Why I use cash

I carry a debit card and a rewards credit card in my wallet along with cash in a variety of denominations. Depending on where I intend on shopping determines when I spend cash. For example, when I go out to eat, I use cash, but visiting my hair stylist or the gas pump means I use the credit card. Cash gives me flexibility. If I am eating with someone and we want to split the bill, I can just pay my friend in cash while she charges the full bill to her card because she lacks the cash to pay her portion. I prefer to use cash at the thrift shop because my money is going for charity and I do not want to add fees to their bottom line. Each time a credit card is used, a transaction fee is charged to the vendor.

Cash makes it easy to bargain at garage sales. Typically, I have a $20 bill, a $10 bill, a $5 bill and 4-5 singles in my wallet. If I plan on hitting several garage sales, my wallet has a few more $5 bills and singles. If I ask the person whether in person at a garage sale or virtually via craigslist to knock off a few dollars or $10, it behooves me to have exact cash and not ask for change. Carrying cash and using it for purchases applies more universally than credit cards. Most farmer's markets run on cash and people casually selling things at work want cash, not plastic or a check. I also keep an extra $20 in my purse as a just-in-case resource. I have only used it once since I started carrying it almost two years ago.

While I use cash for about 25% of my transactions, I don't typically visit my credit union to withdraw money. I access cash using my debit card at an ATM. However, the ATM I visit only dispenses $20 bills. Therefore, I usually break any $20s I acquire when I spend it at restaurants and the thrift shop. As a result, I usually have more bills on hand at home that ensures I have the correct array of denominations in my wallet for whatever occasion I need them.

A recent example why having a range of cash denominations is helpful applies to the propane grill my dad received as a birthday gift. While my share of the grill itself was $40, the propane tank had to be purchased separately. Because I had $5 bill in my wallet, I could give my brother additional money to cover a share the unexpected expense. As I mentioned earlier, I have flexibility and control when I carry cash with me. Plus, keeping some cash on hand at home means I don't have to hit the ATM every week just get some cash to spend.

My question to you: How do you use cash?

Financial rewards of credit card usage

I have been reading in various blogs about credit cards reducing the rewards associated with using their cards or raising the bar for submitting rewards. Others blog about which reward credit cards have the best return on the money you spend. I am a one credit card kind of gal so once I choose a credit card, I keep it in my wallet and use it. (Full disclosure: I do have a second card, but it languishes in a file folder.) My well-used card is a CitiBank Driver's Edge Options credit card, which rewards me with 3% back on purchases at pharmacies, gas stations and grocery stores (6% for the first 12 months), 1% on other purchases and if I submit my mileage, gives me a rebate for the mileage accumulated on my car. I can redeem my rewards for an auto service of at least $25 or for leasing or buying a new or used car. Since I knew I wanted to purchase a newer car in the near future, I thought this rewards card was a good fit for my lifestyle and suited my goals.

Recently, I sent my bill for auto repairs to the Rewards Redemption service for my credit card. If I am enrolled in the mileage rewards, which I am, that bill will also use the mileage noted on the bill to add the Driver's Rebate to my account. When I received my credit card bill about two months after submitting the auto repair bill, I saw I had a credit for my Driver's Edge rewards. I took the credited amount ($105.57) and transferred it to my car savings account. Why? All the other purchases on my credit car were subtracted from my budget, and this money was intended for my future car purchase. I put it in my ING savings account where it currently earns 2.4% APY. This may be a paltry amount, but better than 0% in my reward account.

Using this method of rewards submission, I add to my car savings account and make the rewards I earn by driving my current car more liquid than sitting as a number on my credit card statement. Furthermore, the Driver's Edge rewards must be used within five years so I am ensuring I use the full extent of my rewards without any penalty.

What do you think of my methodology?

How I use credit cards and not carry a balance

In an earlier posting, I shared my debt numbers. College left me with a legacy of over $2,000 in credit card debt and $11,000 of student loan debt, modest numbers by most standards. While in graduate school, I could postpone paying my student loan but not my credit card. I spent many years paying little more than the minimum on my credit card until I had my first job, and then with the increased income, it took me about a year to pay it off. So, how have I stayed debt free since then?

Now consumer-debt free, I was determined never to carry a credit card balance again. I hated seeing the finance charges for items I did not remember or, upon later reflection, did not need. I had a written budget for nearly six years at this point so I decided on a new course: subtract all purchases made by credit card from the spending plan.

I kept track of my credit card purchases for the month. My spending plan is on paper so I wrote a heading of "Credit Card" and started listing the store and the amount spent. For example, if I spent $34.49 at the Mobil gasoline station, I wrote down "Mobil $34.49". Then I subtracted the amount spent from my allocation for Gas and placed a check mark next to the $34.49 total. This would remind me when the credit card bill arrived that I had taken that money out of my spending plan and did not need to "steal" money from my savings account.

Using this method, my credit card balance was accounted for in my spending plan so all I had to do was write a check for the total amount and send it back to the credit card company. The money was removed from the spending plan once spent even if I did not actually debit it from my checking account until I received a credit card bill. However, there are some expenses that I did not place a check mark next to or subtract out of my spending plan. Why did I do this and how did I handle it?

I have several savings subaccounts with my credit union and ING Direct. These accounts hold money for house spending, car savings, charity giving or other items I am holding money for or saving toward a goal. If I spend money at the hardware store for exterior house paint, wood trim for replacement windows, tomato cages and a hose nozzle, I place it on a credit card and mark the total in my credit card charges listing as such: "Ace Hardware $37.43" but do not place a check mark after the entry. This reminds me that I have not subtracted the amount from my budget. However, all these items are grouped as "house spending" so when the credit card bill arrives, I then transfer money from my "House" savings account into my checking account, thus paying the credit card balance.

So what happens when I overspend? Yes, there have been more than a few times that I have spent more money than was in the budget and the items charged were not a house expenditure. While these are only occasional lapses, I do work within the framework of my spending plan and try not to spend more than a particular allocation. For those times I either have little control over the amount spent or I abuse a spending category, I use my savings account. For example, my spending at the veterinarian for one of my cat's exceeded the "Cat care" allocation in the spending plan. I do not have separate savings account for cat care, but when the bill was $283, I paid the balance not covered by my spending plan from money stashed in my savings account.

However, using the savings account to plug the hole in a spending plan can be a slippery slope. While it is true that the credit card balance is paid off each month, there are fewer dollars left in savings to help in a real crunch (e.g., necessary car repair or emergency water heater replacement). Use the savings account sparingly and always add more money into this account than is taken out. The best rule of thumb: replace the money taken from the savings account.

By removing money spent by cash, credit or debit from my spending plan, I can comfortably write that check for the entire balance of my credit card and prevent any finance charges being added to my account. This has kept me debt free for over six years and counting.

Federal interest rate cuts and the struggle to save

After volunteering for my city's holiday fund event where low income people were able to get gifts for their children and boxes of food for their holiday meals, it put my life and my situation in perspective. I had a great time meeting so many different people and I walked away feeling like I had spent three very rewarding hours of my time.

But then I read articles like the one on Bankrate.com. The discussion on who wins and who loses with the most recent quarter point Fed rate cut just strikes me as shortsighted and only a temporary fix. The people who benefit: those who buy on credit and maintain credit card balances. Borrowing money to buy a car or using a home equity loan to fund Christmas all will be cheaper. However, for those crazy individuals like me who want to save money, the hope that interest rates will be high enough to meet or even beat inflation was defeated.

I do not understand how people who live within their means and save money are penalized and those who use credit in all sorts of creative ways are allowed to keep spending into an even deeper debt hole. There has to be a point where the overspending and overuse of credit just collapses on itself. I do not see a way that savers will escape unscathed. Hard earned and saved money will then have to be spent but not on the items/future needs for which the money was being saved.

For people looking to buy a home or refinance, this may be an opportune time. I have a good fixed 30-year mortgage and the numbers are not low enough for me to consider refinancing. Talk to me when a 30-year mortgage is around 5%. There will always be someone who gets a better deal or better percentage than I. It is just difficult to take when my hard-saved money loses its earning power.

My savings accounts rates:
ING Direct dropped 0.1% to 4.10% APY.
Emigrant Direct stayed at 4.75% APY.
iGoBanking dropped 0.1% to 4.90% APY.
Credit union savings steady at 0.75% APY.

I am sure my CD rates will also decrease. The credit union adjusts rates every week and I have not seen them hold the rates when the Fed rate is cut. My savings rates are not bad but considering I opened my ING Direct account in March 2007 at 4.50% APY and the iGoBanking one in September 2007 at 5.30% APY, it seems like quite a few points were erroded from the numbers. The amount saved in these accounts are not large so I only losing pennies not dollars, but it is still painful for me to see.

I am thankful I am not in a precarious financial situation but I fear that other people's overextension of their money and their credit will hit my pocket even harder. Here is hoping my doom and gloom thoughts do not come true.