Today’s tip is to use cash during the 30 Day Challenge. No, this is not an unusual tip, but I’m going to try to add some nuance to it besides “CREDIT CARDS ARE BAD!!!!!” Most people who recommend using cash recommend using only using cash, because they think that credit cards are evil. They are wrong.
Credit cards can be extremely useful because they offer excellent consumer protection, tons of bonuses, financial automation, and they’re an interest-free loan if you pay them off in time. Most importantly, if you use them responsibly, you build your credit. And if you think credit doesn’t matter (I’m talking to you, Dave Ramsey fans), take a look at how much it would cost you to get a home loan these days:
(Check your credit score here.)
The tradeoff with using credit cards, of course, is that it’s much easier to overspend. I wish I could quote you research on whether credit cards cause more spending, but the data are murky and biased, so I’ll just share what happened with my own personal experience.
Case study: Using cash to save 18% in 2 weeks
Recently, my credit card got stolen. I had to wait about a week before my new credit card arrived in the mail, so I withdrew a few hundred dollars in cash. Once I got my credit card, I was lazy and didn’t call to activate it for another week, so for two weeks, I was paying with cash. And because all of my subscriptions sent me a note that they couldn’t process my card, I had to actively decide if each one was worth it…resulting in over $100/month of savings from canceled subscriptions.
Interestingly, not counting the subscriptions, I spent about 18% less over that 2-week period.
Why using cash cuts your spending
1. You’re forced to be a conscious spender about what you pay for. Rather than blindly using your credit card and deferring whether it’s worth it or not until your bill comes — by that time, it’s too late — using cash forces you to make that decision when you pay.
2. You withdraw a limited amount and watch it dwindle. It’s very primal: Since we’re more motivated by loss than by gain, each dollar you physically spend will cause you pain…the good kind of pain.
How to make this tip work: Use the Envelope System
“The envelope budget system has helped me save money because it allows me to see REAL money being spent rather than using my debit card. You basically take out what you expect to spend on each category (eating out, clothes, household, etc.) each paycheck and put it in envelopes or a filing system. You only spend that amount per pay period or month and that’s it! As time goes by, you can see where you really need to cut back because you’ll have money left over in areas that you shouldn’t and probably realize you eat out too much!
After a few months, I’ve been able to trim off a good $100 per month on things I finally realized I need to cut back on once I saw REAL MONEY being used.
–Antoinette Andrews, Memphis, TN
You can read a more detailed writeup on the Envelope System here.
TO DO: Use cash for a limited time period — say, 15 to 30 days. Use the Envelope System to decide how much you want to withdraw. If you’re illiterate/too lazy to click that link, just withdraw $200 and force yourself to make it last for 2 weeks.
Don’t try to use only cash forever — it’s just not a smart financial move. But for the next 15-30 days, measure how much you spend using cash. If you use a personal-finance system like Mint or Quicken, manually enter your transactions within 2 days so you don’t forget them.
And remember: The point isn’t to save hundreds of dollars using this tip, but to force yourself to actively spend and notice what you’re overspending on. Eventually, using credit cards responsibly is a positive thing. Using cash is an excellent way to force yourself to consciously notice where your money is going, and adjust your spending going forward.
Total savings: $50 to $300
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Last thing to do
1. See other tips in the Save $1,000 in 30 Days Challenge
2. Leave a comment on this post describing how much you’re saving with this tip and any unusual techniques you use to make this tip work.
If you found this post helpful you’ll probably like my new Ultimate Guide to Personal Finance. This is an excellent place to learn more simple ways to improve your personal finance and money management.