Monday, April 17, 2006

Three Tiers of Discipline: Deciding How to Purchase

There are basically three ways to pay for ordinary purchases:

1. Cash only
2. Debit card (like cash)
3. Credit card ONLY if it's paid monthly and pays rewards

Each strategy carries with it some significant pros and cons:

Cash Only

Carrying cash and paying only in cash can be a double-edged sword. Some people are more likely to spend, because they have the money on hand; others are less likely, since they see the actual bills pass out of the wallet.

Debit Card

Like cash, except the debit card takes the payment directly out of checking. Again, this can help curtail excess spending by deducting the purchase from cash in a checking account, or make it less "real" than spending cash.

Credit Card

Paying by credit card is a bad idea unless the balance is paid monthly and the card carries valuable rewards for its use. I think the downside is evident here: the chance of interest charges if you can't pay, or a late payment fee if you're two hours late. My friend Dash pays for everything with a credit card: groceries, gas, and weekly lunch out. He pays the balance every month and racks up mileage points that upgrade his biannual trips home to Hawaii to business class. For him this system works and pays a tidy dividend.

The Discipline Factor

Each of the three payment methods corresponds to a degree of personal responsibility. Making all purchases with a credit card, like Dash does, requires a high degree of personal discipline and organization. Paying by cash or debit card require a bit less discipline than Dash's method, but both still require a disciplined tracking of expenses. As for me---it's far easier for me to use my debit card than part with cash. I'll swipe the card before I'll break the $20 bill. So along the continuum of discipline, there's less chance of me to overspend if I have to pay with the cold hard currency.

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