You are probably thinking I mistyped the title. It should read:
Credit Cards Are Evil
Well, that is true too! Credit cards are bad news.
But in this post, we'll talk about how using a debit card can wreck a budget.
Last summer, my wife and I were shopping for our son's birthday. Just a couple of weeks earlier, we decided to get serious about our money and stop the crazy spending. Using Dave Ramsey's advice, we started using cash for our purchases.
Previously, we thought that if we were using our debit card we were doing well because we were not charging our purchases. We were paying with money we had and not going into debt.
But what we didn't realize is that we were overspending by using that debit card. When you swipe, you don't register the pain of money leaving your hands. And you don't have a hard limit on what you can spend.
Back to our birthday shopping. We were struggling. We'd never been on a pure cash basis before. We always caught our slack with the credit card. But here we were, wandering around Target with $100 cash in our pocket. We were suddenly very aware of what we were buying. We wanted to make sure the items we purchased were good buys, and something that our son would really appreciate.
I can remember holiday shopping trips in the past. We just picked up any old thing and tossed it into the cart without much thought. It's amazing how your thinking changes when you are using folding money.
We finally had a cart full of items and headed to the register. This was the big "Ah ha!" moment for us. The cashier rang up our purchases and the total was over $100. How would we handle this in the past? Shrug and swipe.
This time though, we only had $100 to spend. We asked the cashier to put back 2 items to get the total under $100. We felt so empowered!!!
The $20 or $30 we didn't spend on his birthday went toward groceries or gas for the car. Suddenly, this whole budgeting thing made sense.
Dave Ramsey says that studies show that people who pay with plastic (debit or credit) tend to spend 12% to 18% more than if they use cash. And in a fast food environment, it's more like 20% to 30% more (no wonder McDonalds installed all those debit card machines!)
So now, we pay cash for everything. Real, green, folding cash. Gas, groceries, gifts, clothes, everything is cash. We budget our expenses, withdraw the cash and put the budgeted amounts in envelopes. For groceries, we'll take the cash and put it in an envelope with "groceries" written across the front. When we go to the grocery store, we never spend more than what's in the envelope (because we can't - that's all that's in the envelope!)
We now feel terribly guilty when we have to use the debit card. We know that using the debit card means we're spending money that wasn't budgeted for.
This system is the key to paying off debt. We want to make sure we have an extra amount of money each month to send off to pay down debt. By sticking to the envelope system, we can be assured to always have that money available for debt.
Some financial experts say to throw out the budget. (I'm currently reading "The Automatic Millionaire" by David Bach. He says budgets don't work. I respectfully disagree.) There's a saying: "If you aim at nothing, you will hit it every time." A budget gives you a target, something to aim at.
The budget and envelope system is the key to freeing up the money you need to get out of debt.
And getting out of debt is the key to freeing up the money you need to reach financial freedom.