Advantages of Cash Budgeting
The first year after my wife and I were married was a financial disaster. We were living paycheck to paycheck and not seeing a solution in sight. A friend and mentor suggested we try living on a cash budget. He could tell by the confused look on my face that I had no idea what he meant by a
Cash Budget.
He went on to explain the principle behind a cash budget is that you give yourself an allotted amount of cash to spend during the course of a week. The idea is that at the beginning of the week you withdraw a set amount of cash from the ATM. Throughout the course of the week you spend the cash. When the money is gone, the money is gone and you aren’t able to replenish the funds until the first of the week rolls back around.
My wife and I thought this sounded like a good ideas and committed to giving the Cash Budget for two months. We started the next Monday by pulling out enough cash (so we thought) to last until the end of the weekend. As the first few days passed, we spent the money on groceries, gas, and other various expenses. As Thursday morning broke, we realized that we had run out of money. “Now what do we do,” we thought.
Advantages of Cash Budgeting cont.
Only one week previously we would have simply used our credit card or ran to the ATM to get more money, but we had made a commitment that we were going to make the Cash Budget for two weeks. So we ate out of the cupboard over the weekend. When Monday came we pulled out the same allotted amount of money and were much more aware of where we spent the cash. When the weekend came, we had $30 left over so we decided to go out to a cheap dinner.
We continued on the cash budget for another two months. On the weekends when we had enough cash left over we would go to dinner or a movie. When the weekend came that we didn’t have much money left over, we would rent a movie. After two months of living on the Cash Budget we were amazed when we checked our checking account balance and found several hundred dollars lying in the bottom of the account. This several hundred dollars would have normally evaporated through needless spending.
We reported to my mentor our results of the Cash Budget. He said now that we realized how much living on cash help us that another integral part is the allowance. He suggested that we add an allowance for both my wife and I. The allowance makes living on a tight budget more palatable. The allowance is guilt-free money. Each person is free to spend their allowance however they see fit. They can spend it frivolously and not have to worry about being accountable to their spouse for it.
Through the years as a personal finance coach I have realized that the Cash Budget is a helpful tool for multiple reasons. First, it is very simple. When the money is gone you are done spending. Second, it gets rid of the tedious job of tracking and totaling debit card receipts and checks. Third, it changes the way your brain thinks about money. Fourth, it gives you control over your spending. Control is the real power in reducing debt and creating wealth.
Here is an example that illustrates these reasons. I literally know people who run 200 checks a month through Quicken. These people can tell you where every dime is being spent. However, these are the same people who look in the checking account and say, “Whooh, good thing the day after tomorrow is payday, we’re out of money!”
The problem with tracking every expense to the penny is that this only one piece of the budgetary puzzle – information. These people don’t realize that information is not an end in itself. In the game of getting out of debt and building wealth the name of the game is control. Spending cash actually gives you control.
When I go to the grocery store and I pay with my debit card. The only thing it teaches me is that I only need put in my four-digit pin number and I automatically get what I want. However, spending cash makes my brain see the money I am paying on groceries is actually leaving my pocket and hurting my wallet. When I am forking over 20 dollar bills to the cashier with each 20 I hand over, I’m thinking to myself, “Ouch that hurts, OUCH that hurts, OUCH THAT HURTS! Put back the cookies, I don’t need them!”
In life, the ability to
“put back the cookies” is what gives us
control. Yes, I understand that the convenience of pay at the pump is safer and less hassle than dragging your kids into the gas station, but I would encourage you to use more cash in your budget. Spending cash will force you to make better decisions with your money and will give you the control needed to get out of debt and build assets for the future.
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