MilesAbound recently published “Going all cash – should you stop using credit cards for everyday spend?” In that insightful post, MilesAbound pointed out research that shows that credit cards induce people to spend more than they would if they used cash instead. He proposed, rather than going all-cash, that a good strategy would be to use cash for everyday spend, but continue to use credit cards mostly just for manufactured spend. His basic argument is that the rewards earned from everyday spend are pretty small, so most people would be better off saving money by going all-cash than by earning credit card rewards.
Here’s the problem with MilesAbound’s argument: my readers and I are not necessarily at all like “most people”. I can’t speak for you, but in my household, shopping portals and rewards programs have led us to spend less, not more. What follows is a real life example based on my memory of events that took place about a week ago. The following is a conversation between me and my wife…
Wife: I need to buy some new clothes. Do we have any special deals at Lands End?
Me: Well, yeah. I still have a pretty sizable Sears gift card that I got for 21 points per dollar.
My wife then searches LandsEnd.com for about 30 minutes…
Wife: OK, I found what I want to buy and I’m checking out. Where’s the gift card?
Me: Did you log in as me first? That way we’ll earn ShopYourWayRewards points.
Wife: OK, I don’t know what that means, but if you say so… Ugh! I just logged in as you and now my shopping cart is empty!
My wife then spends about 15 minutes re-finding what she wants to buy…
Wife: I’m checking out again, where is that gift card?
Me: Wait, did you go through BeFrugal to get 8% cash back?
My wife glares at me…
Wife: That’s it. I give up!
And, she never did buy those clothes.
The story above is not an isolated incident. A focus on rewards has led us to forgo almost all impulse shopping. For example, if I’m at a store and see something I’m interested in buying, the following thoughts inevitably go through my head:
I wonder if there are any good coupons online?
I think I remember that TopCashBack offers 7% cash back here. I should order online.
Oh wait, Staples.com sells e-gift cards to this store. I should go through uPromise to Staples.com to buy the gift cards. That way I’ll earn 5% back and 5 points per dollar with my Ink Plus card.
Once I get a gift card to this store, I’ll go through TopCashBack to place the order. And, I’ll use online coupons to save even more.
This sounds like a lot of work. I don’t really need this thing.
I’m not making this up! I can hardly remember the last time I’ve made an impulse purchase. My wife still buys a few things here and there when I’m not looking, but I have little doubt that our overall impulse spending has gone down considerably.
What do you think? Do credit cards cause you to spend more? Or, have you become like me… almost paralyzed by the desire to maximize savings and points earned? Please comment below.
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On a serious note (as opposed to my previous comment), I don’t dispute the veracity of the studies, but for me, I’m not sure how much cash would help. i no longer view cash as the primary way of buying things. What I mean is that even if I’m not using a credit card, it’s hard to eradicate from my mind the knowledge that there is hundreds of thousands of dollars worth of “credit limit” in all of the cards that my husband and I have. And even if we didn’t have them, we know we could get them. So, using cash may help, but I think that the availability of easy credit probably has a similar effect to using a credit card to buy things, even when there is cash. We will always know there is an available reserve of money out there. Unless you get into serious financial trouble, which we are hopefully careful enough to avoid, the current banking environment IS a giant credit card, whether it’s cash we’ve using or not.
A good (better?) counterexample could be overspending (say buying 36 rolls of paper towels when you need 12) to get the reward feel of shopping portal + cash back etc.
While the paper towels won’t go bad soon, you could feel as if you were stocked up which gives a sense of invincibility and probable over consumption.
If you consequently use 10% more paper towel to get 7% cash back, you’ve lost 3%. It would have been easier to just buy whatever you need and even better yet use 10% less.
The point here is that for the SMALL things in life, the marginal analysis is VERY TIGHT, hence being a bit stingier with cash may profit.
The even better example is starbucks. It’s easy to get 5x and get gift cards that way (Staples). But NOT having a gift card makes me go less, and therefore I win. Each $5 I save is worth upwards of 500 miles, which at 5x took $100 of spend to get.
For the bigger things in life (Air, Hotel, Rent, Utilities) I go OUT OF MY WAY to get more more more miles, rebates etc. And now that I think about if we probably spend too much there too (we=frequent flier community) because of a mix of status, miles, elite amenities etc.
Manufactured spend is the true gravy, but let’s not forget the cost of time. So I relate to MilesAbound, esp. since increasing my income has helped a ton more than miles! (this coming from a guy with 14 credit cards).
FrequentMiler you are a master and the best at what you do. Keep it up! My comment is more on the nuances and reality check, not a disparaging comment.
I don’t know if I spend more or less with credit cards, but I definitely defer purchases. I saved up some planned, large purchases and some charitable contributions until I got the Citi AA Executive card requiring $10,000 spend. Also, I couldn’t have been happier when the mechanic said my car was due for a major routine servicing. He suggested it could be deferred a few months if need be. No way! Now!!!! He probably doesn’t see many folks so eager. It couldn’t have come a better time.
Nowadays I hate to waste a big expense on routine spending.
I thought the post was hilarious. I have stopped making a purchase because I forgot my user name/password, then ended up just not buying something. On the other hand, I’ve also lost out a great deal on a coat in the color I wanted because I wanted till I was home to order and the item SOLD OUT!
I do think spending cash makes people more conscious of what their spending. It’s too easy to swipe the card and then small purchases add up. . .But, I’d rather getting the credit card perks, so I’m not going back to cash.
This is too good! This is exactly my wife and I…
I need new black shoes from khols (wife alralready knows that khols has consistently been 10X bonus at URM)
Ok, we can go see what they have in person and order them online
UGHH. Ok fine.
Oh and I forgot. We’d also need to get some more GCs first cuz we don’t have enough to cover those shoes…
Never mind I don’t NEED new black shoes…
I couldn’t agree more, FM. Stuff is overrated.
my wife and i have this conversation weekly. thanks for helping us keep our spending in budget.
The reason we are here I think is to learn how to master the spending process as related to frequent flyer miles/points……..ultimately we are each responsible for our own self control or lack thereof………and the transparent story you shared in your house tells us all that there is a huge gulf in the full understanding of this game…….what makes this site so special at times is how well you understand that gulf while pushing the envelope……..
That’s why on a lot of these “mazes” you need to point it out in step by step fashion……….your conversation with your wife almost assumes she has read every one of your posts…..neither have we…….as a master of this process that must frustrate you that we are so stupid at times…….but it is reality…….at least as you fly by us you are not simultaneously talking down to us as some sites do………..that is the ultimate test that keeps you fans……….every day is a new learning experience………
I’ve thought a lot about this. When I first got into the hobby my budget-conscious husband insisted it would encourage me to spend more than I would otherwise. He was so insistent that I actually created a monthly credit card budget for ourselves. Now I pay FAR more attention to our outlays than I did before.
So yes the miles-points pursuit has made me curb my spending – but primarily to make sure my husband doesn’t mess with my favorite new hobby!
Ha ha, that makes sense!
Yawn. Just spend significantly less than you earn and you’ll be fine. If you can’t do that, you deserve what you get. And thankfully, most can’t do that hence the very generous rewards for those who can.
Totally agree.
The comment about alimony payments is hilarious. I read this to my wife – she rolled her eyes and said she can relate. I actually do feel that I spend less when I’m paying with cash…something about handing it over gets to me. However, we still are using CC’s for almost all spend.
Thanks FM for the shout and the thoughtful response. I actually need to respond to my own commentors but I would say in general most people feel like this is true, but not for them. But as has already been pointed out you actually have the gift card because you were responding to some deal. Been there, done that!
I think for sure there is a spectrum where if you gave person A a credit card with a $100 limit they’d overspend by $100 each month and person B with the same card would only overspend by a penny. But if I focus on controlled experiment studies of real samples of real people the evidence is overwhelming, and I think the reality is we all think we are better at this than we actually are.
While I haven’t read the particular studies you mention, most studies are about averages: on average people spend more with credit cards than with cash. This does not mean it is true with all people or with all situations. That said, I agree that most people probably do overestimate their ability to control spending, and for most people in many situations, using cash instead of credit would probably help.
The post is funny, but its never worth it to shop through these cash back portals in my experience. Ever since I started doing this for the past 3 months, I have shopped around 9 times or so through these portals and they were able to track only 3 times or so. Some of those purchases were Amex gift cards only for the portal cash back which I never got. Filing a claim for a 16 cent cash back on a $24 best buy item is not worth anyone’s time. While I enjoy reading these blogs, I think these practices only help when you are advertising and making a ton of extra money through affiliate commissions. In almost all other cases, you are dragged into the vicious circle of MS/using points on vacations which results in more unplanned/unwanted spending.
That’s strange. I shop through portals all the time and it is extremely unusual for the purchases not to track successfully. In fact, I think I’ve earned more rewards over time than I should have. Its possible that you have some issue with your computer such as a toolbar that steals portal clicks or a browser set to not allow cookies or something like that.
Sounds like something isn’t going right for you. I made over $500 on the topcashback shopping portal with amex last month and another $500 cashback from credit card cashback. It didn’t take much time for me at least.
kk, there are credit cards out there that you can make $500 just for signing up and spending money you would have spent anyway.
You are doing it wrong.
used to do a lot of impulse buying at costco, knowing i can return easily. now i can confidently say that’s almost entirely gone with my phone, pulled it out & check reviews & prices online (usually amazon) is tremendous way to shop more intelligently.
Have found that having many credit cards actually stimulates impulse buying. Have yet to be able to resist the temptation to buy more bank accounts, reload cards, gift cards, dollar coins and the like. Yet at the end of the month my credit card account balances are still zero and I seem to have more cash in my pocket. Does this mean I should spend more to assure the economy does not go into another recession?
Tell me about it! I make impulse buys at CVS and office stores all the time. I must be racking up over $100k of spending per month.
I have got to read this book:
http://alturl.com/zw6ei
LOL! Love it!
LOL, yes there is no doubt that many of us have no ability to control ourselves when it comes to those types of purchases!