4 factors to weigh before going all cash

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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.

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?

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.

“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.

“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.

Spending cash “forces you to come up with a spending plan beforehand,” says Jacobs, a Cerified Financial Planner and founder of Step by Step Tax and Financial Planning LLC.

The couple followed their spending plan religiously, squirreling away money to cover emergencies like car repairs and to supplement savings for future needs. When the car needed a $65 tire, “we just paid it,” says Jacobs. “It was a good feeling.”

2. Is a debit card paper or plastic?

Tyson, who also wrote “Let’s Get Real About Money: Profit from the Habits of the Best Personal Finance Managers,” believes a debit card is a good intermediate step in going all-cash. “I’m a big fan of the debit card,” he says. “You still have the benefits and convenience that come with plastic, without spending money you don’t have.”

“When you fork over cash, you kind of feel the effect of that,” Tyson concedes. Another downside of the debit card is that you “have to be aware of how much money is left in the account.”

That can be a problem if you have one account and more than one user.

But Grace Case, a Syracuse, N.Y., mother of two and a corporate accountant by profession, uses a debit card for virtually everything. She says her secret is to treat it just like paper money. It just provides more convenience and security, she says.

3. Is there still a need for a credit card?

Sometimes, planners also will include credit cards in their cash diet for special circumstances.

When they went to a cash plan, the Fernandezes made two exceptions for using credit cards. The first was at the gas pump. “It’s more convenient,” says Fernandez. Besides, gas is not exactly an impulse buy, he says.

The second exception is vacation travel. “I’m not going to carry a ton of cash,” he says. When the couple went on vacation, they stuck to a budget and paid off the cards when they returned.

Americans are accustomed to traveling with plastic. “To reserve a room, you have to have a credit card,” Case says.

With a debit card, some venues such as hotels and gas stations will put a temporary hold on more than the purchase amount — a problem if your balance is low or the money is needed elsewhere.

Still, Ramsey hasn’t had a credit card in 20 years and travels with a debit card without a hitch. He’s also found he and his employees watch charges more closely than with a credit card. “You tend to notice it more,” he says.

4. Can you protect your credit score?

Going to cash can impact your credit rating.

If you’re taking the money you save every month and paying down balances, then your scores should improve.

If you pay off your balances and don’t have any other outstanding debt such as a mortgage or car loan, then sometime in the next six to 18 months, you may discover that you have no FICO score, says Barry Paperno, consumer operations manager for Minneapolis, Minn.-based Fair Isaac Corp., the company that created the FICO score. That can happen if you have no card activity and the company stops reporting your account to the credit bureaus.

In addition, a card company can close your account if it’s inactive, meaning it has a zero balance and no charges for a period of time. The time varies among card companies. But because part of your score depends on the credit you use (your account balances) compared to the credit you’re allowed to use (your credit limits), suddenly having less available credit could lower your score.

Paperno recommends using cards to automate small monthly expenses, such as prescriptions or fixed bills, “so you don’t have to think about it.”

However, if want to retain your credit score and move to an all-cash payment program, there is another easy solution. Once you pay balances to zero, use each card you wish to keep at least once every two to four months for something small. Then pay the balance when the bill arrives.

You can also check your credit reports for free at AnnualCreditReport.com to see that the accounts are listed as open and active. You can pull your credit report for free from each of the three bureaus once every year. Just select a different one every four months so you can check on your accounts year-round.

The bottom line for Sheryl Garrett, a Certified Financial Planner and founder of the Garrett Planning Network in Shawnee Mission, Kan., is a cash lifestyle can reduce stress.

Her own plan includes debit cards and automated payments. Says Garrett, “We can still live in the modern age and do things as simply as possible.”