Dave Ramsey starts every hour of his radio program with “Cash is king.” Anyone who consumes his content knows that using cash as the primary form of payment is a really, really big deal to the Dave Ramsey financial plan. It’s also been the one of the most significant changes my husband and I have made over the last decade that has resulted in a budget that actually works for our family.
And I in turn have made the use of cash central to what I teach on FrugalLivingNW.com with my Smart Grocery Savings and budgeting course, Master Your Budget, because I know, from experience, that it works.
Many students in my courses really struggle with the transition from swiping their cards for purchases to paying with cash. Some of them fight me tooth and nail.
Why the battle? I think it’s because our culture sells using credit as sophisticated, savvy, and financially smart while using cash is simple, unsafe, and fiscally foolish and we have bought it without much thought.
But honestly, who wins when we use a credit card? Yes, we may get some airline miles or cash back, but who is really profiting from this fundamental shift from using cash (or a tangible method of payment) to credit (or an electronic method of payment)?
The answer is pretty simple.
The credit card companies AND the retailers are the real winners. The credit lenders earn hefty fees from the businesses (who pass along the fees to you and me) and they get the interest that the consumer pays on credit card balances.
And the businesses win because you and I spend more money when we swipe our cards than when we pay for our purchases with cash.
Central to making a budget that actually works is paying for as many things as you possibly can with cash and abandoning the credit card forever and your debit card for at least the first 90 days of living on your cash flow plan.
Here’s why cash such an important component on living on a budget that actually works:
With cash, you can physically see how much money remains, keeping you “on budget.”
You can’t know how much you have left to spend on groceries at any given moment if you’re using your credit or debit card, especially if you’re sharing a household with another adult.
It’s almost impossible to keep track of your spending when it’s electronic. Yes, I know that you can use a fancy app or software spreadsheet, but that takes a bunch of work to set up and maintain. I have yet to find a person who sticks to that sort of a system without falling behind and keeps their partner totally in the loop.
There’s something about seeing physically how much money I have left in my grocery envelope that keeps me on track.
You can’t overspend with cash.
It’s physically impossible. There’s no more “Whoops! I spent more than the amount we planned on restaurants this month” because you can’t spend cash you don’t physically have in your Restaurant envelope.
Cash simplifies your money management.
You no longer need fancy software that requires access to your bank accounts, sends you reports, and requires analyzing to keep your spending on track. You just edit your monthly spreadsheet (or budgeting worksheet), withdraw the exact amount of cash, fund your envelopes and then live your life. This money management system takes our family about 30 minutes a month total.
You’re paying for this month’s expenses with this month’s paycheck.
When you use your credit card to pay for your every day expenses, even if you pay the bill in full every month, you’re spending next month’s paycheck today. You’re always a month behind. You’re assuming that the money will be there next month to pay for the credit card bill when it comes.
Doesn’t that seem foolish? None of us can see into the future and guarantee that our income will be there, so why would you spend as if it’s going to be there? Any number of things can happen — death, loss of job, injury, natural disaster — that could effect your paycheck. And in the middle of a catastrophic event is the worst time to be figuring out how you’re going to pay a $2000 credit card bill to avoid a 27% interest payment.
You spend LESS when you’re spending cash.
And spending less money gives you more flexibility in your budget. If you can spend $50 less on this month’s groceries, you have $50 to go into another category, like funding your emergency fund or paying down debt or saving for a replacement car.
Yes, that means even you. Studies clearly show that we spend more money when we’re paying with a debit card, credit card, or gift card than we do when we’re paying with actual bills.
And please DO NOT pretend that you’re the exception. You’re not special. You’re just like every single human on earth. You’re NOT smarter than the credit card companies who spend MILLIONS of dollars (okay, probably billions) on advertising to convince you that you are financially savvy if you use their product.
One study found that subjects paid more when they were instructed to use a credit card rather than cash. In fact, they found that they were willing to spend up to 100% more with plastic. McDonald’s reports that its average ticket is $7 when people use their credit cards versus $4.50 when they use cash.
This is an interesting quote from MoneyCrashers.com:
“Credit card companies have convinced very smart people that they can get something for nothing. There are tons of you out there that are very savvy, intelligent consumers and you are grinning every time you get $3 cash back on a $100 purchase that you won’t pay interest on. But, could that $100 purchase have been $80 if you had brought cash? Now you’ve spent $20 more in order to receive $3 cash back.”
My husband and I, along with every single one of our friends who have made the transition to a cash-only system, have found this to be true.
We all believed that we were responsible spenders and were just using our credit cards to take advantage of the perks, like cash back or airline miles. We were even paying the cards off every month, so no interest paid. Once we moved to only spending cash we were all FLOORED by how much less money we were spending.
One Master Your Budget student said that his family ended up spending $200 less the very first month they lived on a written cash flow plan along with using cash than they did the previous month using their debit card for purchases.
So, why do you spend less when you use cash?
Watching cash leave your wallet is immediately painful and it forces you to more carefully weigh your purchase. Do I really need this now? Can I find it cheaper somewhere else? Can I put off this purchase?
The consequence, or pain, from a credit card purchase comes much further down the road, like 30 days or more, and is often past the return period or you’ve already used the product. Now you’re stuck.
Why does it work that way? Because when you’ve already told your money where to go and have all your cash sitting in different envelopes, you have to THINK about which envelope you’re going to use to make a purchase.
When you see something at the store, you think about which envelope it would come out of, how much money you have in that envelope, and the other things you might need to buy with that money. It slows your brain down and forces you to think logically and you end up making a better decision. And it’s a decision you are happy with.
You don’t feel deprived. You feel free because you are now able to spend money on the things you want to spend money on, rather than impulsively wasting money on things you don’t actually want or need.
Using cash allows for room to negotiate, mostly because the business isn’t absorbing the credit card transaction costs. And cash is immediate and incredibly attractive for the seller which encourages them to accept a lower offer.
You bypass the subtle marketing ploys used by credit card companies and businesses that encourage you to spend more. There’s nothing that is encouraging you to spend more money, like “I’ll get 2% cash back” or “I’m saving an additional 30% when I use my card” or “We’ll get more airline miles.”
When you use cash, you’re evaluation process is simply, “Do I have enough money to buy this now?”
As my friend says,
People like to feel smart about money and marketers have figured out how to help people feel smart while getting them to spend money they don’t have. It’s called “on sale” and “clearance.” No one is ripping Old Navy off when they use their credit card and get 30% off. Old Navy knows that people spend 30% more when they use their credit card. It’s a great way for Old Navy to get rid of stuff that’s about to be out of season and make people feel like they are geniuses and got the deal of the century.
You’re more likely to alter your spending after you’ve made a larger purchase because you know you need to adjust things to make sure you have enough money later in the month. This keeps your spending in check and helps to avoid going over budget.
For instance, when I go on a big Costco run at the beginning of the month and spend $300 with cash, I am conscious that I only have $500 left in the Food envelope and I adjust my spending. I don’t have that same instant feedback when I’m using my debit or credit card.
Transitioning to using cash for your everyday purchases is a BIG one. It requires a bunch of work from all parties involved and it can be a rough couple of months as you make the switch. But I promise you that if you do the work and STICK TO THE PLAN (yes, I’m yelling that) you will solve almost all of your financial problems.
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