3 steps back to the sanity of cash

By MP Dunleavey

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the ongoing quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.

What's going to turn things around for you, for me, in the midst of this financial crisis?

Let me tell you the Parable of the Appliances, a true story about love, loss and financial salvation.

It shows what happens when you start to think in cash instead of credit -- the core of the Women in Red philosophy.

Last spring, our oven died (although the cooktop worked) and our dishwasher perished as well. The appliance guy confirmed that they couldn't be repaired, then informed us that the refrigerator was on its last legs, too.

At first, my husband and I took the natural American buy-now, pay-later approach. We didn't think about cost; we would go to Best Buy or Sears and put three new appliances on our credit card. This was an emergency, right?

But the economy was already shaky, and we were scared to owe more money. We made the novel choice to wait -- and pay for the appliances with cash.

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So we sat tight through the summer, doing our dishes by hand. We got the money together in September, and . . . the car died!

We had to rebuild the transmission to the tune of $2,100. And there went the cash for the appliances. Now what?

Credit Brain said: Just buy what you need. That's why you have plastic.

Cash Brain, weak from years of neglect, but still feisty, said: Don't buy anything if you don't have the money!

Then the appliance angels smiled upon us: We heard about someone getting rid of a stove and fridge in good condition, and we bought them both for $300. Cash. We decided we'd do without the dishwasher.

This was not my plan. I had read the Consumer Reports kitchen issue. I knew exactly which new stove, dishwasher and refrigerator I wanted.

But we bought what we could afford. A thud down to earth.

3 steps to your own personal bailout

I'd wager a cushion of credit has been guiding (or misguiding) your own financial decisions, too, and you could use your own personal bailout.

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While many Americans can and do handle borrowed funds responsibly (taking out what they need, repaying what they owe), millions more have slipped into a fantasy world, thanks to credit -- a fantasy that you could buy now and pay later. And that somehow, somewhere, when you least expected it, you'd pay it all back.

Thanks to all that easy money, a fog descended: Credit made us all believe we were richer than we were.

"People got used to thinking about their financial reach in a way that was totally illusory," says Robert Frank, a professor of economics at Cornell University and the author of several books, including "Luxury Fever" and more recently "The Economic Naturalist."

"The idea that you could dip into your home equity every few years and harvest all this cash and go spend it -- that idea took root in the middle class. And it was totally unsustainable," Frank says.

Sound like you? Here's how to bail yourself out.

Step 1: Get out of the fog

Here's a giant reality check question:

If every ounce of credit now available to you, in the form of cards or home equity or whatever, if all of it dried up, what would your life be like?

The fact that that's hard to imagine is a sign of how deeply entrenched credit-think has become.

Studies by behavioral economists show that credit divorces you from the "ouch" of spending actual money -- and thus it not only changes how much you spend (people typically spend more when they use plastic), it also creates fuzzy thinking around your finances.

One study showed that shoppers who paid with plastic didn't remember what they'd spent, whereas those who used cash did. (If you've ever been to a mall, this isn't news.)

Credit creates a fog. Cash will snap you out of it.

Continued: What would Grandma do?

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