As the calendar moves from 2021 to 2022, Americans of all ages will make a New Year’s resolution. While some will resolve to lose weight or get organized, millions will start 2022 committed to saving money.
U.S. consumer debt increased by $313 billion to $14.96 trillion in the second quarter of 2021, according to the Federal Reserve Bank of New York. While not totally unexpected considering the world has been dealing with the pandemic since March 2020, consumer debit is now $812 billion higher than at the end of 2019.
If you are one of the millions that was hurt by the pandemic or are carrying more debt than you’d like, there is hope. A cash-based budget is an easy way to get out of debit, cut back on careless spending and save for a big expense, like a down payment on a home. There is also evidence suggesting the psychology behind using cash for everyday items will help you achieve your goals.
How a Cash-Only Budget Works
As the name suggests, a cash-only budget involves paying for everyday purchases using only cash.
While not every bill can be paid in cash, that’s okay. Some items like rent or mortgage payments, student loans and insurance may require a deduction from your bank account, you can budget for those items as they’re typically the same amount each month. The point of a cash-based budget is to get a handle on every day and impulse spending.
For convenience, a cash-only budget is typically paired with an envelope budgeting system, where you have an envelope for each category in your budget. The idea is to set aside the amount you budgeted for – trips to the grocery, clothing, gas and household items – and not spend any more than what is in your envelope for that category each month.
Create a Budget
The first step is to figure out what you’re spending money on and where you can cut expenses. While this is never fun, it is crucial to successfully reaching your goal.
ATMs have become such a big part of daily life you may walk past them and never notice. However, once you start living a cash-only lifestyle, the ATM at your favorite convenience store, grocery store or any of the countless businesses that offer ATM service will become much more important. As soon as your paycheck hits the bank, withdraw the cash you’ll need for the week and stuff the bills in the right envelope.
The key to success is to stick to your budget and, if tempted to swipe, leave the debit card at home.
Benefits of a Cash-Only Budget
In addition to being a great way to save money, a cash-only budget is a terrific way to develop healthy financial habits. Using cash is also powerful physiologically. It’s easy to swipe a card and deal with your bank balance later but it’s more painful to physical hand over notes and coins. And it’s been shown that having notes in your wallet provides a sense of satisfaction.
If you commit to only paying in cash, you could easily achieve your goals - to get out of debt, save for a house, a vacation or retirement, or simply cut back on impulse spending - by years end.
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