By Jan Lindsey

 

Those who have been forced into bankruptcy during the recession that began in December 2007 have, for the most

part, no choice but to run their households on a cash basis.

 

Most likely they can no longer draw on their old credit, and any new credit would carry such a high interest rate as to make it unaffordable. It is a lesson not lost on many folks who still have income and a balanced budget.

 

“It’s going to make an indelible impression on them, similar to the impression the Great Depression made on the older generation,” says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies. Those who lived through the Depression “were willing to wait until they had the money to buy something, and for the several generations since then (it) has been just the opposite."

 

Life can be very different when everything is done in cash.

 

“It does require a change in lifestyle to be able to do this," Jones said. “It is easier in this country, now, to pay with a credit card than in cash."

 

So what if bankruptcy has stripped you of access to reasonably priced credit?

 

"The first thing a person should do is take a full stock of their situation and have a full budget and spending plan prepared," Jones said.

 

There’s a difference between the two. A budget covers basic household expenses, including things like car insurance. A spending plan covers the extras, such as vacations.

 

It is not always easy to get a grip on how your money flows, but you can begin figuring out your basic expenses by gathering up all your records from the last year and combing through them for essential expenses. Add them up and you have your budget. The rest was discretionary spending.

 

If you find this exercise overwhelming, try talking to a certified credit counselor. Perhaps best known for assisting those in trouble with debt, they are also skilled in budget development and are available to teach a crash course on money management, Jones said.  The consultation will be free or carry a very small fee.   

 

As tough as it is to change to switch to cash when you are backed into a corner by bankruptcy, it may be even tougher when you are undertaking the conversion voluntarily.

 

Not only do you have to adjust your thinking and attitudes, just like the person who’s been through a bankruptcy, but you can expect to have to increase your expenses until you have finished the conversion. And, to top it off, you still have credit available to tempt you back into old habits.

 

About that increase in expenses: If you have been charging $400 a month in restaurant meals and making a $200 payment on your credit card, you have been building a deficit each month. To move to a cash economy, you will need to pay that $400 a month restaurant bill in cash and still make the $200 credit card payment.  Or you can cut down on dining out.

 

Either way, you will be making this transition slowly. Unless you have a lot of cash lying around and can simply retire your debt in one or two blows, it will be a long, drawn out process.

 

Here too, figuring out a budget and spending plan is essential.

“What you do with spendable cash is extremely important,” Jones said.

 

 If you use it to further reduce your debt payments you will accelerate your progress. If you use it to have flames painted on your truck fenders, you will slow your progress.

 

And Jones suggests talking to the children about the difference between need and want – a concept even some adults have trouble with, Jones said. Most children spend money – perhaps on text messaging, or make financial decisions – perhaps on what brand of shoes they want.

 

“We find children are very understanding and make a contribution in that regard,” he said. “Children really do pitch in and help the family when they understand.”

 

Once you have gotten rid of your credit card debt, and even your car loans, the money you were using to pay them off can go into savings.

 

If you pay off everything except your mortgage, build your cash savings and work on a cash-only basis day to day, it will make a huge difference in your life, Jones said with enthusiasm.

 

With less going out, you can live with less coming in. which means a layoff or an extended illness will be less devastating.

Just think of the amount of worry it will wipe out.

 

Having debt is not inherently bad, if you can pay it off quickly and get it at a reasonable interest rate, Jones said.

 

But, he points out that a $10,000 credit card bill at 18 percent will take 40 years to pay off if you make only the ever-decreasing 2 percent minimum payment each month. That kind of debt management makes no sense, he said.

 

And the days when someone with $35,000 a year in income is extended $50,000 in credit cards are about to end, Jones said.

 

New laws will go into effect next year to protect credit card holders. But credit card companies stand to lose revenue with the change and Jones said they are already moving to raise interest rates and reduce the amount of credit they extend to people. Credit is going to get a lot harder to get and a lot more expensive to have.

 

If you do not have any debt you will build no credit history, which will make credit more expensive – make the interest rate higher – if you ever do need credit, say, to buy a home.

 

There are two ways to build a good credit history, Jones said: Making payments of at least the minimum due on time each and every month, and paying off the balance in full each month.

 

People working on a cash basis can still carry a credit card so they are not walking around with pockets full of money, but the card should be used for budgeted items – say, gas for the car – and paid in full each month.