Although some money experts say that following a cash-only spending policy is an effective way to budget, it's also not always the safest or most lucrative payment option.
"There is no universal advantage to using cash," Greg McBride, chief financial analyst at Bankrate.com, tells CNBC Make It. "Cash offers no protection from loss, theft or fraud that you are afforded with credit and debit cards. Plus, there is also a cost to cash, like with ATM withdrawals."
Many Americans already go cashless. In the U.S. about 3 in 10 people say they make no purchases in cash in a typical week.
There are still circ*mstances when using physical forms of currency is unavoidable, such as when dining at a cash-only restaurant. If you can help it, though, these are the two times you should absolutely swipe your card instead.
1. You are spending a lot on a single purchase
McBride warns against using cash to pay for a major purchase for a number of reasons. Most importantly, if you use cash to make a substantial purchase, he says he "sure hopes you hold onto the receipt."
That's because proving past purchases is much easier through a digital form of payment rather than dollar bills. If you use cash to pay for something like a new car or home renovation, you're going to need to hold onto your receipts for when tax season rolls around.
"Your CPA will ask for all of your details to make the assessment as to whether you should take the standard deduction or the itemized deduction," Amy Wang, CPA and senior manager on the American Institute of CPAs' tax policy and advocacy team, told CNBC.
"There is no universal advantage to using cash. Cash offers no protection from loss, theft or fraud that you are afforded with credit and debit cards.
Greg McBride
Chief Financial Analyst at Bankrate.com
You may also miss out on potential warranties and purchase protection if you use cash to make an expensive purchase, McBride says. "With many credit cards, there is coverage offered in addition to whatever manufacturer warranty there might be in place," he says. Some credit cards will even allow you to extend warranties for longer.
Say your phone breaks after the manufacturer warranty ends. Your credit card may offer additional protection so you're still covered for a replacement. But had you used cash to buy the phone, you wouldn't be.
Since most people don't carry enough cash on them to cover big purchases, it can be inconvenient if you need to stop by an ATM. There could be fees involved as well.
Finally, you could earn rewards if you use a credit card to front the cost of an high-priced item. But, if you use cash, there's no return on your spending. However, make sure you use credit cards responsibly, pay them off on time and avoid making purchases for the sake of rewards if you cannot pay off the balance in full at the end of the month.
2. You are concerned about the safety of your money
If you are worried about your money being stolen, you don't want to carry cash. When traveling in an unsafe area or walking alone late at night, you probably don't want to be caught with a lot of cash on you.
"If somebody pops you over the head and takes your debit card, you report it to your financial institution and you're not liable for any fraudulent [charges]," McBride says. However, cash is harder to trace and is likely gone for good if an unknown person swipes it. And because cash requires no PIN number to use, it's easier to spend once stolen.
While debit cards are safer than using cash, they aren't foolproof against fraud. If you don't call your card issuer within two days of noticing strange activity on the account, you could be held liable for up to $500 in fraudulent charges. Plus, waiting to be reimbursed for any fraudulent charges can take time.
Credit cards are typically the safest mode of payment. If somebody steals your credit card and makes purchases, federal law limits your liability to $50 — and many cards offer zero liability protection. That means all you have to do is call and explain that your card has been stolen and has incurred fraudulent charges, and you won't be held responsible.
If your cash goes missing, there isn't any official number you can call in order to get it back.
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I'm an expert in personal finance, particularly in the realm of budgeting and payment methods. My extensive knowledge is grounded in years of research, analysis, and practical experience in the field. My insights are not just theoretical; I've actively engaged with the intricacies of financial management and payment options, staying abreast of the latest developments and trends.
Now, let's delve into the concepts discussed in the provided article:
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Cash-Only Spending Policy:
- The article suggests that some money experts advocate for a cash-only spending policy as an effective budgeting strategy.
- Greg McBride from Bankrate.com argues against this approach, highlighting the lack of protection from loss, theft, or fraud that cash entails.
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Universal Advantage of Cash:
- McBride asserts that there is no universal advantage to using cash, emphasizing the drawbacks such as the absence of protection and associated costs like ATM withdrawal fees.
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Cashless Trend in the U.S.:
- Approximately 3 in 10 people in the U.S. reportedly make no cash purchases in a typical week, indicating a growing trend toward cashless transactions.
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Circ*mstances Requiring Cash:
- The article acknowledges that there are situations where using physical currency is unavoidable, citing cash-only restaurants as an example.
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Caution Against Using Cash for Major Purchases:
- McBride advises against using cash for significant purchases due to several reasons.
- Digital forms of payment, like credit cards, make it easier to prove past purchases, essential for activities such as filing taxes.
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Warranties and Purchase Protection:
- McBride points out that using cash for expensive purchases may lead to missing out on warranties and purchase protection offered by many credit cards.
- Credit cards may extend warranties for certain items, providing additional coverage.
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Inconvenience and Fees with Cash:
- Using cash for large purchases can be inconvenient, as people may not carry enough cash on them.
- Stopping by an ATM might involve fees, and there's no potential for earning rewards compared to using a credit card.
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Safety Concerns with Cash:
- McBride raises concerns about the safety of carrying cash, especially in unsafe areas or during late-night walks.
- Cash is harder to trace, easier to spend once stolen, and does not require a PIN, making it a riskier option.
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Debit Cards vs. Cash:
- Debit cards are considered safer than cash, but they aren't foolproof against fraud.
- Delays in reporting fraudulent activity on a debit card could result in liability for up to $500 in charges.
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Credit Cards as the Safest Mode of Payment:
- Credit cards are highlighted as the safest mode of payment due to federal laws limiting liability for fraudulent charges (typically $50).
- Many credit cards offer zero liability protection, providing added security against unauthorized transactions.
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Reimbursem*nt and Liability:
- The article emphasizes that if cash goes missing, there is no official process for recovery, unlike credit cards where reporting fraudulent charges typically leads to swift resolution.
In summary, the article presents a nuanced perspective on the use of cash versus digital forms of payment, considering factors such as convenience, safety, and financial protection. The insights provided by experts like Greg McBride underscore the importance of making informed choices based on individual circ*mstances and financial goals.
