Spending Cash

This is a guest post by Robert, who lives in Calgary and works as a financial adviserretired at 34. He is married, has three kids.  Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.

How much do you spend month to month? If you’re like most people, you probably can’t answer that question immediately. Most people have a pretty good idea of how much money comes into their bank account monthly. And the best guess that I’ve most often heard for how much they spend each month is: “All of it.” Given that most people don’t have money left over at the end of the month, that’s probably true. But it doesn’t help people who want to start saving and who wonder how much they can afford to set aside.

I think that a big part of the problem is credit cards. Fifty or more years ago, credit cards were very rare. Some people used charge cards, for convenience, but credit was extended by banks based on a relationship with the bank manager. These days, everyone uses credit cards (often multiple) for the convenience, for the rewards and, in some cases, for the credit. Without getting into the system-wide costs of everyone using cards for transactions, there are negative impacts on individual spending decisions.

According to psychological research, spending cash incurs a certain pain. It’s the feeling of giving something up, the same feeling that comes from losing money, since your wallet now has less. Credit cards have been shown to remove that psychological pain, since we give up nothing. We hand over our card, it’s swiped and returned to us. Using cash instead of a credit card would cause most people to be more reluctant to spend.

Credit cards don’t display a balance. When we spend money using a credit card, we don’t immediately see how it affects our bank account. We can’t get a sense of how quickly we are moving toward spending the money that’s available in our account. In fact, with a credit card (and good credit), there’s no indication when we have spent all the money in our account and more. With most cards, the only indication that a person must stop spending is when the maximum amount of credit has been reached. By that point, the consumer is already carrying a balance (likely) and spending additional amounts on (high) interest charges.

Using a cash budgeting system, on the other hand, gives immediate feedback on the rate of spending and on the amount still available. Suppose, for example, that after my regular bills, I give myself $250 per week for groceries, gas, entertainment and incidentals. As I spend money, my wallet gets thinner. If I take out $50, I can immediately see that I have $200 left, and I get a sense that I’ve used one fifth and that at this rate, I will exhaust my weekly amount after four more similar purchases.

Using cash instead of cards for almost all purchases would give most people increased control of their spending. In many parts of the world, including Taiwan where I lived for two years, credit card acceptance is still not widespread. I found that using cash for all of our spending helped us to develop good spending habits. We could withdraw the amount of money we expected to spend, immediately see how spending choices affected the amount left and realize when we had spent all the money we had allocated for the week or month.

Have you experienced benefits from using cash? Do you have another way to stay aware of spending and your bank balance?

9 thoughts on “Spending Cash”

  1. I make two cash withdrawals per month of $160 and that covers all my day-to-day expenses such as food, gasoline, and my dancing (which is cash only). I use my credit card around 6 times per year and that is for big-ticket items, defined as anything $50 or more and not at the supermarket, and the rare oline purchase. My debit card is more like a safety net in case I happen to be out and am somehow short of cash. That happens maybe once a year.

    I have used his method for the last 26 years and it has worked just fine, with no plans to change it (other than increasing the cash withdrawal amount if inflation boosts the prices of stuff to much).

    To me, using the CC is a minor nuisance and I also consider it a slight fraud risk by having it “out there” so much. I have used it twice this year so far.

  2. I have a smart phone with Mint.com’s app setup. It allows me to see my bank balances and my monthly cash flow easily and it’s kind of ‘in your face’. I almost always use my cc or debit. Spend almost $500 last month on gas alone…

  3. I take out $75 cash per week for my day to day spending. This way I know that I am not overspending on frivolous purchases.
    We also take out cash for groceries but keep this in a separate pouch. Again, an easy way to stay on budget.

    I would find it much more difficult to keep a budget if I used credit cards for some of these purchases, I fully agree with the psychologists! I do use credit cards for purchases that have been saved for from my short term savings, but only if I have already saved the money.

  4. I went with cash on our trip down south this summer. I tend to lose track on holidays and tend to go overboard a bit more on spending. We ended up going over budget (and cash) by about $300 or 10% (what can I say? Borders had their going out of business sale…) 🙂 and the CC got used – 3 transactions in total so not bad. Gas prices were higher than I estimated before leaving and we were gone longer than intended so it made sense. We split it up by an estimated spend of $500/week for 6 weeks. If we were over for the week, we cut back on driving, groceries and boondocking in the RV a bit. It was a better method than the tracking that I did last summer.

    Where I think credit cards (or LOC’s etc) are bad is that I don’t think that people adjust something they’re doing before dipping into them (whether getting creative by earning more money or cutting back on spending). It’s just too easy of a hole to get into – and too hard to get out of. By the time you’re in deep, it’s too overwhelming and you give up in a form of learned helplessness (that I know from personal experience). When I was dead broke though in University and didn’t have credit cards, I managed to deal with it and adjust. Had I had them, I certainly would have racked them up.

    At home I use my CC for almost everything but I have a very smooth consumption pattern (now tracked by RBC’s expense tracker tied to my bank accounts and CC – which I love even though I just look at the monthly total and the renovation costs). Maybe that’s a bad sign that my life is too routine… 😉

  5. I use Quicken, download, and track every cc purchase. Every month the bill is paid in full and I’ve even automated many of my bills to be charged to the cc. (Our rural mail delivery is somewhat less than reliable) I can tell you to the cent where any cc, debit or cheques have gone, but cash purchases require a greater amount of discipline to track. I actually get antsy if I haven’t updated my files in a while.

    I’ve also booked two free flights and had $300 in free gas cards from a rewards program. I think of the cc as a tool. My behaviour, good or bad, is what has the potential to cause the problem.

  6. I agree with Maybe Later that using CC can sometimes save you money through reward programs. If you are determined to start saving money, prepare yourself psychologcally, be disciplined and using cash or CC should not make a difference.

  7. These are all helpful comments. Thank you everyone for sharing your experiences.

    Retired at 44, you’re right that it should make no difference. But until those good habits are in place, using cash has benefits over a credit card.

  8. My wife and I use one credit card for most of our expenses each month. By doing this we achieve two things- we keep better track of our expenses (normally cash receipts get thrown away) and we also get 1% to 2% cash back. The Scotiabank visa we use have an annual fee (I think $70 per year between the two of us) but even so, at the end of the year we get about $500 cash back, which is not too bad for spending on things we need in any case like food, gas, utilities, etc. However,I recently found out that the MBNA cash back mastercard has NO ANNUAL FEE and you get 5% cash back for the first six months and three percent after that. That sounds like a very good offer to me. And one more thing- the balance of our cc is always paid back to the last cent, no exceptions allowed!

    As for keeping the spending under control, I check my cc balance daily, and make clear distinguishment between needs and wants. At the end of the day it all boils down to discipline and common sense.

  9. I rarely use my credit card. Mostly it’s cash and debit card. I use a checkbook register and it is balanced down to the penny. When I do use a credit card, I write down the amount in a notebook so I can keep track of how much I’ve charged that month to make sure I don’t go over how much I can pay off by the due date.

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