Switching to a cash-only budget is a move recommended by many financial experts. Here’s how to make the change.
Choose the Categories to Switch to Cash
The first step in switching to cash is to determine the budget categories that will actually work as cash-only. You may only be able to make certain payments, such as a mortgage or your student loan, online or at least by check. But for those categories where you are able to use cash, determine the ones in which you are consistently overspending. This may be groceries, entertainment, eating out, or clothing. Everyone has their problem areas when it comes to overspending. Once you know what yours are, you can switch them over to cash in order to curb your spending.
Stop Using Your Debit Card for These Categories
The next step is to stop using your debit card, credit card, or even your checkbook to pay for anything in those categories—no matter what. If you are not able to do that, you may consider leaving your debit card at home for a few weeks and disconnecting any automatic payments you can access online, such as those through Paypal. This will help you break bad financial habits.
Create a System to Separate Cash and Track Receipts
When using a cash-based budget, you need a way to track your cash purchases and also keep the cash for different categories of your budget separate. A simple way to do this is to use the envelope system. At the beginning of the month, you stash your budgeted amount of cash into envelopes labeled with each budget category. Once the cash runs out for a specific envelope, you’re done spending in that category for the month. You should also put your receipts into those envelopes so you can review where you spent the money at the end of the month. Alternatively, you can keep a running ledger as you spend the money.
Set Up a Time to Take Out the Cash
In order to be successful at a cash-only budget, you need to actually get the cash and separate it into categories. This may mean a trip to the bank or the ATM on payday or another set day.
Plan Ahead When You Go Shopping
This type of budget requires that you learn to plan ahead. Generally, it’s not a good idea to carry huge amounts of cash around with you all of the time. So, for example, you leave your grocery money at home unless you are going to the grocery store, and take only $20 to work if you plan on eating out that day. You get the idea. Bonus: This will also help to cut back on your impulse purchases.
Stick to Your Limits
As with any budget, this requires the self-discipline to avoid spending all the money in one category too quickly. This also means that you do not use your debit card or your credit card to cover shortfalls. You can switch money between envelopes if you find that you have overspent on your grocery budget halfway through the month. But you will have to cut spending in other areas.
Adjust Your Categories
You should adjust your budget once you have followed it for a few months. You may find that you don’t have enough planned for groceries but you always have money left over in the gas category, or you that you may need to sacrifice some of your entertainment money so that you can pay for meals.
Other Cash-Only Budgeting Tips
Updated by Rachel Morgan Cautero.
