This post is by our regular contributor, Kristi.
I doubt that anyone enters into adulthood planning on being irresponsible with or having trouble budgeting their money. It’s easy to fall into bad spending habits like overusing your credit cards though.
I would know. I’m still working on paying off a substantial credit card balance from a pretty financially unsteady time in my life. I learned from my mistakes though, and I am trying my hardest to get rid of bad spending habits. The past two years have been a huge turn around for me and my family as we work towards achieving financial security again.
Are you living within your means? Do you have harmful spending habits? Do you overuse your credit cards? If you answered yes to any of these questions, then you might want to consider living with a cash budget to unlearn bad spending habits.
Bad spending habits are typically formed over a lifetime and not easily forgotten. If your bill payments are late and you’re wondering where on earth your paycheck went to, you might have some bad spending habits that you need to address. If you want to get rid of those bad spending habits, you need to make a plan.
The basics of a cash budget
A cash budget is a specific type of budgeting plan where you pay for all expenses with cash only, and your budget numbers are based off of last month’s expenses. You no longer carry your credit cards with you to “fall back on.” You can pay your bills online, but all other expenses for the month are carried out with cash in hand or a debit card linked to a savings account. This type of cash budget can stop bad spending habits and help you get your finances back on track.
A cash budget could be the budget plan that helps you figure out how to pay down credit card debt, monitor your expenses, have more money for savings, and get rid of bad spending habits once and for all.
A cash budget will get you get organized
A cash budget will help to get your financial house in order, but first, you need to analyze your expenses in order to build your cash budget. Having your income and expense totals on hand from the previous three months will give you a good average for predicting how much you will need and when you will need it.
Create your cash budget based off your average expenses, and decide which categories to put your money towards each month. A typical cash budget for an individual or household is broken down into these categories: savings, mortgage or rent, utility bills, other bills, food, gas, and entertainment. Build your budget around the categories that you know you will need money for.
Once you have your projected budget, based on categories, consider creating a basic accounting document in word or Excel to keep track of your cash budget performance every month. Put the projected budget amount in the first column, the actual amount spent in the second column, and the variance by percentage or actual cash difference in a third column. This type of accounting sheet will demonstrate which areas of your budget are being overly taxed or underutilized.
You will know when to reallocate your money
Having a cash budget to monitor the inflow and outflow of your expenses will help you to realize if you are allocating too much money to a certain category. This month’s cash budget is built off of last month’s expenses. So how did you do last month? By doing a compare and contrast of your expected budget and your actual budget, you will have the information you need to know where and when to re-budget your available income.
If, for example, your entertainment budget is more important to you than your food budget, learn how to cut your food spending so that you can allocate more money to entertainment every month. If you are pulling from your savings budget to put money towards your utility bill, they you may need to reassess your spending priorities for the next month.
If you are constantly running out of money in one category and pulling from another category to fund it, you’ll know what areas of the budget are most important to you. It helps you understand when and where to cut out unnecessary expenses.
Your cash budget will promote more thoughtful spending
Did you have to cover any unexpected expenses? Was it a real emergency expense or did you just need to pull from one budget to make up for a deficit in another budget? If you’re using a cash budget, your credit card should be on lock down. Your credit card is there only for true emergencies.
Knowing how much money you have to spend per category per month really makes you question each financial decision you’re making. Since you won’t be falling back on a credit card, you really need to be thoughtful about each expense.
When paying for all of your purchases with cash, you will find that you ask yourself more often do I really need this. A cash budget will help you to live within your means, because once the money is gone, it’s gone. You’ll quickly learn to spend it wisely.
A cash budget will guide and encourage saving
If you decide to live with a cash budget, you will know with absolute certainty where your money is being spent and whether or not you are missing opportunities to save money. Is there an extra $50 month that you could be adding into your IRA instead of at grocery store or movie theaters every month?
Maybe you will realize that you aren’t spending your money and too much of it is just sitting there in your bank account. You don’t want your money sitting idle every month, because idle money is pointless. Make your money work as hard for you as you worked to earn it. Any money you aren’t spending should be invested, or at the very least put into an interest bearing savings account. A cash budget will encourage you to make the best financial decisions about when to save or invest.
A cash budget will prepare you for the future
You can’t be a good financial planner without first learning how to plan your finances. When you build a cash budget based off of your previous month’s expenses, you’re setting yourself up for future financial success. You know how much you typically spend, so you know where to tweak your budget to meet your financial goals.
A cash budget will show you how to maximize your money so that you can increase your chances of financial success in the future.
Have you ever tried using a cash only budget? Did you have success with your cash budget as a financial planning tool? What other tools do you use to maximize your resources and allocate your money efficiently?
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I have already stopped using credit cards and only use cash but there is still a deficit at the end of the month. My problem is I overspend and then “make it up” with my part time income as opposed to utilizing my part time income to make extra payments on debt.
We used a cash budget when we first started budgeting. It was the perfect solution for us. Now that spending discipline is more ingrained in us, we are able to follow our budget without having to go to the bank for cash withdrawls. The on category that we sometimes still go for cash is our “splurge money” if we know we have a few events to attend, and don’t want to worry about busting the budget with extras.
I think that cash budgets are definitely a great way to manage money, especially for those who tend to overspend. I find myself being able to keep my spending on track in other ways, so I usually just use a credit card for my purchases because I like that rewards that come with it. But I definitely have to say that not everyone should handle their money that way because I think most people have the tendency to overspend when using credit. So important to figure out which you are to be able to have a strategy that works for you individually! :)
I have never tried a cash budget, but I’ve heard good things from others. I still use my credit cards, but mostly because I love racking up points on them. It’s a great way to treat yourself once you save up enough points. I’m fairly diligent about not over spending though.
LovetteMacc I have the same problem with overspending and then trying to make up for it later. Recognizing that there’s room for improvement is the first step towards making improvement!
Hannah UnplannedFinance That’s fantastic that you were able to use it to change your habits and then modify your use of it later. Your story is a prime example that a cash budget doesn’t have to be your forever budget.
Christina@EmbracingSimple Credit cards are fantastic for rewards, but I agree, you should definitely have a firm hold of your spending before using them.
MyUrbanFamily Credit card points are great for so many things! Cash back, travel hacking, rewards, and gift cards…the list goes on and on! If you know how to use your credit cards diligently, then definitely rack up more points =]
I have never tried a cash budget at home, but often when I travel I use cash if credit cards aren’t widely accepted. I think another benefit, aside from the ones listed, is that cash is just plain tedious. I always feel awkward fumbling with change and finding the right bills (doesn’t help if its a foreign currency), and I think this actually has the effect of making me less likely to purchase small items due to the hassle of paying. Whatever helps me cut back on spending is a good thing in my book!
Ali_AnythingYouWant I agree! I like using a cash budget because I don’t feel comfortable carrying large amounts of cash with me. It definitely helps limit how much you’re spending out.
According to the definition of a cash budget I’ve been doing this since January. I haven’t used credit in a while. I don’t really plan on using it ever again. I like using a cash budget. It teaches you discipline.
Jason @ The Butler Journal Credit can be good is doses, especially if you enjoy earning points and rewards, but I agree that using a cash budget definitely requires more discipline.
Been there…done that and paid off
the debt to prove it. Groceries is an all cash item to force me to stay on
budget. No lying, cheating, or stealing from myself!
Mrs Crackin the Whip That’s fantastic! Good for your for paying off your debt and being true to yourself and your budget!
Paying with cash really promotes more thoughtful spending with me. When I use a credit card, I’m likely to spend more knowing that I can pay it back at the end of the month but when I’m spending my own money, I’m a little more hesitant to spend on certain things and I pay attention to my budget more closely.
There is something way to easy about swiping a credit card. Almost as if it’s not money at all. Paying in cash really gives you that physical line of sight into how much you’re spending on certain items. It’s a great exercise to truly see where you’re money is going.
Chonce I agree, Chonce! I am much more reluctant to part with cash than theoretical money in an account somewhere.
Financial Tour Guide Paying with cash instead of credit really does help you to have a concrete grasp of your budget and how much your spending on particular items every month.
I thinks its great to have a cash budget. I tried it a couple of months back, as a result of which I now know at the beginning of the month itself as to how money money il have to reallocate it.
Try using any of the budgeting apps to get started with your cash budget. Thats what made me gwt started.