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Show Me the (Cash) Money


The long-lasting recession has had one not-too-surprising upshot: More individuals put away the credit cards and embraced a cash-only lifestyle. Studies show people who do so spend less and save more. That's the good news -- but there are definitely downsides to ditching the plastic.

With the rise of plastic -- first credit cards, then debit cards and finally gift cards -- largely replacing the check economy, actual cash transactions are on the wane. So much so that one wag predicted that, within our lifetimes, the only people handling real money will be the poor. We'll all be able to claim, as some in the British royal family do, never to have actually handled the stuff.

There have even been increasing calls to eliminate the smaller coins and bills as the cost of production has surpassed face value. According to the United States Mint's 2009 Annual Report, it cost 1.6 cents to produce one penny and 6 cents for each nickel (with metals prices soaring, those numbers are now likely higher). There appears to be no profit in making money anymore, at least not small change.

But there is reason for a mini-resurgence in paper and coin money in the last few years as more people in difficult straits have returned to a cash-only lifestyle as a means of reducing debt and doing a reality check about spending. It reminds me of family members who survived the Great Depression -- they had a habit of carrying a huge roll of bills in their pockets, often bound by a thick rubber band. No trust in banks and ready for anything.

What are the advantages of living on a cash-only basis? For one thing, multiple studies have shown that people who rely strictly on cash tend to spend less. Cash counted out of hand, bill by bill, is much more painful than the casual swipe of a card for an impulse buy. And any substantial purchase requires a lot of counting, or even a separate trip to get more cash. Sometimes the thought of an extra trip, and often an extra ATM fee, has changed many a mind about a "must have" item.

Another benefit is that when you pay with cash you have license to ask for a discount equal to the 1 percent to 3 percent that the merchant would have to pay to the credit-card company. Hey, it all adds up -- often surprisingly so, if you do the back of the envelope math.

Decreasing spending, reducing debt, and being able to do it in the least-painful way possible are a powerful driver of behavior change. But there must some downside to this deviation from the norm, isn't there?

Of course. Watch that wad in your pocket -- both accidental loss and theft come to mind. Next, it is work to keep track of what you have spent and how much you have left in your roll. So you must get and keep receipts for everything, especially if a possible return of an item is ever to be achieved. A spending log is something the credit-card companies do for you, but you only see their record briefly once a month and it takes no effort on your part to maintain it, unlike a cash-based log.

The third unintended consequence is that you will end the day with a pocket full of coins. TV money maven Suze Ormond once said that that was a great way for strapped individuals to begin paying down debt, with relatively little pain. Just save all coins instead of spending them, and use them to start reducing debt. Eventually, though, you’ll need of those small coin-rolling gizmos (banks still take rolled coins, but won't do the rolling for you). Or you could use one of those coin-counting machines, though you have to lug all the coins to the machine and then you’ll typically pay a fee for the convenience, defeating the purpose.

Eliminating plastic from your life may save money, but it raises other problems. Try renting a car or buying an airline ticket without one. (The Sept. 11 plane hijackers paid cash the day of their flights, remember? So do the airlines.) So check with your carrier ahead of time to be ready for what you may need to provide in lieu of plastic to insure your bona fides.

Another downside of the all-cash lifestyle is the running total of ATM charges that can add up. The average ATM fee is now $2.22, according to Bankrate.com’s 2009 Checking Study. (If you’re stuck in an airport or casino, however, you could pay as much as $10 a transaction.) In many cases, you get dinged twice: One fee charged by your bank for using an out-of-network ATM, and another charged by the owner of that ATM. Yes, you can access your money free by using an in-network ATM, or by asking for cash-back at the grocery store, or by withdrawing funds from the bank in person, but this is not always possible or convenient.

There is also the aspect that the use of cash often leaves little or no paper trail, which may have tax implications for some. Back in the day, when medicine was more cash of an all-cash business, this was a real ethical, legal and bookkeeping issue that led to more than a few unpleasant Internal Revenue Service audits. Today's Byzantine insurance structure has relieved the medical profession of most of that particular problem -- replaced, of course, by other unpleasant burdens.

After all of this, some might find it interesting and instructive to conduct a one-month personal test to go all-cash to see if: 1) it helps save you money; and 2) if you can live with it. But no matter how it ends, the experiment is bound to be instructive. Oh, and one last thing: Whether or not you decide to give up plastic temporarily or permanently, do not cancel the accounts. Just lock them up in your home safe or safe deposit box. With the convoluted way credit works, reducing the amount of credit available to you by closing your accounts may adversely affect your credit score. What a world.

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Victor J. Dzau, MD, gives expert advice
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