Control Spending by Using Cash

Nowadays, most people prefer their debit or credit cards for daily purchases either because they find it more convenient or because they feel more secure not to carry cash around. Some also believe that it is not easy to record cash expenses as opposed to credit or debit card expenses. It is also the fact that some cards offer extra rewards and all it takes to obtain a new line of credit is simply filling out an application form that arrives in the mailbox.

However, if you are striving to stay within your budget, yet you are spending more money than you should, it might be smart to start using cash for daily purchases. Because, in spite of its convenience, plastic money does not help you stay within your budget. In contrast, it makes spending much easier and can exponentially increase your financial liabilities.

Why using cash in the first place

By using cash you can control your finances. The reason is that you know immediately how much you spend for your purchases and how much you have left. As the most recent credit crisis has proved, credit card debt builds up exponentially and rates are overpriced. Yet, with cash you can keep track of the true value of your money.

With cash there are no fees involved. There are no late or hidden fees or over-the-limit charges. There are no billing mistakes or overcharges on your bank account. Consequently, there is no risk of damaging or ruining your credit record because there is no credit involved, but most importantly, you don't bear the risk of going into debt.

Cash is accepted everywhere. Have you ever seen a sign "cash accepted" as you see signs for several credit cards? Of course not, because you can pay in cash everywhere. Moreover, you are very likely to get discounts for paying in cash and save even more money.

On the contrary, with a debit or a credit card you cannot know exactly how much you spend before you receive your monthly statement because of the fees involved in every transaction. Besides, by charging small amounts of money to your credit card it makes it more likely to lose track of your finances and receive a fat credit card bill at the end of the month. Without realizing it, small expenses do add to your credit card bill.

How to use cash effectively

1. Have a certain amount of money in your wallet

Take a look at your checkbook to see how much money you have spent over the last weeks on groceries, gas, lunches out etc. and have this certain amount of money in your wallet. By using your credit or debit card you had no clue how much money you were spending until either balancing your checkbook or receiving your credit card statement.

For instance, if you typically spend $450 a month on your debit or credit card and you aim at spending 20% less this week than last week, do the following; divide $300 by 4 and multiply by 80%. This will give you $90. This is the amount you should spend this week. This amount represents the amount of money you can spend on routine expenses according to your budget.

At the end of the week, there are two scenarios: the best case scenario is that you have some cash left to use as you like; the worst case scenario is that you have no money left and, therefore, you cannot spend more. However, if at the end of the week you have $5 left, you can even start saving. $5 per week makes $20 per month and $240 per year.

2. Cut on unnecessary spending

Keep your grocery list short and avoid shopping at convenience stores. You may not realize it but, because convenience stores do not buy large quantities of items they charge you a lot more for the same items you can find in your local grocery chain. Therefore, if you have only cash in your wallet and you avoid convenience stores, you can save a lot of money annually.

3. Classify your expenses using the envelope system

Using the envelope system for managing your cash is one of the best systems currently available for money management. Basically what you do is deciding on your cash categories and classifying them into areas of spending: groceries, gas, utilities, children etc. In that way, you are able to better monitor and control them. By creating an envelope for each category, you can allocate the proper amount of cash every week or month, write a description and keep a balance. Soon, you will spend only when you have to paying pay for your purchases solely out of the allotted envelope. In doing so, you will keep your expenses within your budget.

In conclusion, by using cash you can monitor and control your spending habits. By using the money you can afford to spend, you avoid extra fees on your credit card and you can keep track of every purchase. At the end of the day, you have a perfect idea of your financial situation.