Creating a budget to keep spending under control can be one of the most difficult things we have to do when it comes to our finances. Spending money is easy, and thanks to the abundance of ATMs, debit and credit cards we go through money without even thinking twice about it.
The key to keep spending under control can be as simple as taking a step back and get back to basics. Do you remember the days before you had instant access to your bank account via a plastic card? Having access to cash has never been easier, and more importantly that ease of access has virtually eliminated cash for many people. With a debit or ATM card we know all too well how easy it is to make a purchase, it is convenient, there is no doubt about it. The problem is that when we become dependent on using electronic means for spending the value of money can seem diminished. When you stop to grab lunch and swipe your card and see the receipt all you see is $5.23 printed on a piece of paper. You obviously know what $5.23 is worth, but how easy our brain forgets about that last purchase when it is time for a new purchase. The little purchases, regardless of how small add up, but when it is all done electronically we view each new small purchase as just that.
If you find yourself struggling to stay within your budget or always seem to be spending more money than you know you should, it is time to try cash again. I know that with rewards and points everyone loves to earn by using their various cards it is hard to go back to cash which doesn’t earn you any points, but the results can be far more rewarding.
When you have to physically go into your wallet or purse and count out cash to make a purchase it has far more impact than swiping a card. Even if you know you have $1,000 in your checking account and you’re only spending $10 we can all quickly do the math to know what we have. But, how many of you would carry $1,000 in your wallet? Clearly that money is not all earmarked for spending, but we generally make purchases based on knowing how much money we have and making sure we spend within that limit.
So for a week, try an experiment by switching to cash only. We all know what we need to buy throughout a week. We have regular purchases such as lunch, some grocery shopping, gasoline and maybe the occasional stop for a coffee in the morning. Then with this basic budget in mind, come Monday make sure that you have cash in your wallet or purse to cover these expenses. (Obviously if it totals a few hundred you may not want to carry it all at one time) Then be sure that everything you buy in your daily routine is done with cash. It sounds simple, right? It is a simple premise, and while paying with cash may be inconvenient at times, wait until the week draws to a close. When you are stopping to pick up dinner for the whole family on the way home and you are thumbing through your bills only to find $8.00 you soon realize there is a problem.
The effects don’t have to be so drastic though. Simply having a visual and physical reminder of how much money you have and how much purchases cost can have a significant impact on your spending habits. When you switch back to cash you begin to again realize the true value of money which by instinct will create better spending habits. I personally do this for my lunches during the week and it has made a big difference. The first thing I did was determine how much I was spending on lunch during the week via my Brown Bag Experiment. Then using a set dollar amount per week to use for buying lunch I start the week with X dollars in my wallet. When I buy lunch it is with cash, and sometimes if I don’t spend wisely I end up eating an apple for lunch on Friday. But by using cash only I’m forced to stick to my budget, at least with my lunch spending.
So if you are always having trouble finding ways to meet your spending limits I suggest you try a week or two using cash only. For many generations all we had was cash and people manged just fine. By going back to basics you may find that it isn’t so hard to keep spending within your budget after all.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
You're all too correct about the psychological impact associated with physically handing over cash. What's going to be more interesting are the mobile payments; with a flip of one's phone, the transaction is complete -- think about it...using the phone for calls doesn't have a pang of money remorse, so it will be even easier to spend a lot of money without really realizing it.
Good tip. I have been doing this for awhile, but on a monthly basis. I buy all of the household groceries on a free miles card, and then I withdraw $200 in cash (one withdrawal, otherwise you can lose a bit of money thru atm fees.). That $200 goes for eating out, whatever i need to spend on lunch (I brownbag it most days), gas (I have a 6 mile commute, so not a lot spent there), and anything else I want to buy for myself (coffee, magazines, etc). When the money is gone, I find other ways to pay for what I need. Sometimes I allow myself a bit of overflow to my credit card, like if i need to buy something that's a big chunk of the budget, like a gift or something, but I force myself to pay that in full at the end of the month if I do that. Most months I break about even or go over by a little. Some months I even have a surplus.
Obviously, the priority goes towards the essentials with this money (ie gas and the couple mandatory lunches i eat in restaurants for work purposes), but overall I find it works well for me, and paying in cash is usually way more convenient anyway.