Are you struggling to commit to a budget and don't know why it always fails? Well, you're not alone. In America, only 67% of households commit to a monthly budget for their expenses and savings.
There are plenty of reasons why people fail with their budget. Their goals are not attainable, they can't break the habit of overspending, or they don't know how to make one that works. Whatever the reason is, there's a solution for you.
Switching to a cash-only budget can help you get on track with managing your funds. If you were previously budgeting with your credit cards and debit cards, that is likely the reason you failed. Having access to credit cards encourages spending and builds debt if not managed properly. It gives the illusion of inflated wealth. When we restrict ourselves with limited cash, we become more conscious of what we have available; therefore, we don't spend as much.
If you're ready to start a cash-only diet, we complied a list of compelling reasons why this can be the solution to your budgeting problems.
1. Prevents You From Overspending.
When you get paid and have a specific amount of money deposited into your bank account, without allocating those funds into secure savings accounts, your money sits there freely to be spent as you wish.
You can write down a budget and tell yourself you're only going to spend a certain amount of money, but that's generally not what happens, and this is why people fail at budgeting. Too much access to funds encourages overspending.
Suppose you automatically withdrew funds to use as your monthly budget and didn't have access to your credit cards; you would only spend what you have.
2. The Psychology Behind Cash vs. Credit
Credit cards are set up in a way that makes spending not just easy but very addictive. There is something about going into a store and deciding to purchase something because we have credit to pay for it. We tell ourselves we can pay it later.
But what if you walked into that same store and looked at that same item with the only difference being you were carrying a fixed amount of cash and not credit to fall back on. Even if you had just enough cash to buy it, internal warning signs go off that tell you it's not a wise decision to purchase it because you won't have money for other essential expenses. Credit card companies understand impulse shopping, which is why they extend credit limits so frequently.
In addition, when you're purchasing something with your credit card, you aren't visualizing the decrease in your net worth. In contrast, if you have a written budget and are calculating all your expenses using cash, you're far more conscious of how you spend that money.
3. Less Debt
Another reason why people fall off track with budgeting is that they can't commit to a plan. After all, their debt is too high. If you carry a heavy debt: income ratio, there is no doubt you will struggle to stay on budget—a large portion of your income is required monthly to maintain your credit card payments.
The good news is, it's not impossible to commit to a budget when you have significant amounts of debt or just struggle to budget. The first step is to stop using your credit cards entirely, and it would be best to replace them with cash.
The most significant benefit to this transition is that you will stop accumulating high-interest debt onto more debt. Additionally, you will start to notice your debt balance go down, and your budget will slowly become more manageable. Keep in mind that you save on transaction fees at some retailers when you make cash purchases, which is a little hack to saving money.
4. Cost Savings
If you were to have enough money for the purchases you want to make, you are ultimately saving on the overall price of the item by using cash over credit. How? When you make a credit card purchase and don't pay the balance off in time, the interest applied is ultimately added to the cost of the item. Additionally, some retailers will add a surcharge fee to your purchase price if you pay with credit or debit card below a certain amount.
While these little added savings won't solve your problem right away, the underlying benefit of doing this is that you develop a habit of using cash and sticking to a budgeting plan.
How To Stay On A Cash Budget
So know that we've illustrated the benefits of a cash-only system; we will go over simple ways you can create and stay on a cash budget.
1) Create Your Cash Budget
To avoid any mistakes, the first thing you want to do is analyze where you stand financially. You want to calculate your monthly expenses versus your monthly net income. This will give you a clear picture of your cash balance at the end of each month.
Once you narrow this down, You should factor in roughly 15% to allocate to a savings account. You will be left with a small amount of cash that you can withdraw from your bank account, to use it for your monthly budget. The purpose of this step is so you set attainable goals rather than arbitrarily setting values to a budget you can't financially commit to.
2) Cash Stuff For a Cash Budget
Cash stuffing is an excellent way to keep you on track and to keep you accountable for overspending. Once you've created an analysis of your finances, the next step in adopting an all-cash system to incorporate cash stuffing.
The purpose of this is to track all your expenses while creating restricted budgets for each category.
An excellent starting point is to create a list of categories that you generally overspend on with your credit card. For example, if you regularly overspend on leisure items using your credit card, set aside an amount within your budget and create an envelope labeled leisure. You're restricting yourself from overspending by only allowing cash purchases and by reducing the dollar value. You can repeat these steps for other categories that fit your budget.
Over time, you'll become accustomed to using cash for the types of purchases that you previously would overspend on. Once you become comfortable doing this, we recommend introducting cash stuffing for your overall expense and budgeting needs.
3) Cancel Your Credit Cards
This one can be a little tricky, considering many transactions in life require a credit card. In this case, if you have more than one credit card with balances, try and consolidate your balance onto one card and cancel the remaining. Another excellent option is to cancel your cards once they're paid off. You only need one credit card, and the more credit you have, the more temptation you are faced with.
4) Periodically Adjust Your Categories
This is an important step that should not be overlooked because it goes back to why people fall off track. You will need to monitor the fluctuation of your expenses vs. your income. Suppose your grocery expense has increased, exceeding your allotted monthly budget, but your salary has stayed the same. You don't want this to encourage credit card spending, so instead, go over each category and see where you have a surplus each month and allocate those funds to the grocery category.
If you notice other categories continuously have a surplus, allocate it where it is needed. If you're skipping this step, you're missing areas of opportunity to maximize your cash.
5) Monitor Your Progress
Knowing where you stand with your budget is essential to keep you on track and help you make the appropriate adjustments. Utilizing a cash-only diet is very difficult, but it has many incredible benefits, so you don't want to be discouraged.
Suppose you're faced with a situation or a challenge that burdens your budget or your financial situation entirely; it will be easy to fall off track if you haven't been tracking and celebrating your progress.
You can do this by setting up a cash goals track sheet where you can track your monthly surpluses and the categories you've been saving most on. If you aren't regularly monitoring where your money is going or the progress you've made, you can quickly find yourself back in the same position you were in before you began your cash journey.
Final Thoughts
Suppose you're looking to adopt the cash-only diet and significantly reduce your credit card usage. In that case, there are many excellent strategies and hacks you can try, as we illustrated above. Becoming accustomed to a life without credit cards can be made simple if you analyze your financial situation and create new habits. Applying the cash stuffing method to limit your spending is an excellent way to help you overcome these hurdles. Remember to monitor your progress and constantly reevaluate your categories to maximize your overall budget.
Like anything in life, you will stay on track and committed if your goal is practical and attainable.
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