Are cash-only budget systems a good idea?

What is a cash-only budget system? As the name implies, this kind of system involves using only cash for your spending.

Older generations may remember when this was the norm, but today, using only cash for your spending may sound like an out-of-the-box idea, since most purchases are made using credit or debit cards.

Why would you want to change to a cash-only budget system in the first place? If you often overspend, it may be time to change your spending habits. Using a cash-only budget system is a great way of keeping your spending under control so you can work toward a brighter financial future. However, first you’ll need to understand how a cash-only budget system works, what the advantages are and what kind of disadvantages to be aware of. Once you know what is involved, and you are aware of the pros and cons, you can decide if a cash-only budget system is right for you.

How does a cash-only budget system work?

According to the rules of a cash-only budget system, you are not allowed to use credit cards, debit cards or checks. The only thing you are allowed to pay with is cold hard cash. Work out how much money you need to spend in the coming month, or week, and withdraw the amount in cash from your account. The amount you withdraw is all you are allowed to spend.

The idea behind this system is that it motivates you to stick to the budget you have set, when you may have previously been tempted to put a purchase you couldn’t afford on a credit card. This is easy to do when you start to run out of money at the end of the month. Psychologically, a cash-only system may make you more aware of the physical amount of money you are spending and are less tempted to dig in further to your budget.

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The best way of using a cash-only budget system is to pair it with the envelope budgeting system. This means you have separate envelopes for each of your budget’s categories. These categories can include expenses like:

  • Rent.
  • Utility bills.
  • Miscellaneous bills.
  • Food.
  • Fuel.
  • Clothing.
  • Recreation.

Once you have spent money from those categories, make sure you obtain receipts. Put the receipts into the corresponding envelopes. This is so you can see what you have spent your money on at the end of the month.

You may have some payments you cannot easily pay by cash. This is generally true of mortgage payments, rent payments and student loans. Excluding these items is acceptable, as the alternative is to set up cash deposits through the mail, which are risky and take significantly longer to process, which could lead to late fees.

When you start to pick categories for your spending, look at which ones you are continually overspending on. For instance, this could be entertainment, groceries or clothing. Put aside an amount of money you can afford to spend for each of these categories in your budget.

If you find yourself running out of money for one or several categories, you might end up wanting to put a purchase on a card. When this happens, resist the urge. If you find you cannot control your temptation to use a card, then you need to leave it at home when you go out. If you find you succumb to online purchase with your card, consider storing your card someplace hard to reach, or even cancelling your card entirely.

What are the pros of a cash-only budget system?

There are many advantages of using a cash-only budget system. In addition to greater control over your spending, other pros of a cash-only budget system include the following:

  • It helps you accelerate paying off your debt. If you have a high amount of debt, the cash-only budget system helps you stop spending more than you can afford and put cash aside each month to pay off your debt in an organized way.
  • It helps you avoid shopping on impulse. If you constantly impulsively buy, having a limited amount of money puts an end to your impulses.
  • There are no extra expenses. By using cash only, you do not have to pay additional fees, such as credit card fees and interest rates.
  • It can help you become more resourceful. By sticking to a cash-only budget system, you can learn new ways of saving your cash. Having to watch every cent you spend can mean you become prone to wasting less money.

What are the cons of a cash-only budget system?

A cash-only budget system may sound like a great idea, and it certainly can be. However, no budgeting system is completely perfect, and the cash-only system has its drawbacks.

The cash-only system is not necessarily the best choice of budgeting for everyone. If you are unorganized, you could lose track of your envelope system (finance-tracking apps can help with this). If you forget to put receipts into the envelopes after spending, the whole system could collapse and you end up losing important financial information.

You may also be tempted to borrow from one envelope category to pay for another category. If you are super organized and on top of your cash-only system, there is no reason why you cannot do this. Just make sure you have funds left over in one category at the end of the month and you know there is nothing more to pay out. However, if you are not organized, it can be easy to lose track of where the money is coming from, at which point your envelope system ends in disaster.

Other disadvantages of using a cash-only budget system include the following:

  • You cannot earn points or cash back on your cards.
  • Your credit score may drop.
  • Having to visit your bank once a month, or once a week, to withdraw the set amount of cash may not always be feasible.
  • If you lose your cash, it is gone for good.
  • You are not able to make online purchases.

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