If you are having a hard time sticking to your budget, you may find it beneficial to switch to a cash-only system. A cash-only budget can help you stay on track because of the psychological impact of using cash as opposed to a debit or credit card to pay for something—you realize how much it really costs.
Switching to a cash-only budget is a move recommended by many financial experts. Here's how to make the change.
Choose the Categories to Switch to Cash
The first step in switching to cash is to determine the budget categories that will actually work as cash-only. You may only be able to make certain payments, such as a mortgage or your student loan, online or at least by check.
But for those categories where you are able to use cash, determine the ones in which you are consistently overspending. This may be groceries, entertainment, eating out, or clothing. Everyone has their problem areas when it comes to overspending. Once you know what yours are, you can switch them over to cash in order to curb your spending.
Stop Using Your Debit Card for These Categories
The next step is to stop using your debit card, credit card, or even your checkbook to pay for anything in those categories—no matter what.
If you are not able to do that, you may consider leaving your debit card at home for a few weeks and disconnecting any automatic payments you can access online, such as those through Paypal. This will help you break bad financial habits.
Create a System to Separate Cash and Track Receipts
When using a cash-based budget, you need a way to track your cash purchases and also keep the cash for different categories of your budget separate.
A simple way to do this is to use the envelope system. At the beginning of the month, you stash your budgeted amount of cash into envelopes labeled with each budget category. Once the cash runs out for a specific envelope, you're done spending in that category for the month. You should also put your receipts into those envelopes so you can review where you spent the money at the end of the month. Alternatively, you can keep a running ledger as you spend the money.
Set Up a Time to Take Out the Cash
In order to be successful at a cash-only budget, you need to actually get the cash and separate it into categories. This may mean a trip to the bank or the ATM on payday or another set day.
Note
You can request that the teller give you the money in the correct denominations, such as all $20s or $10s, so you can easily separate the money into the correct categories.
Plan Ahead When You Go Shopping
This type of budget requires that you learn to plan ahead. Generally, it’s not a good idea to carry huge amounts of cash around with you all of the time. So, for example, you leave your grocery money at homeunless you are going to the grocery store, and take only $20 to work if you plan on eating out that day. You get the idea. Bonus: This will also help to cut back on your impulse purchases.
Stick to Your Limits
As with any budget, this requires the self-discipline to avoid spending all the money in one category too quickly. This also means that you do not use your debit card or your credit card to cover shortfalls. You can switch money between envelopes if you find that you have overspent on your grocery budget halfway through the month. But you will have to cut spending in other areas.
Adjust Your Categories
You should adjust your budget once you have followed it for a few months. You may find that you don’t have enough planned for groceries but you always have money left over in the gas category, or you that you may need to sacrifice some of your entertainment money so that you can pay for meals.
Other Cash-Only Budgeting Tips
- Using cash may not always seem very convenient, but it is a great way to stop yourself from overspending. It makes you consciously consider your purchasing choices. This type of budget can also help you to stop using your credit cards.
- To carry your cash, consider using an expanding pocket file that fits into a purse, and keep it separated according to budget categories. However, this does mean carrying all of your cash, so it might not be the best option if that makes you nervous. Instead, you might try only carrying the cash you need for the week.
- If you are married, budgeting as a couple can be very difficult. A cash budget can help make budgeting easier. You can divide the money between your individual categories, and leave the grocery money or entertainment money where you can both access it if you need it. Just be sure you're checking in throughout the month so neither person is surprised when one envelope is empty.
Updated by Rachel Morgan Cautero.
FAQs
Cash makes it easier to budget and stick to it
When you pay with the cash you've budgeted for purchases, it's easier to track exactly how you're spending your money. It's also an eye-opener and keeps you in reality as to how much cash is going out vs. coming in from week to week or month to month.
How to switch to a cash only budget? ›
5 tips for a cash-only budget:
- Make a cash budget.
- Use envelopes to manage your money.
- Hide your bank and credit cards.
- Plan your budget ahead of time and bring only what you need.
- Adjust your cash budget.
Solving a cash budget question involves estimating and planning for the cash inflows and outflows of a business over a specific period. Here's a general process you can follow: List Cash Inflows: Identify all sources of cash inflows. This may include sales revenue, loans, investments, etc.
What is cash only budgeting? ›
Whether going to the grocery store or the mall, leave your credit cards at home and only take the amount you have budgeted for yourself. You are less likely to go over budget if the only money you have to spend is the cash on hand (or the small amount of money in your checking account/virtual envelope).
Why is cash better than cashless? ›
When people are handling less cash, bank robberies, burglaries and corruption drop. Because cash is essentially untraceable, it's a useful tool for criminals, where digital currency is less easy to exploit, and can be shut down quickly if it falls into the wrong hands.
What are 3 advantages of cash budget? ›
Preparing a cash budget has a number of benefits:
- It can identify any times where there may be a shortage of cash. ...
- It can help to regulate expenses. ...
- It will clearly show where a business has more cash than expected ( surplus.
With credit and debit card spending, it's often easy to lose track of how much you've spent, accumulate debt and derail your budget. Cash, on the other hand, comes with built-in guardrails — once it runs out, you can't spend any more.
Is it better to only use cash? ›
Using only cash has a big advantage, as Manktelow-Pimm pointed out: “When you use cash, you don't have to worry about interest charges on credit cards or loans. This can save you a lot of money in the long run.”
Do you spend less money with cash? ›
Paying for everything with cash could help you spend less, because consumers are normally more willing to spend when using credit cards. You miss out on the chance to earn rewards, such as cash back or points.
What are the disadvantages of a cash budget? ›
One of the main drawbacks of using a cash-only budgeting system is that it can be inconvenient and risky. You have to withdraw cash frequently, which may incur fees or limit your access to your money. You also have to carry cash around, which can make you vulnerable to theft or loss.
On the other hand, cash utilisation includes salary, rent, mail, telephone, and entertainment costs, payments to creditors and the purchase price of assets are all cash budget examples.
What is an example of cash budget method? ›
For example, if the company needed to buy a $60,000 non-current asset during the first three months it would ensure that it could be paid for in March and not February. The cash budget can also be used to help prepare the budgeted statement of financial position, part of the company's master budget.
What does the cash budget deal with? ›
A cash budget is a financial tool that outlines a company's expected cash inflows and outflows over a specific period. It helps businesses manage their liquidity by forecasting the money available to meet their financial obligations. 2. What are the key components of a cash budget?
What does the cash budget start with? ›
The cash budget starts with the beginning cash balance to which is added the cash inflows to get cash available. Cash outflows for the period are then subtracted to calculate the cash balance before financing. If this balance is below the company's required balance, the financing section shows the borrowings needed.
What is the meaning of cash only? ›
used to describe a payment that you can only make with cash, and not by cheque, bank card, etc.: Tickets to the concert were cash-only. FINANCE.
Is cash better for budgeting? ›
While paying in cash will most likely help you save money and make fewer impulse purchases, paying in credit cards does offer an enviable convenience and allow you to afford larger items—given you monitor your spending carefully and make sure to pay off your balance each month.
What are the advantages of using cash? ›
There are certain advantages to using cash, such as:
- you only spend what you have.
- you don't pay interest or fees.
- you may get a discount since merchants don't have to pay a fee to accept cash transactions.
- it may be faster and easier than other payment methods.
- it doesn't require equipment, internet or electricity.
Cash allows you to keep closer control of your spending, for example by preventing you from overspending. It's fast. Banknotes and coins settle a payment instantly. It's secure.
Why is it better to carry cash? ›
Cash allows you to purchase essential items like food, water, and medical supplies when electronic means of payment are unavailable. Cash can also serve as a backup in instances of identity theft or fraud, offering an alternative means of payment while resolving any issues that may arise.
