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Tim Chen

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4 Reasons We Need Cash

Posted: 05/10/2012 10:10 am

If cash disappeared tomorrow, would you notice? According to some estimates, cash will disappear completely by 2020. With the increasing popularity of electronic money transfers via online and mobile payment services such as Google Wallet, some are predicting that cash, and even credit cards, are permanently on their way out. But even if that does happen, would it really be a benefit to society, as some experts so boldly claim? We don't think so.

There's nothing wrong with electronic transfers, of course. They are easier to trace and, in many ways, they're more convenient and more secure than cash. Moreover, we don't think it's practical or safe for any adult to rely on cash exclusively. Cash is extremely vulnerable to loss or theft, and nearly impossible to trace. However, getting rid of cash altogether could have some serious unintended consequences for society. Cash, while not perfect, is vital for a healthy economic system. Here are four reasons why it's here to stay:

1. Cash is an essential financial literacy teaching tool

If you received an allowance as a child, you already know what we're talking about. When you're saving quarters in a jar, or handing over a crisp $10 bill to buy a new toy, concepts like saving, budgeting and spending are very easy to understand. Without cash, money is merely an abstract concept, or, at most, numbers on a screen. Critics of cash argue that money is an abstract concept anyway. It's a valid point. You are, after all, exchanging paper and metal for goods and services based on some made-up system. However, as any elementary school teacher will tell you, people have to learn with real, permanent objects before they can understand ideas. Financial literacy works the exact same way. Most people won't learn good money management skills without managing "real" money first.

2. Cash is good for small merchants

Don't you love swiping your credit or debit card? It's easy and convenient to pay for things electronically, and assuming you pay all your bills on time, it doesn't cost you anything extra. If you're using a cash-back credit card, you'll probably earn a little extra money, too. However, that's not the case for merchants. In order to accept payment cards or, increasingly, mobile payments, they have to sign up for a payment processing service, and then pay a fee each time they accept a payment. Most merchants charge higher prices to compensate for these fees. When you pay for products in cash, it's more cost effective for them.

3. Cash purchases can save you money

With a little discipline, credit cards and debit cards are great tools for managing money and earning rewards on your everyday purchases. However, they also come with the temptation to overspend. If you're on a tight budget, try making your important purchases in cash. Once you see how much something costs, you may find it easier to prioritize your purchases. Cash can also be helpful when you're trying to bargain, especially at local businesses. Cash saves businesses the hassle (and the expense) of processing a payment card or taking a check to the bank, so they may be more willing to cut you a deal.

4. Cash doesn't require a third-party partnership

Without cash, a corporation will always control your payment transactions. In order to participate in the economic system, everyone will be required to sign up for third-party money management service, whether that's a bank account, a prepaid card, or a mobile payment service like Google Wallet. We're not saying this would be a disaster, but it does take away a basic economic freedom.

Of course, it's not unprecedented for the government to make everyone sign up for a financial service. Almost every state requires licensed drivers to purchase some sort of insurance, and all states require drivers to provide proof of financial responsibility. However, this isn't a fair parallel to mandatory electronic payments. Not being able to drive is extremely inconvenient, especially in parts of the United States that don't have a solid public transportation system. However, not driving doesn't have the same consequences as not being able to participate in our country's economic system.

The future looks bright: electronic payments go mobile

Long story short, electronic payments are here to stay. Mobile payments, the latest offering, are already increasing in popularity. According to Pew Internet surveys, one in three Americans have already used their smartphone for online banking, and 38 percent have used their phone to purchase music, clothing or daily deal coupons. Mobile payments are especially popular in the developing world, and many economists believe they'll become a practical payment option for unbanked population in the United States. However, it's important to keep new payment technologies in perspective. They undoubtedly serve a need, but they won't necessarily replace older payment systems, and they certainly won't replace cash. As Jeff Eisenach of Navigant Economics LLC so eloquently puts it, "Cash -- tangible, hold-it-in-your-hand dollars -- has been around for millennia. It won't go away in a decade."

Tim Chen is the CEO of NerdWallet, an unbiased credit card comparison website that offers a comparison of the best credit cards of 2012.

 

Follow Tim Chen on Twitter: www.twitter.com/nerdwallet

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