This is Part 2 of my review of Die Broke.  You can read Part 1 by following this link: Barbaric Book Review: Die Broke by Stephen M. Pollan

Step 2: Pay Cash

The authors feel that there are three things that will keep you trapped: an unwillingness to change, and your ATM and credit cards.  These cards represent instant gratification, making it too easy to spend your money.  In order to achieve the goals laid out in the book, you should make spending difficult and uncomfortable.

The argument is that ATM and credit cards take the pain out of spending.  You don’t focus on the amount spent if you’re not counting out the cash.  Online banking and automatic payments distance you even more from bill paying, and you may be charged for the convenience.

The authors offer a few suggestions for Saving and Spending in the Twenty-First Century:

1. Melt Your Plastic - Remove all credit cards from your wallet, and replace them with a charge card for emergencies.  Consolidate your debt on a low interest credit card, and put the card away.
2. Bank with People - Remove the ATM card from your wallet also, and go to the bank once a week for cash.  Withdraw the cash by writing yourself a check.  Don’t spend any more than you’ve withdrawn.
3. Practice Cognitive Spending - Keep track of where every dollar is spent on an index card, then categorize your expenses each week.  This will get you to think about how you spend your money.
4. Buy Your Second Home First - The real estate boom was an anomaly traceable to the baby boom generation driving up the prices for a limited number of homes.  Don’t practice serial home ownership, but save for your dream home.
5. Avoid “Everest” Buying - Don’t buy something “because it’s there.”  Buy things only when you need them, not when you want them.
6. Ignore the New - Don’t buy the latest gadget, but wait forsomething that answers a true need.
7. Repair Before You Replace - Retailers profit more on new things than repairing old things, so focus on repairing what you have.
8. Pay Yourself First - Put away what you can in your 401K, and do it automatically.

My Take:

1. For people that have no self-control, this is the best advice.  However, if you’re responsible, you can use credit cards to your advantage, such as rewards or zero-interest arbitrage, provided you pay off the balance each month.
2. I’m disciplined enough that I don’t abuse my ATM card.  I stick to my weekly budget.  I rarely go to the bank.
3. I track most large expenses, but our walking-around money doesn’t get analyzed.  As long as we stay under our weekly allowance I’m happy.
4. Well, we’re living in our first home, and probably will for the near future.  We bought the home in part for the tax advantages, and have added on to it over time, paying cash for the improvements.  We’ve also paid off our mortgage.
5. I use a cooling-off period to counteract impulse buys.  Can’t argue with that one.
6. Or that one, either.
7. I repair rather than replace if it makes sense.  I’m not upgrading an old computer if I can buy a new one for the same price as the repair.
8. We do this.  The key is to automate it.  Pretend you didn’t get that raise, and put that away, too.

In Part 3 of my review of Die Broke, we’ll examine the third step, called Don’t Retire.

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