Are you a member of the cash only club? You know, the one that always invites Dave Ramsey to be the keynote speaker?
Or perhaps you like to borrow? Maybe you never carry an ounce of change and you leverage credit cards for all your spending?
It’s a polarizing topic and everyone seems to have a strong opinion.
Either way, it might be worth considering each alternative. Depending on the individual, the old “cash is king” mantra may or may not hold true. I’d like to present 5 reasons for each side of the argument of cash vs. credit, then I’ld like to get your take in the comments section.
5 Reasons Why Cash Is King
- Emergency Reserves and Liquidity
I’m no believer in holding a huge “emergency fund” in cash if you have a stable income that pays all the bills each month. At the same time, unforeseen expenses can occur, like a medical bill or an accident. At such times, you never want to be forced to withdraw investment money. Holding cash provides a buffer so you can avoid credit card interest. Of course, other options are also available (and possibly better) such as a HELOC.
- Purchasing Power
This is probably my biggest motivation to hold cash reserves. Cash provides leverage during price negotiations when you are making a purchase. Used cars are an excellent example, as people want the full payment. Housing can be an example if you can afford a large down payment. Even Craigslist transactions can be manipulated by tossing out the infamous: “I’ve got cash in hand.”
- Investment Flexibility and Security
Cash won’t lose it’s value during a stock market cash. Furthermore, holding cash can indirectly protect your investments by giving you the peace of mind to not sell them during bear markets. If you have a cash reserve, you won’t feel dependent on investments to pay for daily living expenses. Another advantage is that if an investment opportunity presents itself, you have the means to immediately invest. Without this, you would either be forced to sell shares of other investments, perhaps at a time when the market is down, or forgo the investment opportunity altogether.
- Avoid Interest and Fees
I do recognize that some individuals really struggle with spending too much money. I would call it a severe discipline problem, but nonetheless, they probably shouldn’t carry a bunch of credit cards around, swiping and jollyhooting at will. Doing so usually results in outrageous interest charges because most of these same people don’t pay off the bill each month. In this case, carrying a small amount of cash could be a nice solution.
- Cash-Only Transactions
Some (small, local) businesses still don’t accept credit cards, debit cards, or checks. Vendors on the street corner probably don’t either. Other local shops might offer a discount for using cash. This is getting rare, but I suppose worth mentioning.
5 Reasons Why Cash Is Not King
- Paper Trails
Cash leaves no trail. When you spend it, it is gone. This can be really problematic for a couple of reasons. For those who are attempting to track their spending, it’s a black hole. Beyond that, it leaves a terrible proof of purchase. Credit Cards allow easy tracking and receipt for all purchases.
- Purchasing Power
Cash earns no interest, therefore it loses value over time. Inflation eats away at the purchasing power of cash, so it shouldn’t be held for no reason. This is an argument against holding a large cash emergency fund.
Cash purchases don’t usually involve any kickbacks. Say what you will about reward credit cards, but they are here to stay. It’s foolish insist on paying with cash if a credit card will give you 5% back for every purchase.
- Lack of Protection
Cash offers no consumer protection. Good luck getting your money back if you’re ripped off in a cash transaction. Credit card companies have a statutory duty to protect you. They’ll even offer free extended warranties on most purchases, sometimes even doubling the warranty period. Other benefits include free roadside assistance, and collision-damage coverage when you rent a car.
- Ease of Loss
Cash is easy to lose, misplace, or forget about. Beyond that, it can be stolen. If any such events take place, you are out of luck. It’s gone and the only way to feel better is to weep a little bit and apply for that new Discover IT Card
I guess I’ll close by stating my opinion and adding the Cash Cow touch. Cash(flow) is king, hands down.
When you spend far less than you earn, it becomes easy to create liquidity. New cash is always on hand each month. You can then choose what to do with it.
At the same time, spending far less than you earn is also indicative of excellent discipline and wealth management, which means you probably don’t need a huge cash reserve, and you probably don’t spend overcharge on credit. This is the reason that we choose to carry very little cash and make all purchases on credit.
What’s your take? Do you agree that cash is king?