How to spend money

You grab the items off the shelf and bring them to the counter. You hand them to the cashier, who scans it and then tells you how much it costs. The cashier then looks at you, expectantly.

How do you pay for the items?

I don’t mean to turn this into a Choose Your Own Adventure book, although that might be fun (“if you pay with a credit card, turn to page 17“), but I want you to think about your spending habits. Because the method of payment matters, more than you might think.

Paper or plastic

To recap, let’s talk about the various methods of paying for things.

• Debit card. This is a card that allows you to purchase something by transferring money directly from a linked account (often a checking account) to the merchant. It’s kind of like an ATM, except that you withdraw money and hand it directly over to someone else.
• Credit cards. This is also a card, but this allows you to purchase something by taking out a loan from a creditor. The creditor then bills you at a later date for the purchase value.
• Cash. The de facto currency of our nation. Pieces of paper or coins that we all accept are equivalent to a certain value. It is by far the most direct and immediate form of purchase, short of…
• Barter/exchange. “That will be one-and-a-half goats please.” In this form of payment, no actual currency changes hands, but instead something equivalent of value is exchanged. This works really well for services (“I will mow your lawn if you help me plant my garden.“) but is not usually viable in a traditional retail environment.
• Check. A check is a promise of payment to a merchant. Later on, the check is “cashed” and the money is sent from one account to another, usually a few days to a week after. This form of payment is very infrequent these days, usually relegated to rent checks to landlords, or trips to the DMV.

So with all these options, what is the best way to pay for something? Are there times when one form of payment is preferred from another?

Here are my suggestions (I consider these guidelines more than rules):

Guideline #1: Pay with your own money

This means currency you actually possess, not a loan.

Many people like to put all of their spending on their credit cards and then pay it all off at the end of the month. The usual reason for this is that the credit card company will give you perks for putting spending on a card, such as airline miles. While this can certainly be viable, and many people are able to make this work without problems, in general I don’t recommend it (and this is why I’m probably not cut out to be a travel hacker).

Paying for purchases with a credit card adds complication. For example, when you pay for a purchase with a credit card, you haven’t actually paid for it at all. You then need to actually pay back the company who loaned you money in the first place later. If you don’t do this in the right manner, you could potentially get charged extra fees (if you’re, say, late with a payment once and get hit with finance charges).

There is also the potential to buy more than you can afford, and when it comes time to pay off the card, you’re either going to have to dip into your savings (not good) or worse, leave a balance (definitely not good). I like airline miles as much as the next person (okay, maybe more), but it’s easy for the perks to be outweighed by the fees charged.

If you pay with your own money, you simplify all this.

Guideline #2: Pay immediately

In this day and age of check-your-balance-online, current information is key. If you pay in a way that shows up immediately, then you know that the money is gone. Paying with temporal payment tools such as checks can fool you into thinking that you have more than you do, which can cause problems. You can keep track of this separately, of course, but it is an extra complexity.

Guideline #3: Pay with money that hurts

I’m not talking about an electric shock or a nasty paper cut; I’m talking about paying in a method that makes you feel like you’re spending money. And the way that I’ve found that makes you feel the purchase the most is by using cash. I once bought a large ticket item in cash that was many hundreds of dollars, and let me tell you, I think I was sweating by the time I was done.

I admit that this is a guideline that I don’t really follow all that avidly these days. I will usually pull out bills if I have them, but if I’m at a hotel (say), I’ll usually just pay with a debit card rather than carry around lots of cash. But for some people, this guideline is key.

Rank

So if I had to rank the methods of purchasing for everyday use, I would rank them roughly as:

• #1 (tie): Cash, debit card. Your own money. Cash fits all guidelines, but the debit card allows you to track individual purchases automatically, which is a consideration that edges it up a bit in the ranking for me.
• #2: Check. You’re still paying with your money, but the gap in between the payment and when the payment goes through gives this method of payment a big demerit.
• #3: Credit card. Not paying with your own money and having to pay the credit back later makes this a hard-to-recommend method of purchase, even with the airline miles.
• #?: Barter. Who can say? I can no more rank this method of payment than I can divide a goat in half.

How you pay for purchases depends on what your goals are, so all the more reason to figure out what they are, because with every purchase you make, you’re acting on them.

But enough about me: how do you spend money?