A lot of my readers and friends have asked me how to save more. While I tell them to buy what you need not what you want, it seems like all things these days people want a quick actionable shortcut. Of course, things to understand with thumb rules and shortcuts is that there would be exceptions to them.
Anyhow, so the thumb rule is : Use cash instead of credit card
Why credit cards lead to more spending?
There is a lot of research that has gone in this area (as if it is a rocket science). Mr. Richard Feinberg of Purdue University did a quick experiment. He placed credit card logos on a few tables and left other tables alone. The results were startling, a mere sight of credit card logos was enough to make people spend more and leave bigger tips (nothing against large tips). This is one of the many experiment that shows that credit card acts as a stimuli to spend more.
But why cash?
To spend less and save more, cash is a good alternative. Reason being, the physical act of seeing currency notes part ways with your wallet makes you ration it out more. A 100 rupees for a cup of tea paid via credit card that has Rs. 5,00,000 spending limit doesn’t look like a big deal, but when you take out your wallet that has Rs. 1000 in it, then parting way with 10% of that money makes you careful.
But what about all those credit card points?
Yes, I agree that you will not be earning those credit card points if you use cash. If you are anything like me who uses credit card points to fund my travels, you would be disappointed. But think it like this, by using credit cards to buy what you want not what you need, you are just getting equivalent of a discount on what you spend. When indeed you shouldn’t have been spending at all. It’s like saying, “Hey there is an end-of-season sale of 50%, let’s shop!!!”, when you actually didn’t have to.
Also, there is a new app in India called CRED using which you get rewards if you pay credit card bills on time. This is a great app that rewards you if you pay credit card bills on time. But again, this does not mean that you have to inflate your credit card bill to get rewards.
What is the middle ground?
Of course, with all things in life these days there has to be a middle ground. The middle ground is as follows:
- I cannot stress this enough, but buy what you need not what you want. If you can follow this, then definitely use a credit card and get more by using the points.
- If you think it is difficult to always be hyper-rational then before you leave for your home figure out what you want to buy beforehand. Take an extra 5-10% in cash with you. If you want to buy something you hadn’t thought of before, use cash for that. For everything else, there’s mastercard :).
You might have noticed that I have not promoted use of debit card. My primary reason for that is card fraud. In case of a credit card fraud, you can still argue and refuse to pay for something if there is a fraud. In case of a debit card fraud, the money is gone from your account and you cannot do anything. That’s all my friends on my tips on how to save more.