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What is the best way to handle your daily transactions

Our personal finance columnist offers some sage advice

UAE Dirhams
Image Credit: Supplied
In your wallet, you should carry enough money for the things you expect to buy with cash that day.

There’s something satisfying about a thick wad of cash. However, carrying around large bills all the time is impractical, so what’s the best way to pay? For one year now, it has been illegal for businesses in the UAE to charge fees or commissions for using plastic, so there are no longer additional costs to transactions.

Credit cards are common but much maligned. Although it is true that credit balances can be extremely expensive if not paid off swiftly, when used carefully, your flexible friend offers the most cost-effective and secure way to make any purchase. Credit card providers today offer high levels of protection against unauthorised use and have procedures in place to avert crime and prevent you from losing money.

If you pay off your balance in full each month and have no fixed monthly or annual fees, your credit card is actually better than cash. Furthermore, simply having a good, paid line of credit will improve your chances of being granted a loan or mortgage in the future, and also reduce the interest rate you will be asked to pay on any further borrowing.

Because checking into a hotel, hiring a car or booking a holiday will often demand a credit card number in place of a deposit, some might argue that a credit card is essential in modern business, if not everyday life in general.

Often seen as the younger sibling of the 
credit card, the debit card is a little more than a mobile bank account. An added benefit over cash is that you will have a complete record of purchases on your monthly statement and so, 
can easily document your spending and manage your budget.

While it is undoubtedly more convenient to carry one piece of plastic than bundles of paper notes, particularly when travelling, debit cards still leave their user particularly susceptible to theft. The daily transaction cap is normally a small value in order to prevent criminal losses, but this can also make large purchases very difficult.

Cheques operate in the grey area between cash and credit. Arguably the most simple and versatile way to pay large sums, their susceptibility to fraud has led to chequebooks being all but extinct in most parts of the world.

Finally, we have cash. The oldest technology. It may seem counter-intuitive that cash is the most expensive way to pay for anything. Apart from being cumbersome, time-consuming (for both the vendor and customer), perishable and having no protection at all in case of theft, cash costs you money at every stage.

Holding too much cash in a current account in order to access it at a moment’s notice guarantees that it will lose value through inflation. As an approximation, 3 per cent of your spending power will be eroded each year. If your account has regular fees or charges then you lose even more.

Exchanging cash for another currency, withdrawing it abroad or even accessing it from a cashpoint can induce additional charges that eat away at your money. Furthermore, cash just disappears! This is no magic trick. Virgin Atlantic estimates that an average of $0.18 (about 70 fils) in lost coins is left behind on its aircraft per customer per flight. Some basic maths will scare frequent flyers into checking their seat next time they leave the plane. Studies have suggested the amount of discarded or loose change just lying around the average household could be $90!

So what is the best course of action? Well, first of all, I believe that cheques should only be used when they are the only method of payment available or accepted. Secondly, don’t carry cash ‘fat.’ Excess cash is a hindrance. Speak to your financial advisor about the appropriate levels of money to have in your wallet and your current account. The rule of thumb for the latter is to keep enough to carry out your regular expenses for three to six months, just in case. If you have more than this amount, a good advisor will help you to make your money more efficient without losing access to it during emergencies. In your wallet or pocket, you should carry enough money for the things you expect to buy with cash that day. A pocket stuffed with large notes is excessive for a short taxi fare and a sandwich.

Carry your debit card if you must, but keep it separate from your credit cards. For large or incidental purchases, use your credit card but be sure to pay it off in full each month. Never make a transaction on credit that you cannot pay off in one go, and you will never suffer horrendous interest rates.

Take independent advice when choosing 
a credit card or dealing with those you already own – bear in mind they are financial products. Bank staff are paid commissions for each 
credit card they provide to a customer, so they have an incentive to steer you towards more expensive structures, which may not be suitable for you.