No credit card, no 401(k), no problem?

By Walter Updegrave, senior editor


(Money Magazine) -- My husband and I have never had a credit card during the 37 years we have been married. We pay cash up front for everything. We do not have or want 401(k) accounts and the like. We keep our money in savings accounts and CDs.

We don't have cell phones. Our only monthly bills are for utilities and satellite TV. Everything we have is paid for. I think we are doing great. Would you agree? -- Diane L., Buffalo, New York.

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Hey, if you're happy, then I'm happy for you, too. That's not to say I necessarily agree with your approach. In fact, I wouldn't recommend that others follow your lead in many of the things you do.

By foregoing 401(k)s or IRA accounts, for example, you are likely giving up substantial tax benefits that, as I've noted previously, can boost your rate of return and bulk up your nest egg.

Even aside from a 401(k)'s tax bennies, automatic payroll deductions make 401(k)s and similar workplace plans a convenient way to save. So I don't see the point of not taking advantage of such plans if you have a choice.

I also don't think someone is doing himself a big favor by keeping all his savings (aside from an emergency fund and short-term cash needs) in savings accounts and CDs.

I say that not just because savings accounts and the like pay such paltry rates of return these days. But had you invested in a conservative mix of stocks and bonds rather than huddling in bank accounts for decades, you likely could have earned a considerably higher return (and had more money for retirement) without subjecting yourself to undue risk.

As for going without credit cards, yes, I know it's possible to live without plastic and that there are a number of upsides to doing so. (For details, check out this piece by my MONEY colleague Donna Rosato.)

But in today's world I think doing without credit cards altogether is a bit of an extreme reaction. A more reasoned approach, to my mind, would be to choose a credit card that offerslow costs or other benefits and then use it judiciously.

That way, you get the convenience a card can provide while minimizing the downsides. That said, it seems that you and your husband have managed to combine your lives and your finances in a way that works for you -- and that avoids the problems we've seen all too often in recent years that come from piling on debt and investing too aggressively.

And even though I don't recommend that others totally adopt your spartan attitude to personal finance, I still think people can draw some valuable lessons from your approach. One is the value of keeping things simple.

Granted, I think you've gone too far down the road of simplicity by keeping all your money in savings accounts and CDs. But I believe more investors would be better off if they adhered to the "less is more" school of investing.

To maintain a well-rounded portfolio, people don't need to load up on aluminum ETFs, leveraged mutual funds or any of the other dozens of niche investments Wall Street firms are peddling.

As index fund pioneer John Bogle told me in a recent interview, a very simple mix of low-cost stock and bond funds is all you need to participate in the long-term gains the financial markets have to offer.

Similarly, I don't think people need to completely shun plastic or other debt. (After all, few of us could buy a house if we had to pay cash -- which makes me wonder, did you?)

But if you're going to use credit cards or borrow in other ways, it's important that you control your debt rather than letting it control you. That requires discipline and restraint.

As a practical matter, that may mean not whipping out the old credit card to buy something you don't really need just because you can, or deciding to forego borrowing even if some lender is more than willing to extend you credit.

In the wake of the financial crisis I think people have become more aware of the responsibilities and downsides of taking on debt. We'll have to see if they remain as chastened as the recovery takes hold.

Of course, all of the issues you've raised -- where we choose to put our savings, which investments we're comfortable with, how much debt we're willing to take on take, how much of our money we spend on cell phones (or satellite TV) --involve subjective judgments.

And every person must make a choice that's right for him or her (or them in the case of a couple). When making these choices, however, it's important to think hard about the true pros and cons of the alternatives.

For example, a savings account-and-CDs investing strategy may seem the obvious choice for someone not comfortable with risk. But sticking with such low-return investments for an entire career could leave someone with a nest egg that that's too small to see him or her through retirement.

So avoiding short-term investing risk could expose you to another risk later in life. In the case of credit cards and debt, a strict hands-off policy certainly relieves you from ever having to shell out bucks in bloated interest charges or worry about dealing with delinquency notices or collection agencies.

But it could also mean doing without experiences you might have enjoyed but didn't because your reach was limited by your savings and cash flow at the time. Ultimately, making choices comes down to accepting trade offs -- less risk for lower return, more security today for a smaller payoff tomorrow, etc.

You seem more than satisfied with the choices and trade offs you and your husband have made. So kudos to you. I hope that your question will spur others to think harder about the choices they make, so they can end up feeling as good about theirs as you do about yours. To top of page

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