How would you like to spend 12-18% more in retirement without taking ANY additional risk?
If I can convince you to put away the credit cards and – instead, use good-old-fashioned cash, you could spend more without changing how you invest! In researching this subject, I’ve found this applies to pre-retirees and retirees and how we can make retirement more enjoyable by using cash.
I’m not here to beat up on credit cards, BUT, If we transition to cash, however temporarily, we can accomplish some incredible things.
How can you stretch your current retirement
income so that you make the same amount of money last a little bit longer than you might otherwise? Additionally, our goal is to be more intentional with savings. You can only spend a dollar once, so we want to spend it on more important things, as defined by you, YOUR GOALS.
I want you to try a trial run at your retirement budget. Envision yourself on the first day of the first month of retirement. Pay all your bills online, the utilities, the mortgage, all of those non-discretionary items. Then, take all of your debit cards and credit cards and simply put them in a drawer and forget about them for two weeks.
Next, I want you to visualize what you anticipate your spending needs will be for that two weeks, bearing in mind you won’t have your credit cards. You need to make a decision ahead of time about how much cash you will need to take out of your account, whether it’s $500, $1,500, or $5,000. Go to the ATM and physically take cash out of the bank . This is a thought experiment regarding what you think your spending patterns are. As we approach retirement, we want to come up with a budget that gives us a guideline on how to spend, how to invest, what sort of risks we’re taking, acknowledge the investment timelines, all those important things that we talk about over and over with our clients and in our blogs and podcasts.
This experiment provides physical proof as to how close you actually are to your retirement estimations. This could be called a trial run at retirement. Pretend on first of the month that you’re retired. You’re not going to have an earned income anymore and you’re going to live off your savings. This is a tiny microcosm of a thirty year retirement; it’s a two week period. It should give you insight into the economic reality of your spending versus what we think it is when we plan it out on paper.
Shopping for groceries, gas, clothes, or entertainment, will be based off the cash you have. It’s super simple budgeting for the simple reason that once the cash runs out, you’re going to be done for that two weeks. We obviously don’t want you to starve if you run out of cash, but we do want this to be an impactful experiment in your retirement income planning.
For those clients out there, for listeners and readers who are finance buffs, this concept of cash spending probably isn’t new to you. I first came across it through Dave Ramsey’s Financial Peace University. My wife and I have co-coordinated quite a few classes through Dave Ramsey’s Financial Peace University over the years. I agree with Dave on many subjects, if you are looking for an adult education curriculum for your church, I highly recommend Dave’s program. (Not that Dave Ramsey needs any free advertising from me!)
My wife and I taught one of the budgeting lessons last Sunday with our class. The way Dave talks about cash is really inspiring. That’s a big reason why I’m writing about it today. When you think about cash, and you think about swiping your credit card at the point-of-sale, there are some very important psychological responses that are happening. When you swipe your credit card, it’s a simple flick of the wrist, removing all emotional connection with your money. This is all by design – you are not connecting the idea of “I’m swiping this card” with “it’s being debited from my account or accumulated in the form of a credit card to be paid at the end of the month.” That design is a little scary!
Now compare that process to the physical action of paying cash. If you’ve got a hundred dollar bill, when you hand that money over to the cashier there is a physical response that happens. It’s a biological response that you feel immediately, as you’re handing that cash over to the cashier, that the money is being deducted from your net worth. You will feel some pain! It is such a radical change that you’ll actually spend less.
I mention that cash helps by making budgeting in retirement super simple. Next, we’re going to go a little bit into how to stretch your current retirement income. I know people are thinking, “Well, I want to gain airline miles, or I want to gain some cash back points, that’s why I use my card.” It is difficult for me to argue with that. However, the data proves that you will spend less using cash, thus stretching your retirement income more than the benefits of credit card rewards.
Just to be clear with everyone, I’m not here to beat the drums that credit cards are bad. For my own personal purposes, I do not own a credit card. I carry a personal debit card, a business debit card, and some cash. I don’t have a good feeling regarding credit cards; maybe it’s all these years of being a Dave Ramsey acolyte. I don’t like credit cards because they are too convenient. That is the issue: they are, by design, conveniently too convenient. It’s the convenience that makes mindless swiping a budget buster. If you are approaching retirement and having a difficult time creating a budget, or if you are living off of your savings currently, and you’re just not quite making it every month, it could be the “mindless swiping” that is creating a struggle.
It is not my job to put clients on an allowance. I understand that this is your money. You’ve earned it! I’m not telling you to not fun and enjoy your money. As we approach retirement and set out on a plan, we keep coming back to the idea that we need to be more intentional with our plan, more intentional with our investments, more intentional with our budget.
Mindless credit card swiping can deplete resources from what you truly want to spend money on. I say it time and time again, but you can only spend a dollar once. When you sit down and start to plan your retirement and think about all of your ‘bucket list’ dreams, you realize many of those are expensive items. If we’re not keeping our day-to-day spending in check, you are siphoning funds away from your ‘bucket list’. A dollar that is mindlessly swiped is a dollar that doesn’t go towards the lake house, or taking the kids to Disneyland, or paying for your grandkids’ college, or you name it.
It’s probably not the end of the world to do some mindless swiping, but for two weeks when you undertake this cash experiment, you might be surprised what happens when you cease the credit card swiping. Once we get into the numbers, which is my favorite thing since I’m kind of a nerd, you’ll see what I’m talking about.
Speaking of ‘bucket list’ items, as I’m writing this article, a client of mine just left on a once-in-a-lifetime vacation. They are jumping out of a plane in New Zealand as you’re reading these words. If they had too much mindless swiping, this ‘bucket list’ item that they’re very excited about might not have been a possibility without an intentional, well-thought-out plan. This is a real-world scenario where someone set the big items as priority, thus creating it in reality.
You don’t think spending cash will cause you to spend less? I can prove it!
When you approach a restaurant drive-thru, you don’t know specifically what you want to order in most cases, thus making it an example of a spontaneous purchase. Nerd Wallet gathered data on debit and credit card expenditures versus cash expenditures in this drive-thru scenario. What they found is that when you spend cash at the drive-thru window at McDonald’s, you spend, on average, $4.50. People typically spent $4.50 in cash, and a whopping $7.00 when swiping with a card.
These figures back up the idea that you are able to spend a large percentage less just because of the natural mental synapses that are firing when you’re spending physical cash dollars versus swiping. When you swipe, you are mentally disconnected from your money.
To further broaden the idea of the hard science behind our theory, let’s look at a study referenced in the Nerd Wallet article by Dun & Bradstreet. The study found that people spend 12% to 18% more when using credit cards instead of cash. This is not a few cent difference, 12% to 18% more is actually quite substantial. I often hear from clients and friends, “Well, I get 1% to 3% cash back on my credit card,” or “I get frequent flyer miles.” You don’t get 12% cashback. If there was a company that offered 12% cashback, there would be a line around the block of people trying to get that credit card.
Even if you are getting 1% to 3% cashback, you are spending 12% to 18% more. This isn’t by accident. The credit card companies realize that you’re spending more by not spending cash. That’s why they can incentivize you with a portion of that cash back in the form of a rebate. Even if you’re getting 1% to 3% cashback, you just spent 12% to 18% more. You still went 9% to 15% backwards. The percentage difference is something to think about!
I’m borrowing a line from Dave Ramsey here, but I’ve never met anybody that, on their first day of retirement said, “Thank God for those frequent flyer miles, because that really made the difference in my retirement plan!”
We talked about the McDonald’s figures and the Dun & Bradstreet survey. This one, I thought, was really interesting: A 2001 study that examined purchasing tickets to a basketball game that was completely sold out. It was a highly coveted basketball game that many people wanted to attend. They polled some people and asked, “What would you be willing to spend to attend this basketball game?” They split the people up into two groups, people who were going to spend cash versus people that were going to buy on credit. On average, the credit card buyers were willing to spend twice as much for the same basketball tickets as the people who were going to spend cash.
That blows the original 12% to 18% estimate out of the water: that’s actually 100% more savings. I’m not proposing that you’re going to cut your retirement spending by 50% using only cash. However, conducting this experiment for two weeks will lead to some eye-opening results for you and your family as you enter retirement. I’m not expecting you to convert all of your retirement spending to cash. If you’re looking to stretch your retirement dollars, converting to cash can help, even in small areas of your budget, whether it be groceries or entertainment or clothing.
If you’re looking for help in super simple budgeting, meshing the theory of your retirement budget with the reality of your current cash budget, spending only cash is a great way to attempt that as a trial run at retirement. If you go by the Dun & Bradstreet numbers, every dollar that we can spend in cash is essentially stretched in our retirement income by 12% to 18%. Again, you have to practice this and find out for yourself. The more expenses that you can convert to cash in your lifestyle, you’re going to get a 12% to 18% increase, thus in theory, stretching your current retirement income.
Think about my client jumping out of planes in New Zealand. Every little bit of mindless swiping that we can avoid is quite literally, especially when we’re retired and living on a fixed income, dollars that we can directly transfer into those big bucket list items. For most people, these are the reasons you want to retire in the first place.
Find areas where you can convert your retirement spending into cash. It’s going to have literal dividends for your retirement future.
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