Cash or Credit? Easy Formulas to Help You Juggle Payment Options
Especially now, in a time where the economic situation may be forcing you to be creative in your spending exploits, you have to be on top of your money. It’s in your best interest to be smart when you spend.
Your ability to find that delicate balance between cash and credit could be the difference between:
· Having enough reserves to cushion a possible financial blow, and
· Having a mountain of debt staring you in the face
Using these strategies will help you juggle your payment methods effectively:
1. Separate recurring and one-time expenses. Split your expenses into two categories: regular monthly expenses, like utilities and rent, and one-time expenses, like a trip or unexpected medical fees.
· In most cases, recurring monthly expenses can be paid for with your credit card because you likely would have budgeted for them from the onset. Just be sure to clear those amounts from your credit card in full when the statement comes.
· One-time expenses are best settled with cash so you’re more honest with yourself in terms of your financial position. Credit cards can sometimes give a false sense of financial wellness because of the spending power they give you.
· When using this strategy, it’s really important to be able to stick to your budget. Remember to put aside those funds for your recurring expenses, even if you’re putting them on a credit card. One of the worst financial mistakes is to spend the cash for your rent on a one-time expense!
· The beauty of using cash for your one-time expenses is that when you run out of available cash, you know to stop spending, at least until the next paycheck.
2. Assess ability to make deferred payments. If you can pay for your purchase in the next 30 days, for example, then you can budget for it and pay cash when the time comes.
· The less debt you rack up from credit card spending, the better off you’ll be.
· Remember that if you can’t afford to pay for something with cash, it’s probably not a good idea to pay for it with a credit card.
3. Determine which offers better tracking capabilities. Do you track the previous month’s expenditures to see if there are habits you can improve upon in the current month? This is always a wise move. Either cash or credit might work better for you in this endeavor, depending on your habits:
· If you’re disciplined with saving receipts, you could be better off spending cash. This way, you always know when to stop spending (when your cash allotment runs out), plus you can analyze your receipts to look for ways you can save.
· However, if you can’t find most of your receipts for cash purchases at the end of the month, it will be difficult for you to assess your expenditures. You may be better off using a credit card so you can look at your statements to analyze your spending.
4. Assess your spending patterns with cash vs. credit. Nobody knows your habits better than you! Are you a more frugal spender when you use cash vs. credit cards?
· In most cases, you’ll likely spend less money if you allow your cash reserves to cover expenses. From a psychological perspective, it’s easier to hold back on cash expenses because you can easily see how your reserves can go from healthy to empty in a matter of seconds.
Once you try these strategies, you’ll be able to determine which method of payment offers you more returns, better flexibility, and the most realistic look at your financial status.
-Tiffany M. Vaughn, CPA