Isn’t a cash budget so “last century?”

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I know what some of you are thinking when you read blog posts or articles about using a cash budget.

Why would I do something so archaic when there’s an app/software/tool/etc. for tracking my spending? Get with the times!

I know this because that same thought has crossed my mind more than once. I’ve experimented with other methods of budgeting that don’t require asking the teller for a particular number of 20’s, 10’s, 5’s and 1’s. I’ve tried both online tools and computer software and have also kept a handwritten ledger to record our debit card transactions in their respective categories. But each time, I’ve come back around to using cash again.

 Now, there are definitely categories for which we do not use cash. With the ability to pay bills online, it’s far more practical to set up those predictable recurring expenses to automatically come out of our account. And there are also budget categories for which it doesn’t make sense to withdraw cash from each deposited paycheck, such as saving for a vacation or home project. We choose to keep those amounts accumulating in the bank until we need them.

I’m talking about those variable expenses that can be budget busters: groceries, entertainment, clothing, and eating out, to name a few. Even gas can throw off a budget if one isn’t intentional about combining errands, carpooling, or employing other strategies that reduce driving distances.

While there are some people who have no more of an issue with overspending when they use debit or credit vs. cash, even disciplined people will acknowledge that when they pay with cash, they spend less. If I bring $100 with me to the grocery store, guess how much I will spend on groceries? $100 or less. If I go into it planning to spend about $100 with a debit card, I can almost guarantee you that I will find a way to justify spending $125.

An interesting study conducted by researchers at Carnegie Mellon, Stanford, and MIT used magnetic resonance imaging (MRI) to study which regions of the brain activated when participants had to make decisions about purchases. The insular complex—associated with pain—was activated when people viewed prices of goods and were faced with the decision of spending actual money. The conclusion?

“Credit cards effectively anesthetize the pain of paying,” said George Loewenstein, Carnegie Mellon professor of social and decision sciences (SDS) and co-author of the paper. “You swipe the card and it doesn’t feel like you’re giving anything up to make the purchase, unlike paying cash where you have to hand over bills.”

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 Another benefit is that there is no risk involved. If you use cash, you remove any chance of not being able to pay for your purchase when the bill comes due. What if you make a habit of using a credit card but then you lose your job or face a major crisis between your shopping trip and when your statement arrives? At the very least, you’ll be paying interest on those charges, possibly for a while.

{Interesting side note: As part of a multi-billion dollar settlement this summer, Visa & MasterCard agreed to lift their longstanding policy against businesses passing along credit card “swipe fees” to their customers. Kroger even considered either charging two separate prices for groceries (a card price and a cash price) or giving a cash discount at the register. It could be just a matter of time before this becomes reality at some stores. Another reason to use cash!}

But there’s a lot of risk involved in carrying around a whole bunch of cash! you might protest. This is true. So only carry with you what you expect to spend, with a little cushion. For example, if I’m going grocery shopping, I’m not going to bring along the entire amount that’s budgeted for that pay period. I’m going to make a list and bring what I believe I will need.

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I’m not saying that operating with a cash budget is without its drawbacks. It takes a little bit more planning and a trip to the bank or credit union, and you have to be committed to not steal from one envelope to cover another. But I challenge you to try it out for a few months and see if it helps to temper your spending and save you a little money. You have nothing to lose!

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