full every month. If you can be smart and think of it as a debit card or writing a check – you come out ahead.
The reasons
1. REWARDS. 1-2% cash back all purchases (master cards such as capital one), or 5% on item x at month x-month x, etc.. from Visa if you don’t mind memorizing the reward scheduling and being sure to use them before they expire. I prefer the flat no hassle/expiration of capital one myself. Go miles or points if you have done the tricky filtering and math and see a better deal for you. (generally though that is crap to cold hard digital cash/statement credits)
2. Builds credit – thus making you look sweeter for even better rewards offers, rates for that god awful mcmansion you can’t quite afford but want anyways :)
3. Is insured. A man puts a gun to your head and takes your wallet. Say he gets $500 off you. He can spend it and as for reimbursement from theft – sorry. Somebody steals your credit card – they back you up. They are great to you when you pay your debts. Best friend you could have (and devil incarnate if you fancy that piece of plastic a magical free card- but hey you deserve it!)
4. Lastly purchase security. Buy something? Seller kind of screw you? Chargeback. Sort of a hassle but they always come through for me.
as far as cashback rewards, that’s available from debit cards as well, like the one from Perkstreet Financial. I’m not interested in building credit either, the only reason I’d need it is to go into more debt – and as far as getting a home loan, I’m sure i could get one manually underwritten if I absolutely had to get a loan. Most visa debit cards hold some purchase protection as well, pretty much the same as credit cards. Yes, you may lose some money out of your checking account for a short time, but if you’ve got a emergency fund saved, it won’t be an issue until you get reimbursed.
I’m with yuiop. I disagree with the concept of paying cash for everything. (I lump checks and debit card payments into “cash.”) Here’s why:
A. Few retailers give discounts for cash payments.
B. Paying for everything with credit cards has many advantages:
1. No need to carry large amounts of cash, and no need to go to your bank to withdraw money to make a purchase of more than a few hundred dollars.
2. Many credit cards offer 1-4% cash back rewards. Buy putting all purchases on credit cards you can get back hundreds of dollars a year.
3. Many credit cards extend the warranties of your purchases and add travel insurance when you buy airline tickets.
4. If your purchased item doesn’t work and the vendor won’t take it back, your credit card company often can get your money back for you.
5. By using a credit card, you delay paying for your purchases by 25-55 days (depending on the timing of your purchase, the timing of your credit card bill, and the length of your grace period). You get an average of 40 days extra interest on your savings.
6. If you set up automated monthly payments for the full amount of your credit card bills, you never will miss a payment and you never will pay interest or penalties. (Caveat: You risk being overdrawn if you don’t keep enough money in your bank account, but that’s usually avoided by direct deposit of pay or investment income.)
7. Using credit cards like this helps to give you a high credit rating, an important factor if you need to apply for a mortgage or loan or if a potential employer performs a credit check.
8. Your credit card statements provide an excellent window for examining your spending patterns if your income falls, and most credit card companies provide online tools for displaying expenditures by category or vendor. (Or, you can import your credit card data into a personal finance program and generate custom reports.)
My family has used credit cards whenever possible for over twenty years. Our credit scores are nearly 700. We’re moderately thrifty and don’t buy what we cannot pay off the next month.
I think some people are taking Mr. Money’s cash only advice literally. He is not suggesting that you move around with a suitcase full of cash. In accounting terms cash does not mean bank notes but actually means money at hand.
I am a cash only guy but I use my visa for each and every purchase. My visa is linked to my checking account. Whenever I make a purchase on my visa I always keep the receipt and when I get home I simply log onto my account and transfer that amount on my receipt to my visa.
Buying a cheaper car and “paying yourself” the car payment each month is a really awesome tip! It reminds me of the SNL sketch with Steve Martin about a program called “Don’t Buy Stuff You Can’t Afford”. Putting a lot of big items on credit cards can be a quick slippery slope! Thank you for the tips!