September 2010
This article is provided by Brian Marling of Neighbourhood DLC – Canada’s #1 Mortgage Team 905.372.7222
One of the ongoing discussions I have with many of my clients centres around the idea of reverting back to a cash based budget, or what I like to call a cash based Spending Plan (don’t like the ‘B’ word). I suppose the idea of reverting back depends on the age of the person I’m speaking with, since many of my clients have never been on a cash based plan. The alternative to cash of course is credit, and lately, we are told, the trend is starting to change.
In fact, according to recent surveys, more people paid cash this past holiday season to keep spending on track and reduce or eliminate post-holiday debt. Bryan Eshelman, managing director at Alix Partners comments that, “Consumers are looking for discipline in their spending levels that they can achieve from using cash.”.
Often those struggling with high consumer debt are told to ‘cut up the cards & pay cash’, but that is now becoming a more wide spread philosophy. The cash vs credit card debate has also become popular in the media & with well known financial experts like Dave Ramsey and Gail Vaz-Oxlade who recommend a more regimented approach to budgeting using envelopes or jars so people can literally see what they are spending – personally I prefer envelopes since they take less space.
Even well known Suze Orman has recently launched her ‘Back to Cash Movement’ as she urges her television audience to only pay cash for a week or month or more and get “connected” to their finances again.
I have been ‘preaching’ this for years (maybe I can get a TV show) and it is refreshing to see it coming from the main stream now. Perhaps we are finally beginning to admit what the psychologists have known all along and what the bankers hoped we would never realize, namely that when we use credit or debit we are far more likely to over-spend.
Cash has it’s advantages. The thinking behind the strategy is simple: living beyond our means is a recipe for financial disaster, and credit & debit cards make it too easy to spend. Keep in mind also, that you are usually spending money that you haven’t even earned yet! Research has shown that parting with cold hard cash in our hands is harder to do and the visual/physical reminder makes us think more carefully about our purchases.
One of the illustrations I like to share with my clients in an effort to help them change their thinking about credit use goes like this: if you have only a $500 balance on a card that is charging 18% interest and you are making minimum payments it will take you almost 7 Years to pay it off. Usually I will ask them to guess before I tell them how long it will take and normally they are shocked at the answer. However, what about a more realistic scenario where the debt is more likely to be 10, 15 or 20 thousand dollars. A little more scary for sure.
Neither experts nor consumers are going to unanimously agree that either cash or credit cards are better. Perhaps a combination of both works for some. So then, what to do? If your current strategies are working for you, there’s no need to change simply because it’s the thing to do. However, if a change is warranted then you may want to try something new. Give the cash only strategy a try and see how it goes.
Regardless of whether you use cash or credit or both, the bottom line remains the same: if you don’t have the money in the bank, you can’t afford it.
Here at Neighbourhood not only do we provide Award Winning Service and the best selection of mortgage products in the country, but we also offer our Free Financial Fitness Seminars and have added Personal Financial Coaching for those who truly desire a change but would like some assistance along the way. If you don’t change something then don’t expect different results. As always you can call us anytime to discuss how we may be able to help you.
At Neighbourhood, & the home of the Brian Marling Mortgage Team, we are concerned for the total well-being of our clients. That’s why we are taking the years of experience from our award winning office and offering a series of FREE Seminars to our clients and their friends & families and to the public at large. The seminars, entitled ‘Financial Fitness’, will be offered free of charge and will cover all the secrets of successful personal financial freedom. Our next scheduled seminar will be Tuesday, September 28th at 7:00 P.M. If interested please call our office at 905.372.7222 to reserve your spot as seating will be limited.
Thanks to Elizabeth Rogers at 50Plus for some of the references in this article.