At first it seems like good advice; pay cash for what you need and you’ll never get into financial problems. A slew of TV shows, like Till Debt Do Us Part and Maxed Out, feature people who got themselves into a financial mess because they let their credit card debt get out of control. One of the first things the host does to help these people is to put them on an all cash budget, no more credit cards. That is good advice for the people on the show but is it good advice for the financially responsible person? The answer is a big fat no.
If you are someone who lives below you means – you don’t spend more than you make – then you should never pay for purchases with cash. Instead, you should be using a cash back or rewards credit card. For example, my TD Gold Elite Visa gives me 1% cash back on everything I charge. The money is paid out at the end of the year – it’s like getting a rebate.
Many people think 1% isn’t much but if you add up all the money you spend in a year to live, it can add up to a decent amount. Last February, I received a check for $1,036.43 from TD Visa for my 2005 charges. That’s almost enough to pay for dinner at Lumière! Had I paid cash for those purchases I would have made nothing. Remember, the little things add up. That’s how this blog makes money – with a 25 cent click here and a 30 cent click there. All those small clicks add up to a decent income.
The problem with credit cards is many people abuse them. They don’t keep track of how much they’re charging and next thing they know, they’re in over their heads and have fallen into the credit card trap. And I guess this is one reason why many financial planners (and parents) tell their clients to stick with cash. However, the same problem people have with credit cards they can have with cash. How many people here keep track of every cash purchases? Unless you write it down, as Gail recommends on Till Debt Do Us part, cash is not track able. A financially responsible person would know their credit card balance at all time. And if they don’t know it, they can easily log into their account online to get it (and see some of the stupid things they bought).
Cash back credit cards only work if you pay off the full balance every month. If you run a balance, you will incur interest charges and those charges will kill any cash back you earn. Paying interest on a credit card is just plain stupid because the interest is extremely high and not tax deductible in most cases. You want to avoid interest charges as much as possible.
The smart use of credit is a very powerful thing. Whenever possible, I charge all my purchases to my Visa card. Sure, I can pay cash but why would I if I can get 1% cash back? There is no extra effort involved. Instead of handing over cash, I hand over my TD Visa.
The only downside to my Visa card is it cost $100 a year. CIBIC has a 1% cash back Visa with no annual fees. I went with the TD Visa card because it offered additional features that I wanted, like Trip Interruption Insurance and free TD Auto Club membership.
The final reason for using a cash back credit card instead of cash is the money you get back at the end of the year is not taxable. The money is not income. It’s just a return of money you already spent.