Why paying with cash hurts (and why it should)
These days, my monthly budget is on the boring side. Aside from our regular spending, I've got a mortgage payment to fork over, groceries to buy, and utility bills to pay. Throw in some payments to my kids' 529 plans and my SEP-IRA and I'm basically done for the month. After all of the bills are paid, the key for us is making sure that the rest gets transferred into savings so that it doesn't accidentally get spent.
But it wasn't always this way, and I was reminded of that fact the other day when I was flipping through one of my old notebooks. That's when I found our monthly zero-sum budget for August of 2010, and that's when our old lifestyle smacked me right in the face. Want to know how many bills I paid in that month? Twenty-four.
Car payments, credit card bills, and personal loans, oh my. It's no wonder we weren't saving anything. Fortunately, it was easy to look at that old monthly budget and pinpoint the exact cause of our unfortunate situation. The problem: We financed everything and never, ever paid cash.
Low Monthly Payments for Life
Fact: You can have nearly anything you want.
I can too. We all can. Cars. Clothes. Diamonds. Trips to Hawaii. Almost any earthly possession you've ever laid your eyes on can be yours.
Well, kind of.
If you're willing to make monthly payments for as long as it takes, whether it's five years, ten, or twenty, then it can be yours. Does that sound tempting? Probably not.
But that's exactly what we do. In the fourth quarter of 2013, U.S household debt swelled to a monstrous $11.52 trillion. Of course, some of the money was borrowed to purchase homes, pay for college, or start a business. A certain percentage can also be blamed on things like medical bills, unemployment, and emergencies. But the rest? My guess is boats, iPads, and designer shoes. Oh, and let's not forget furniture, date nights, and family dinners at the Olive Garden. The rest is anyone's guess.
Stop the Cycle
We all know how easy it is to trade your car in for another. You walk into the dealership, they look your trade over, and you pick out another, nicer car. Your new car payment could even be the same as it was before. Hell, it might even go down. But are you really doing yourself a favor by trading up without the cash in hand? The answer is probably no.
I've been there. My husband and I traded cars around more times than I could count, mostly just because we would. Looking back, I think we were just bored. And sadly, we weren't able to see that there were real costs associated with constantly trading up. We only focused on the monthly payment, and never had the goal of actually paying them off.
Fortunately, we finally made the decision to change our lifestyle sometime around the time that that budget was made. And once we stopped the madness, we made one huge change that put an end to the cycle once and for all. We began paying cash for anything and everything, and we refused to add to the pile by financing things we couldn't afford.
Turning an Awkward Moment Into a Learning Experience
In the meantime, we got serious about getting out of debt. Fortunately, it didn't take long to knock out everything but the two biggest sums we owed — the loan for my minivan and my husband's student loans. I still remember the day we paid both of them off once and for all. The total was well over $10,000 and it literally pained me to hit the keys that would initiate the automatic bank transfer. I mean, it hurt. That money was mine and was earned with my own blood, sweat, and tears. And if you subscribe to the theories espoused in books like Your Money or Your Life, that money was literally my life force, and it was getting sucked away by a stupid van that I overpaid for in the first place.
I still have that van. Want to know why? Because it's paid off, as is everything else I own. And now I'm literally gonna drive that van until the wheels fall off, or until the engine finally gives up or explodes out of sheer exhaustion at maybe 500,000 miles. (A girl can dream, right?)
I learned something from our adventures in debt and from that final $10,000 payment — most notably that I never, ever want to go down that road again. Parting with that much money at once was painful. It burned. It made me uncomfortable. And now, years later, I'm convinced that that's exactly how it should feel.
Pay Cash and Feel the Burn
Since then, we've paid for everything with cash including a car for my husband, furniture, home remodeling projects, and more. And even though it has sometimes been painful, our refusal to finance anything has been a game-changer for our financial future. Here's why:
- Paying in cash forces you to consider the real purchase price – No matter what you're buying, the fact that you're paying in cash turns it into an entirely different experience. That's because you have no choice but to consider how much money you're paying overall, and not just what you'll have to pay on a monthly or yearly basis.
- Paying in cash might help you spend less – When you force yourself to pay in cash, big ticket items start to lose their appeal. Try walking into a dealership with the intention of paying $15,000 or $20,000 for a newer car. All of a sudden, the prospect of keeping your old paid-off junker becomes an incredibly attractive option. Am I wrong?
- Paying in cash keeps you out of debt – The best thing about refusing to finance things is that it keeps you out of debt in the first place. We all know what a slippery slope that can be. There are so many benefits to being debt-free, including the option to save more of your income, less stress, and of course, the feeling of not really being beholden to anyone. It's a freeing feeling, and it's one that I will never, ever surrender without a fight.
If you're in debt and are ready to make a change, start by creating a debt snowball. Conquer each one of your debts one by one by one, and refuse to give up until you're finally debt-free. Adopt the mindset that if you can't afford to pay cash for something, then you can't afford it. Period. Only then will you free yourself from the chains that bind you. Only then will experience the feeling of owing nothing to anyone and the unexplainable sense of freedom that comes with it.
Once you've done what you set out to do, force yourself onto a cash-only diet. Cut up your credit cards if you have to — and learn to pay for everything with the cash you've stashed away in your own accounts, not with other people's money. Know that it may make you feel uncomfortable, and rest assured that it's supposed to. Paying cash hurts, and it should hurt.
That burn you feel? It's simply the price you pay for your freedom, and it's totally worth it.
How do you feel about paying cash? Is it painful? Do you think it should be?
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