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How to save money with a cash-only budgeting system

If you're overspending on credit cards, feeling the 'pain of paying' in cash may help you get your budget back on track.
by Holly Trantham /
Image: Woman takes money out of her wallet
If you have to put the effort into getting cash out of the ATM, you may be less likely to squander it.Anfisa Kameneva / Getty Images/EyeEm
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When it comes to budgeting, I am far more lax than most other personal finance writers. I save a set percentage of my income each month (or “pay myself first,” as they say), and I do whatever I want with the rest. I also put nearly all of my spending on one credit card — that way, I can track all of it in one place, and I’m also making the most of my credit card points program.

But I couldn’t always rely on this system. Overusing credit cards got me into some trouble in the past — I didn’t know yet how to treat my card like actual money, and at one point, I ended up with about $3,000 in credit card debt. Swiping my card didn’t make me feel anything, and that non-feeling led to spending too much. And, of course, not feeling the sting of payment in the short term meant really feeling it when I finally looked at my credit card bill.

To get myself back on track, I finally did what I’d been told would work so many times, but always made excuses to not do: stick to cash. Instead of relying solely on my debit and credit cards to make purchases, I started actually visiting an ATM. I’d withdraw a set amount of cash that would be my spending allotment for a certain amount of time — for example, I’d take out $50, and that was all I would be allowed to spend that weekend. And guess what? It worked. I controlled my spending enough to be able to pay off my outstanding debt via a balance transfer card, and I never got myself in that kind of situation again.

The “Pain of Paying” in Cash

I’m hardly the first person to realize that using cash puts your spending in perspective in a tangible way. But what is it about using cash that makes it so universally effective?

In behavioral economics, it’s an idea called “pain of paying” — because human beings are loss averse, spending money is painful. But if you’re paying with a credit card, that pain isn’t felt right away — it’s delayed to a later date. With cash, however, the pain of parting with one’s money is felt immediately.

Cash users were 82 percent better at recalling aspects related to an items cost than credit card users.

Different people will experience different levels of pain when paying in cash, of course. But because dealing with cash has a greater physical component than spending with a credit card, it’s easier to recall what we spend. A 2018 study from ValuePenguin surveying business students about their spending found that “cash users were 82 percent better at recalling aspects related to an items cost than credit card users.”

Plus, sticking to cash is a painful practice in more ways than one. Beyond being more difficult to spend due to our emotional attachment to holding onto our money, cash is simply inconvenient for most. If you don’t work in an industry that deals with cash, regularly making withdrawals for your spending money will likely mean going out of your way to get to an ATM. But I’d argue that inconvenience is more beneficial than not. After all, it adds yet another layer of tangible sacrifice onto spending money: if you have to put in this much effort to acquire it, you may be less likely to squander it.

Using the Cash Envelope System

Learning to follow a cash-only diet when you’re used to subsisting on credit can be tough — but it’s not impossible. Jessica Forrester, a writer from Cleveland, Ohio, has been a major proponent of using the cash envelope budgeting system for over a year. At the beginning of each month, she withdraws her budget in cash and divides it into different envelopes for different spending categories, e.g. food and gas.

“I've found it to be very effective at helping me set and stick to a budget,” she says. Instead of swiping her card and forgetting what she spent minutes later, cash forces her to put all of her spending in perspective. “The cash envelope system works better for me because it forces me to be more mindful of my spending. I had gotten into the bad habit of using my debit card like I wasn't spending ‘real’ money. Now, every time I reach into an envelope, I'm aware of the cash that's going out.”

Of course, even she has slip-ups from time, but she always returns to her cash roots. “I'll be honest, there's been a few hectic weeks over the last year where I've given myself a break and resorted back to the ease of using my debit card. But after about a week, I always find myself craving the control and organization that comes with using my cash envelopes.”

If you struggle with sticking to a budget, going cash-only is a great way to impose a hard limit on your spending. “I'd recommend the cash envelope system to anyone who has a messy relationship with their debit (or credit) card, and anyone who likes getting and staying organized,” Forrester says. “It takes a little work — and a little time to figure out what works for you — but, in the end, it's totally worth it to have your budget under control.”

Using Cash in an Increasingly Cashless World

Naturally, relying on cash isn’t going to remain a viable option in a society that is becoming increasingly cashless. In the restaurant world, for example, credit-only establishments are becoming more and more the norm.

But this doesn’t have to be a downside: if you’re trying to spend less on food out, you might have fewer options available by going cash-only, meaning fewer opportunities to overspend. And, on the other hand, patronizing cash-only businesses might be another simple way to limit your spending — since these establishments don’t have to pay merchant fees on credit card transactions, they often have lower prices.

Going cashless may not be a viable option for you forever, but if you’re looking to get your budget on track quickly, it’s definitely worth a shot. After all, if every dollar you spend has to physically pass through your fingers first, you’ll have a much better picture of where all your money is going.

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