There are many studies out there that show that people are more likely to spend money when they have plastic in their hands as opposed to cash.
Intuitively, this makes sense. A credit card isn’t tied to anything tangible; it’s just a card that you swipe, and you get the bill in the mail later. Spending with it doesn’t give you a sense of immediate concern.
When you spend with cash, however, you’re forced to look into your wallet and see just how much you have—or don’t have—left, which may cause you to think twice about spending. You’re also more emotionally connected to your cash, so it can hurt to physically fork it over.
If you’ve noticed that your spending increases when you pay with credit, or you have credit card debt, here’s why you should pick cash over credit to save money.
Cash is limiting
One of the best ways to get out of credit card debt – and save money – is to pay with cash because it’s limited. If you leave your house with only $100 in your wallet, that’s all you have to spend.
On the other hand, if you bring your credit or debit card, you can keep swiping until you’re declined, which isn’t good!
Be honest with yourself: there have been times you’ve spent way more than intended. It happens to almost everyone. You can save yourself money by limiting the amount you have to spend, and a cash-based budget is the best way to do that.
Cash envelope budget
The cash-envelope system is easy to follow and is just one suggestion for how to execute this kind of approach – so if it doesn’t work for you, don’t be afraid to try something different!
Grab a bunch of envelopes or an accordion-style wallet, and label each with the categories from your budget. For example, most people will have envelopes labeled “groceries,” “gas,” “dining out,” etc.
Once you’ve made your monthly budget, take a trip to the ATM, and withdraw the total amount of money you need for the month. So if your grocery budget is $300, your gas budget is $100, and your dining out budget is $40, take out $440 and divvy up the funds according to their respective envelopes.
Now, whenever you go grocery shopping, fill up on gas, or dine out, you know exactly how much money you can spend. If you’re nearing the end of the month and you see you have $50 left for groceries, you’ll be more inclined to try and save money to make it stretch.
Don’t allow yourself to have the backup option of a credit or debit card unless absolutely necessary. You can’t succeed if you know you have that safety net. Leave the plastic at home.
You pay for access to credit
Unfortunately, many people view credit cards simply as a source for the money you don’t have in your pocket, which isn’t exactly true. You’re borrowing money from creditors and paying it back at a much higher interest rate. There’s nothing free about that unless you pay off your balance in full every month, and even then, the risk is there.
Paying with cash is the safer bet. Again, you’re limited to spending only what you have in your wallet. You can’t go over that amount. The same can’t be said for credit, and if you can’t pay your bill in full, you’re facing an average interest rate of 16.05%. Forget the original price of whatever you purchased – you’re now paying more.
Overall, credit isn’t worth the risk and hassle if you have a habit of overspending (or if you have existing credit card debt). Limiting yourself to a cash-based budget allows you to “train” yourself to spend with discipline as opposed to swiping freely. Choose cash over credit if you want to get your spending under control and start saving more money.
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