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4 factors to weigh before going all cash

Highlights
  • Create a spending plan that you and your family can realistically follow.
  • Determine if you can use a debit card and not overspend your account.
  • Some expenses are better suited to a credit card, such as travel.

When it comes to ditching debt, cash is king.

But is it really practical? Can you give up plastic without feeling like a 19th century holdout in a 21st century world?

The answer for many who've tried it is a resounding "yes."

Financial guru Dave Ramsey gave up credit cards more than 20 years ago. "It simplifies your life," says Ramsey, author of "The Total Money Makeover: A Proven Plan for Financial Fitness," and host of "The Dave Ramsey Show."

The other plus: "No gotcha fees," Ramsey says.

Even so, using cash only may not be for everyone. It requires writing a spending plan, staying on top of your account balances, monitoring your credit score, submitting to only minimal and calculated credit card spending, and most importantly, being disciplined. If you think you may be up to it, read on.

Like the phrase "low carbs," "all-cash" means something different to everyone. To many, going all cash means using cash, checks or debit cards, without deferring payment to a later date. To others, it means using cash or checks only. To them, a plastic debit card feels and spends much like a credit card.

To Ramsey, cash means "that we're paying for things (now)," rather than running a tab, he says. "We write checks and use debit cards at our house."

When Dave Fernandez and his wife went all cash about eight years ago, the Arizona couple just wanted to hit the reset button on their spending habits. "I'd get a huge (credit card) bill every month, and I was always shocked at how much we spent," says Fernandez.

So they used a mostly cash system for the next few years and right away, they noticed a difference. "We spent $1,500 to $2,000 a month less when we started using cash," says Fernandez, a Certified Financial Planner and founder of Wealth Engineering LLC in Scottsdale, Ariz. Having to part with real money, he says, "just makes you think twice about it."

Greater saving after switching to cash is typical, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. On average, she finds people save as much as 20 percent when they spend cash instead of plastic.

4 morsels to taste-test in an all-cash diet
  1. Is an all-cash spending plan for you?
  2. Is a debit card paper or plastic?
  3. Is there still a need for a credit card?
  4. Can you protect your credit score?
Plus: "4 steps to an all-cash diet"
"They are amazed they don't feel deprived," Cunningham says. "But they become more thoughtful about their purchases."

A lot of it comes down to "how you're wired," she says. "Some people really take to it and think it's the easiest way to save 20 percent," while others "can't wait to go back."

Here are four factors to consider as you convert to a cash diet:

1. Is an all-cash spending plan for you?

Living on cash is "a lot more practical than most people realize or want to admit," says Eric Tyson, author of "Personal Finance for Dummies."

"Some people go from spending more than they earn to consistently saving 10 percent to 20 percent of their income," he says. "Once you get a handle on your spending and get a handle on your consumer debt, you can have a pretty dramatic turnaround."

There are several key questions to answer as you consider an all-cash spending plan. How much money comes in and when? How much do you need to allocate for various bills and expenses? And what pay-it-now methods -- cash, checks, debit cards, electronic or automated bill payments -- will give you convenience and control, without tempting you to spend more?

The spending plan can be jotted on a piece of paper or created with a spreadsheet or special computer program.

As you switch to cash, security should be a big consideration. Smart cash spenders make a point of not keeping cash around the house. Even with home and rental insurance, a large amount of cash isn't normally covered, so if it's lost or stolen, it's gone.

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"Even the most generous policy would not cover more than a couple of hundred in cash," says Michael Barry, spokesman for the Insurance Information Institute in New York.

Kevin Jacobs of Broken Arrow, Okla., went to an all-cash spending plan six years ago and stayed on it a little more than six months. It was just long enough to give Jacobs and his wife an idea of where their money was going every month.

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