The Extra Benefits of Budgeting in Cash

There are many benefits of using cash, as an allowance, to budget your spending. The most obvious is, of course, that by spending cash only, you immediately eliminate interest or fees. These could accumulate if the same purchases were made on a credit card, or using a debit card to make your checking account overdrawn. Besides this immediate advantage, other benefits of giving yourself a cash allowance include:

Not maxing out your credit card
 

If you set up all your bills to be paid by standing order or direct debit, and only withdraw your cash allowance each week, your credit cards can be put away in reserve for emergency spending, or for large purchases where you want the extra protection they afford.

No potential for embarrassment at the checkouts

If you do your weekly grocery shopping using cash only, you won't hand over your card at the checkout and have it declined. Get into the habit of shopping from a list, and use a calculator to add up your spending as you go. You may be surprised how thrifty you become. Often, just knowing you have a limited amount in your pocket is enough to encourage you to shop more carefully. You may also find you waste less food this way, as you develop the habit of buying only what you need for the week.

Physically parting with cash for services reintroduces appreciation for the value exchange

For many, it's psychologically harder to part with cash than it is to hand over a credit or debit card. Seeing the money leaving your hands puts the purchase into perspective. After all, the card you hand over to make a $5 purchase is the same one you hand over for a $500 item. When you switch to spending cash only, the differences in these transactions become much more real.

Spending only cash can give you a shopping advantage

Handling cash not only increases your appreciation for it, it gives you more bargaining power. While discounts for cash used to be more commonplace than they are now, you can still barter for goods and services for a cash discount in some places. When you pay with plastic, it's harder to convince a salesperson of your limited means than if they can see how much cash you have in your hand.

Allows excess to build in the bank

Provided you can discipline yourself to stick to your cash budget and not fall back on the plastic when your allowance is gone, budgeting using cash only will allow you to build up a buffer in your checking account. That buffer can then be transferred into savings, or used to pay off debts more quickly. As an example, if your monthly income is $3,000 and your fixed bills are $2,050, that leaves you with $950 each month for spending. To make sure you don't get caught short on five-week months, multiply this by 12, to give an annual allowance of $11,400. Divide by 52 weeks for a weekly allowance of $219.23. If you round this down to $200, you build a buffer into your cash budget for fluctuations in your bills.

It's also a good idea to split your cash allowance into smaller allowances. If you are part of a family, ensure every member has a small cash allowance of their own they can spend guilt free on anything they choose, and put separate amounts aside for groceries, and any other spending that needs it's own budget. These separate amounts can be stored in envelopes in a budget box, or locked in a home safe if they are to be saved for larger purchases.