Making the Leap – Switching from Credit to Cash

So yesterday, I got an excellent question – How do you make the switch from credit cards to cash?

I love these questions – makes my whole day.

I, of course, can't speak for everyone, but here's our story:

When we were first married, we combined our credit card debt and it totaled about $6000.  That was our wedding rings, couple of school payments, some honeymoon expenses (and truthfully, thousands of just plain waste.)  We worked diligently to pay off that credit card.  I still remember it was a Discover Card and had a 0% rate and we paid $600/mo on it.  It took us 10 months.  I remember emailing my mom and my sister, with such excitement, when we paid that last payment. 

I wish I was kidding when I say the very next month we ended up with a credit card bill of over $1000 that we couldn’t pay off.  We were credit card debt-free for less than one month.  I doubt we are the only ones out there that did this.  (Feel free to comment and make me feel better – lol!)  It  was a crushing defeat that began a slippery slope of even accumulating even more debt.

One of our main problems was that we used our credit card for everything.  We paid for groceries, gas, eating out, car repairs, etc. with our favorite plastic accessory.  (I even had a keychain credit card that was the IT item about as long as jellie shoes.) 

It’s hard for two people to be accountable when you do not have to keep a record – you just wait for the bill.  It was impossible to figure out how much was spent from each category.  We couldn’t keep track and before we knew it, our bill was way over our budget. 

The first step in our debt-free journey was to convert to cash.  Easier said than done.  If you think about it, your credit card statement is paid the month after you spend.  It can cause real problems when you try to pay your credit card and pay your monthly expenses because you’re basically paying two months worth of living expenses with one month’s income. 

For most of us, we wouldn’t have debt if we had savings.  As hard as it is, the only way to swing it was to pay only the minimum payment that first month.  It pained me to watch our debt load increase by $XXX (or maybe it was even $XXXX!!!)  But that was the only way we could do it.

Some people are lucky enough to have some cash saved away.  (No, this is not your FPU $1000 emergency fund.) If you are one of those lucky ones, it’s easy - pay off the credit card then start fresh the next month with cash.

(Side bar conversation – I always get baffled by the callers to The Suze Orman Show who have $30,000 in savings and $15,000 in credit card debt.  Seriously, what kind of interest rate are they getting on that savings to make it worth carrying that kind of debt load?  Anyhow…) 

We now pull out enough cash to last us two weeks and divide it up into our envelope system. (Heard of Dave Ramsey, ya'll???)  We pay the rest on bills and now that we have “leftover”, we transfer it to savings.  We leave enough in our checking account for gas.  (DR suggests even using cash for that, but I’m too lazy to go in stores – especially in sub-zero temperatures.) 

But one thing I learned from one of my new favorite shows, Till Debt Do Us Part, was when you switch to cash – WRITE IT DOWN!  Whether you write on envelopes (as DR recommends) or keep a “Budget Binder” (as suggested by Gail Vaz-Oxlade) – just write it down!  That way you, and your spouse, can look at any point in the month and see what was spent, where it was spent, and what you have left.  (And keep your receipts for 3 months.  If you need to return an item, without credit cards, most stores can’t trace your purchase.)