Can You Survive Without a Credit Card?

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3 Steps Back to the Sanity of Cash

Waiting until you have the money in your pocket has its disadvantages (we're hand-washing our dishes) but it will buy security later. Call it "real-income living."
By MP Dunleavey

"While many Americans can and do handle borrowed funds responsibly (taking out what they need, repaying what they owe), millions more have slipped into a fantasy world, thanks to credit -- a fantasy that you could buy now and pay later. And that somehow, somewhere, when you least expected it, you'd pay it all back. "

Thanks to all that easy money, a fog descended: Credit made us all believe we were richer than we were.

Step 1: Get out of the fog Here's a giant reality check question:

If every ounce of credit now available to you, in the form of cards or home equity or whatever, if all of it dried up, what would your life be like?

The fact that that's hard to imagine is a sign of how deeply entrenched credit-think has become.
Studies by behavioral economists show that credit divorces you from the "ouch" of spending actual money -- and thus it not only changes how much you spend (people typically spend more when they use plastic), it also creates fuzzy thinking around your finances.

One study showed that shoppers who paid with plastic didn't remember what they'd spent, whereas those who used cash did. (If you've ever been to a mall, this isn't news.)
Credit creates a fog. Cash will snap you out of it.

Step 2: Think of Grandma

The second step is switching to a cash-based mindset. That doesn't mean giving up all forms of plastic. It means learning to think and spend based on how much money you actually have.
That's how your grandma did it, and my grandma, and anyone's grandma who lived back in the 1930s, '40s or '50s -- before you could borrow yourself into oblivion.

Grandma (and Grandpa) somehow managed to furnish a house, raise and feed a family, procure a car and save for emergencies -- all with cash. Why? Because credit as we know it today did not exist. Actual credit cards became common in the 1970s. When you bought something, you paid for it and then got the item, not the reverse.

What was it like, living on cash -- and why is it so powerful that it can turn your financial life around, even now?

Step 3: Find your means

Alas, "living within your means" is just a giant personal finance cliché at this point. People have lost track of what it signifies. LWYM has come to mean that you're fine if you spend every dime you make.

If you have to use plastic to cover a few gaps here and there -- your vacation, the holidays, some groceries -- that still counts as "living within your means" because you eventually pay it all back. Probably.
So it's really about spending a small portion of your income to live, and saving a large chunk of it -- for emergencies big and small, for the unexpected and for a warm, cozy, secure and happy future.

You're not going to turn Tupperware containers into shoes. And I'm not suggesting you grow a bailout garden and can green beans (unless you're so inclined). As scary a time as this is, we as a country are unbelievably wealthy compared to those who survived the 1930s.

But we all need to come down to earth, to a more solid and sensible way of living, with cash as the anchor.

Published Nov. 5, 2008