August’s Message

Paper or Plastic?

It’s been said that life is a game of inches and little bits add up.

Here’s a question: “Are you more likely to be on track for retirement if you paid with cash instead of a card when eating out?” Remember, on track means saving 10 to 12% of gross income for retirement

 My assertion is the majority of Americans would more likely be on track for retirement if they paid cash for everyday purchases like eating out instead of using credit or debit cards.

Some research on American’s use of credit cards:

30% of credit card users are “dormant,” a term credit card companies call people who have a card but don’t use it. 30% are “transactors,” or people who pay off their balance every month. The remaining 40% are “revolvers,” designated as people who use the card and carry their balance over month to month.

“I like the rewards I get from my credit card” is a common reason people give for credit card use. If you’re successfully being a “transactor,” please carry on and enjoy your rewards. For those who are “revolvers,” there is a substantial penalty.   The average American consumer is spending over $2,500 a year on credit card interest according to a recent article.

It’s safe to say most Americans are misusing credit cards.

A second realty is that you overpay when you use plastic versus cash. This is sometimes called the “Monopoly Money Effect” and is illustrated by looking at our behaviors when eating out. Wendy’s estimates customers spend 40% more when using plastic versus cash. Let’s put that into perspective:

Households earning more than $70,000 per year, spend nearly $10,000 on food and eat out 45% of the time or $4,500 a year. If you used cash instead of plastic and didn’t spend as much, say 20% (a more conservative estimate than the 40% example from Wendys research), you’d save $900 a year. That’s not a lot you might say, but many Americans don’t even have that much money in a retirement account.

Specifically, the EBRI reports that more than a quarter of all Americans have less than $1,000 in retirement savings, excluding their home. So, if you paid cash when you ate out for a little over a year, you’d have more than then a quarter of Americans have.

I understand that when you eat out, you’re not always going to Wendy’s, but ask yourself this: Do you tip more or less when paying with cash versus when you fill out a credit or debit card receipt?  Can you think of other instances when the Monopoly Money phenomenon could occur?

Let’s review

$900 saved from paying cash versus plastic while eating out and $2,600 saved from not paying credit card interest. That total of $3,500 going into your retirement account and getting you closer to the desired 10 to 12%, all by simply changing your purchasing behavior from plastic to cash.

Little bits add up. Are they adding up in your favor?

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