Forget Debit, Credit Cards: Try the All-Cash Diet
Anything That Makes Spending Easier, Including Debit Cards, Can Make You Spend More
Column By DAVID McPHERSON
Jan. 26, 2010 —
No doubt, you've heard of the Atkins diet, the South Beach diet and the Jenny Craig diet.
Now, allow me to introduce you to the All-Cash Diet, a regimen designed not to lose pounds but rather to add heft to your bank account. There are no calories to count, just dollars to save.
With the All-Cash Diet, you put away both your credit cards and debit cards and instead rely upon good old-fashioned cash to cover your day-to-day expenses. Instead of pulling out the cards for each measly purchase, go to the bank, withdraw enough cash to last you a week and then try to live on those funds.
Use it for the gasoline, the groceries, the morning coffee and just about any other daily expense.
This is a routine I've begun to follow myself as I look for ways to trim my personal spending. The early results are promising, but I can't say I've changed all my old habits. There's more work to be done.
My belief is that relying on cash in the wallet rather than plastic instills greater budget discipline and reduces impulse purchases. By relying only on the 10s, 20s and maybe even 50s in your wallet, you buy only what you really need rather than what you think you need or want.
The negatives of credit-card-spending are well documented, but it is only recently that attention has turned to the downsides of debit cards.
At one time, I was a debit-card addict, pulling it out for the smallest and most needless of purchases. My wallet overflowed with debit card receipts.
I actually thought using the debit card was good for my spending, as it prevented me from going overboard with a big purchase as you can with a credit card.
And it fed my desire to keep close track of where and how I spent my money. I've used Quicken personal finance software for many years, and I loved being able to download all of my transactions from my bank and see where every penny went. For a money geek like me, it was almost nirvana.
But what if that debit card only induced me to spend more pennies than I ought and produced data so minute as to be meaningless? Do I really need a record of every Starbucks transaction? Wouldn't it be better to just spend a dollar or two less each time I visit a coffee shop?
Debit Card Users More Likely to Overdraw Their Bank Accounts
I've come to conclude that anything that makes it easier to spend money means, in fact, that we will spend more money.
Such is the case with debit cards. The evidence suggests that consumers spend more when using debit cards rather than cash. They may not go overboard in terms of big purchases, but they do go overboard with small purchases. Debit card users are also more likely to overdraw their bank accounts, according to Consumer Reports.
And a New York Times story last year reported banks earn billions in overdraft fees triggered by small debit card purchases.
Debit card processing fees are a big expense for retailers, but card issuers argue the higher sales from customers make it worth the expense. Many retailers -- particularly mom-and-pop operators -- are becoming vocal in their protests of debit-card processing fees and urging customers to pay in cash.
I sympathize with the small business owners in this fight, but my switch to the All-Cash Diet is more about me and my personal budget than taking up someone else's cause. We just happen to share a common enemy.
The biggest challenge with the All-Cash Diet, of course, is to know the right amount of cash to pull out of the bank each week. Many worry that we will spend too freely if we carry around more cash than usual. But I'm convinced that's a psychological barrier that prevents us from doing what's best for ourselves.
Try the All-Cash Diet for a month and see how it goes. There's no money-back-guarantee, but my bet is you will find more money in the bank.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
David McPherson is a Certified Financial Planner professional and founder of Four Ponds Financial Planning LLC (www.fourpondsfinancial.com) in Falmouth and Mansfield, Mass. Contact McPherson at david@fourpondsfinancial.com