In this article i will focus on just one technique to improve your finances by taking a close look at how making purchases with cash can contribute to your ability to budget, save and invest.
A Plastic Affair
With the proliferation of plastic alternatives to hard currency, some people consider carrying cash a throwback.
To be fair, plastic is much sexier than a piece of colored paper with a dead president staring vaguely into the distance. Some banks even allow you to customize the graphics that appear on the credit card/debit card or choose from a range of designs and colors the company is marketing.
There is also the security advantage with debit and credit cards. Debit cards are protected by your personal identification number (PIN) and credit cards by your signature (and for some cards, a PIN number too). Cash is only protected by your ability to defend it should someone else want to take it from you.
Moreover, nowadays cards are as widely accepted as cash shops. And yet, from a personal finance view, cash is almost always the better choice for making a purchase. Here’s why:
One of the drawbacks of credit and debit cards is that they encourage you to spend more than you intend to by giving you easy access to more capital. With cash, spending more than you intended requires going to a bank or ATM to get more and then going back to the store to complete the purchase. For most people, this provides time to reconsider whether their budgets can handle any extra strain.
Generally speaking, only carrying the cash you are prepared to pay for a given product will prevent you from buying the next level up and paying for features you don’t need. This works for small-scale purchases, but buying a computer or a car can involve large amounts of cash that probably shouldn’t be carried around. If a check can’t be used, a debit card is better than a credit card because you are spending money you have rather than money you don’t.
So what can you do to avoid this? Only carrying enough cash to buy the things on your list can limit the damage. This is the best way to keep shopping within your budget. If you are motivated, you will find discounts or cheaper alternatives to your regular brands to make that cash go further and maybe earn yourself a luxury item.
Cash has one very clear advantage over using a credit card: If you buy something on your credit card and end up carrying a balance, or only make the minimum payment each month, you will incur interest at a rate of 20% or more of your purchase (which can have you paying Tsh.20,000/- or more for every Tshs.100,000/- you spend). If you save up enough cash for the same purchase, you are giving yourself the equivalent of a 20% discount by not using your card. Before you even sign up for a card, make sure you know what you’re getting into.
For most people it becomes a matter of 10,000 shillings here, 100,000 Shillings there, another 40,000 over here and so on until they give up keeping track of how much has been spent in a day – let alone a month. Then it’s a shock to their systems when the monthly statement comes and it’s far too late to do any good. With cash, you can see the damage as it is done and hopefully curtail your spending before it gets out of control.