Monday, April 8, 2013

Plastic??? Cash???

Many personal financial advice programs will tell you that using cash will make you more aware of the money you spend and will put you in the habit of saving. THIS IS NOT TRUE.

Using a credit card does not give you the right to buy things you cannot afford. The banks love you to do that though. We always use a credit card for everything, unless paying a cash offers you a discount.

So here are some reasons why we chose credit cards over cash:

Rewards/Cashback:
Most credit cards offer some kind of cashback or rewards program. Those cashback and rewards can really add up for daily use. For example, the well known Chase Freedom credit card offers rotating 5% categories every quarter. So you're getting money back doing your regular grocery shopping. If you use cash, no rewards.

Tracking Expenses:
Some people using cash will keep you on track. Once you run out of cash, you stop spending. That is not the case for me. When I have $10 in my pocket, I tend to use it and forget where I spend it on. It might just be $0.50 snack in the vending machine or the $2 soup from the downstairs cafeteria. With credit cards, online activity is updated almost in realtime. It helps to track exactly what I'm spending on. One thing to mention is: you have to be well disciplined and check your statement or activity quite often.

Time Value of Money:
Time value of money is something finance professors will teach you in Finance 101. A dollar today is worth more than a dollar tomorrow because a dollar today can earn interest. By using a credit card, you are actually deferring your actual payment for about 30 days. Even though the interest rate isn't great nowadays, but any money that's earning interest is making money for you. To achieve that, DO NOT CARRY A BALANCE OR PAY THE MINIMUM. Pay it off when it's due!

For many people, it takes great discipline to use a credit card correctly. Credit cards offer you the opportunity to buy things you cannot afford, but it doesn't mean you have to have that. Credit card debt in America is a huge issue, but if used correctly, it does bring you wonderful benefits. It may not be right for everybody, but it's working for us.

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