Spend Cash, But Don’t Forget Opportunity Costs

Over the last couple years I have written many posts extolling the virtues of paying for things with cash. Shopping with cash causes transactional pain – that little twinge you feel when Uncle Benjamin leaves your wallet to be replaced by a few George Washingtons in change. That hurts.

When you swipe plastic, especially plastic representing money that doesn’t belong to you (credit cards), it hurts much less. This is why spending with credit cards is so dangerous. But spending cash can be dangerous, too, for an entirely different reason.

We are a couple months into saving for a Disney vacation in the upcoming year. While we are determined to cash flow the entire trip we also want it to be memorable for our kids. Neither child has been to Disney, and none of us have been on vacation for a couple years. You can probably see where this is headed.

Just because we plan to use cash, there are still plenty of opportunities to be separated from our money, and fast, especially at Disney World! It’s a trap many others have fallen into with big expenditures. The fact you are paying with cash doesn’t necessarily mean it makes sense, financially.

Cash does not equal affordability. I used credit cards for much of my twenties, racking up debt while away at school and again after returning home. I recognized that I could not afford many of the things I charged, but justified their purchase for a variety of reasons. It was school tuition, books, baby expenses, medical expenses, new clothes, and much-needed vacation, etc. Since I was charging these items and not paying off the full balances each month the financial sins were rather obvious each time the credit card bills arrived, and I was greeted with an even higher balance than the month before.

Since we stopped using credit cards a couple years ago, choosing instead to live on a cash basis, I have found that measuring affordability is a little more difficult to do. After all, just having the cash in hand doesn’t guarantee smart spending decisions. There are always opportunity costs associated with spending.

By not spending $100 on a new pair of shoes, or a new tool, or whatever strikes your fancy, you’ll have $100 to do something else such as save and invest that money. That investment will likely grow your original $100 over time, so the money you are giving up in growth represents the opportunity cost of spending that $100 on a new cordless drill today.

In our case, the cash saved for our Disney vacation could be used to pay down our remaining debt, or build our emergency fund, or to invest for retirement. We are giving up plenty of opportunity to spend that money on vacation, but it is a sacrifice we are willing to make for a memorable family vacation. Saving and paying cash does not make the trip any cheaper, but at least we won’t be dragging credit card debt back with us from Orlando.


  1. This part alone, “Shopping with cash causes transactional pain – that little twinge you feel when Uncle Benjamin leaves your wallet to be replaced by a few George Washingtons in change. That hurts.”–is the basic point.

    When we spend what is clearly “our money” we’ll naturally be more reluctant to spend it. That creates a natural budgeting mindset that’s often absent with credit cards or even debit cards. It’s the visual impression it makes, aka, one picture is worth a thousand words.

  2. Moving to an all cash basis sounds like a good idea for controlling spending. However how do you order things online (that can be cheaper than in a store) with only cash?


  3. Good points. Using cash over credit doesn’t mean smart spending, but I do still think I make better overall decisions. Actually seeing the cash in my wallet dwindle as I spend it helps me to step back and think twice. To make truly wise decisions, however, you need to plan ahead and set budgets/limits, so you don’t just view that $100 in you pocket as available money to spend on whatever you want.

  4. Whenever a shop accepts a credit card as payment for an item, 3% (in the UK) of the amount is paid to the credit card company.

    Because most items are sold at the same price if bought with cash, this means that by paying with cash, you are subsidising the benefits enjoyed by credit card users (mainly not having to pay for their purchases for up to 56 days).

    As I’m going to pay for those benefits irrespective of whether or not I use a credit card, it would seem that paying by card offers better value for money.

    I realise you are not avoiding credit cards for value for money reasons, but do you think this aspect should figure in your thinking at all?