Is Cash Really King?

My old accounting professor used to always tell us, “Cash is King”. For businesses, this is totally true. Just watch the businesses that went insolvent in 2008, most of them had a lot of debt, little cash flow, and even less cash on hand.

But does the same hold true for your personal finances? Dave Ramsey thinks so!

However, most people use the “buy now and pay later” credit adage throughout their daily life.

Which is better?

Let’s dig into this and find out……..

Why Pay in Cash?


Paying in cash has a lot of advantages.

Cash is King

Limits Unnecessary Spending

When paying in cash, purchases are budgeted. This makes it easy to track how much money is spent. It keeps spending in check because you are easily able to track how much money is going out vs how much money is coming in at any point in time.

A great side effect of this is the curbing of impulsive spending urges.  With credit cards, it is VERY easy to spend and give in to those spending urges. With cash, the amount to spend is a lot less and very finite. Once it’s gone, there is no credit extension.

This finite cash spending limit is a great enabler for creating and sticking to budgets. For example, my wife uses a cash budget for the groceries, clothes, and gifts portion of our budget. She carries over any leftover cash from 1 month to the next. She knows at any one time how much money she has to work with and definitely curbs her spending impulses.

A cash budget enables wiser choices with the money available. Paying in cash makes a person think about the transaction more because the purchase is real. With a credit card, you don’t see the money going out of your bank account directly into the cash register….. but you do with cash.

A person is more apt to look for good deals and discounts to make every dollar stretch farther. Seeing every dollar spent encourages brainstorming of ways to be more efficient and optimize spending.

Build Stronger Connections to Purchases

Psychologically speaking, it is more difficult to hand over cash to someone than swiping a credit card.

Cash is King

Cash forces people to see their physical money being spent right in front of their eyes! A person can see money leaving their wallet and going straight to someone else. Purchases tend to be de-valued more when a credit card is used.

Also, people develop stronger connections to the stores they purchase from when cash is used.

From this article in Psychology Today, research has shown that the payment method used affects the shopper’s relationship with both the purchased product and the store being purchased from. The research showed that shoppers who paid cash to buy something increased their emotional attachment with the overall purchase experience as compared to credit card users.

Cash users also tend to be more loyal and more likely to make repeat purchases at the same store afterwards.

The strange paradox is that while people who purchase in cash build stronger relationships with the stores they purchase from, these same stores strongly favor credit card users. If you think about it, the dichotomy is that stores favor credit cards for the convenience, more impulsive buying, and larger transaction prices. They setup a ton of incentives to use credit cards.

If that same store wanted to build a cult-like customer following (i.e. Chick-Fil-A), they should find ways to incentivize the use of cash purchases.

Food for thought……. 😊

Curbs Debt Buildup

If you want to limit debt accumulation, spending with cash is the way to go.

Why is this?

First off and psychologically speaking, people tend to spend less when cash is used. A person quickly connects the money spent to the items being bought. Using a credit card, these same connections aren’t being made as quickly.

Not only does this develop financial discipline, it also helps to optimize cashflow by plugging money leaks.

Not convinced that it works? …. Give it a try for 30 days and track the results.


For all of its advantages, paying in cash does have a few drawbacks.

Lack of Fraud Protection

Once the cash is handed over and with no written agreement, if something goes wrong there is little chance to get that money back.

For example, let’s say a plumber is paid $300 to install a hot water heater. A month later, the heater springs a leak. If using cash to pay the bill, good luck trying to get that same plumber to come back and fix the problem. A lawsuit could be filed but that wastes more money and more time.

However, with a credit card, the purchase can be contested with the credit card company and there is a good chance you’ll get your money back. Many credit card companies won’t hold you liable for any contested or fraudulent charges.

No Cash Rewards

Using cash only purchases enables missing out on taking advantage of the cash rewards offered by a lot of credit card companies. Whether it’s free travel, Disney points, or straight cash back on purchases, credit cards do offer a lot of benefits that, if managed properly, offer HUGE benefits.

If used correctly, credit cards will propel you forward. If used inefficiently, credit cards will place you deeper into debt and continue the downward debt spiral.

Cannot Use Cash for Online Purchases

In today’s environment, online purchasing is paramount for everything from ordering groceries to prescriptions to the new guitar you always wanted. Online shopping can also be a source of overspending too if not used wisely.

IF used wisely, there is a plethora of online rebates, coupons, and offers to save lots of money. On top of that, items are shipped directly to your door. All of this is possible if credit cards are used.

However, if cash is used, none of this is possible. Cash cannot be used for online purchases since only credit / debit cards are accepted.

When Best To Use Cash

Using a strictly cash budget is best for the following situations.

Cash budgets are great when on a very tight budget. If you need to ensure every dollar is stretched as fast as possible, cash is the way to go. As stated above, people track spending better when using cash since it limits unnecessary spending.

Cash budgets are great when a person is first starting out. When people are fresh out of college, most of them have a difficult time setting a budget and tracking expenses. Going cash helps with this. Using cash makes the “pie” finite. When you use it, you lose it. No credit extensions, no line of credit.

Lastly, cash budgets are excellent for variable purchases such as groceries, utilities, gifts, clothing, etc. We use the envelope method for this. We have envelopes set aside for groceries, the water bill, clothing, and gifts. Since the water bill fluctuates, I found the average usage for the year and divided by 12 for the monthly allotment. It takes a little bit of initial work to get it set up but once done, you can literally “set it and forget it”.

Why Pay With Credit?

According to 360 Degrees of Financial Literacy, there are a lot of benefits with using credit to make purchases. We’ll talk about only a few below that I think provide the biggest “bang for your buck”.



The first advantage is how convenient credit cards are. There are accepted virtually anywhere in the world. No additional ID is required to prove your identity (i.e. like back in the “good ol’ days” with trying to cash checks). Large amounts of cash do not need to be carried around.

Since credit cards are universally accepted all over the globe, credit cards work in any currency. Be careful, some cards charge currency exchange fees so if international traveling is expected, do your homework. There are credit cards that do not charge these fees! 😊

Helps to Build a Credit History

Second, using credit cards can help with building up a credit history and, if used properly, can help to improve a person’s credit score.

Credit card account details and payment history make up a key part of a person’s credit score. If the account is kept in good standing, this information helps to build a good credit score which increases the likelihood of getting approval for other products like car loans, mortgages, etc.

Likewise, if credit cards are not used wisely, a person’s credit score can be severely damaged, sometimes, irreparably. Be careful when using credit cards to build your credit score.

Easy Access to Capital

Third, credit cards proved a quick and easy way to add additional capital. It is a line of credit issued to people without the need for hard assets as collateral. Credit cards can be used as a safety net if you don’t have enough savings or cash on hand to cover unexpected expenses.

Theft / Fraud Protection

Lastly, credit cards offer safeguards and protection against fraud, theft, disputes, customer complaints, etc. A chargeback can be requested through the credit card company if a dispute exists with a merchant. FYI, if fraud is noticed on your account, call your credit card company right away.

A credit card can be cancelled quickly and easily if a wallet or purse is lost or stolen. Security processes are also in place if your account is suspected to have been used in a fraudulent transaction or if identity theft has occurred.

Under the Fair Credit Billing Act, liability for unauthorized purchases on a credit card is limited to $50. If the card is reported lost or stolen before transactions are made, the card owner is not responsible for any unauthorized charges. If your credit card number is stolen, the card owner is not responsible for unauthorized charges.

I recently had a situation where my credit card company call me asking if I purchased over $600 in groceries from a store several states away that occurred an hour ago. After explaining that I was at least 6 hours away from that location, my credit card company did not hold me liable for these charges, cancelled my current card, put my account on fraud alert for the next few months, and issued me a new card that arrived at my house 2 days later… now that’s service! 😊


According to 360 Degrees of Financial Literacy, there are also lot of drawbacks with using credit to make purchases. We’ll talk about a few that I think are the biggest detriment toward using credit to make purchases.

Difficult to Accurately Keep Track of Purchases

A monthly statement is sent to the card holder that tracks all purchases in detail. However, on a daily basis, it is harder to keep track of purchases. Due to its convenience, people do not pay attention to how much has been spent. As stated above, credit card usage disconnects the purchaser from the purchase. Because of this, people tend to not track credit card purchases.

Encourages More Spending Than Needed

Credit cards offer a line of credit that can seem like an infinite pool of money…. until the bill comes due. When it does, the reality hits on how much was spent and how much additional debt was accrued.

Overspending on a credit card is one of the most common ways to get into debt. If a credit card needs to be used, keep a running tab of monthly purchases. This helps to not only prevent overspending beyond your means, but it can also help to spot fraudulent activity on the account.

Monitoring spending can help to keep regular tabs not only on how but where your hard-earned money is being spent. This information can be useful to curtail spending IF a person chooses to do the work.

High Interest Rates and Fees

Another side effect of overspending and not paying off right away are high interest rate charges on the balance accrued.

The reality is credit cards are best used as a short-term stopgap to a problem. What really happens is that credit cards are used as a long-term revolving credit door.  In this situation, the only one who benefits is the credit card company.

Interest rates can quickly grow a balance to the point where it gets beyond the spender’s control.

Also, credit cards charge many fees. There are fees for late payments, balance transfers, cash advances, annual fees, and other things.

The simplest and best way to avoid this is to pay off the balance each month. If not possible, at the least pay the minimum on time and try to make extra payments whenever you can to lower the balance owed in order to avoid debt accumulation.

When Best To Use Credit

Credit is best used when a person has established a strong discipline with budgeting and managing money. Using credit effectively goes together with tracking daily expenditures and effectively managing the overall pool of money available.

Credit also works best for people who make far more than they spend and can easily absorb periodic spending fluctuations.

Lastly, credit works best when an individual pays off the balance each month. Due to the high interest rates and fees, the rewards and cashback programs offered by credit card companies are only a good deal if that card is paid off every month. Otherwise the damage done by the accrued interest and fees far outweighs the good the rewards provide. Like anything else in life, the overall tradeoffs need to be looked at to determine if it is a good deal or not.

What I Do……

As I mentioned in a previous article, my wife and I had a lot of issues managing money as a team. I had my way, she had her way, and the methods clashed. Boy, did they clash! 😊

 It took us years to figure out a system that works for us. On top of that we had a mound of debt to payoff that seemed to be growing by the week.

Here is what we finally decided to do:

First thing we did was we took the expenses that seemed to regularly skew the budget into the negative and decided to pay for those things in cash. In our case, the variable expense items giving us the most grief were the following:

  • Water Bill
  • Groceries / Clothing / Gifts
  • Date Night

We used the envelope method for paying these items. We literally followed the Dave Ramsey method of creating specific envelopes for each expense and labeling them (i.e. “Water Bill”). We agreed to ONLY use the funds in that envelope for that expense and nothing else. Any surplus money is carried over to the following month.

My wife is the primary manager of the grocery budget. This empowered her to make quick decisions when needed. She didn’t need to call me to understand what was left in the budget because she owned it and knew it better than I did.

Next, we used the pull method to automate the key expenses that we had every month no matter what and were constant. For us, these expenses are:

  • Car Payment
  • Life Insurance
  • Cell Phone
  • Internet

This eases my burden of having to always write checks (yeah, I’m old fashioned but I have my reasons and will explain later) or do bank transfers to pay the bill. These items are also the least I worry about for potential fraud activity affecting my account.

I literally keep a monthly list of all our expenses and check off the expenses as paid. I staggered the payments such that I have a buffer in case money gets tight and we need some temporary monetary bandwidth.

Lastly, we use the push method to pay for our remaining expenses that are the most likely to negatively impact the budget and / or are most likely to be impacted by potential fraud activity. For us, this list includes:

  • Credit Cards
  • Mortgage
  • Other Utilities (i.e. gas, electric, etc.)
  • Student Loans
  • Medical Expenses
  • Periodic / One-Time Expenses (i.e. car tags, auto insurance, etc.)

This way I can control the payment amount. If decided to make an extra payment, or payoff a debt, it is much easier doing it this way than giving these companies direct access to my accounts.

Also, we have both been victims of identity theft. Even though electronic payments have gotten safer over the years, using checks or bank transfers is still the safest way to pay these bills. I can limit access to accounts that, in the past, hackers got ahold of and almost wrecked our finances.


So, is cash really king or does credit rule the day? Depends on your point of view and perspective. For us, paying in cash has allowed us to optimize cashflow, to plug money leaks, and generally took stress away from us. Our budget is tight right now with little margin for error. For us, cash is definitely king!

How about you? Is your situation different than ours? Does credit seem to work better for you? I’d love to hear from you! 😊

Whatever is decided, make sure that the system chosen works best for you and your particular needs. If one system doesn’t meet your needs then consider a hybrid approach. We did and it works great for us. How about you? Until next time…..

Live the Life You Love, Want, and Deserve! 😊