Is It Time To Put Your Day-to-Day Spending On A Cash Basis?

Paying with cash is getting to be so rare nowadays I often feel like a fiscal outcast when I pull out those quaint green bills at a cash register. Everyone else is slip-sliding credit or debit cards through that little machine....usually again and again, because it never seems to work the first time (the idea that paying by credit card is faster than paying by cash is a pure myth) or they're writing checks. Still, anachronistic as it might seem, I'm going to make a pitch for paying for day-to-day purchases with cash.

Why? Because when you pay cash, you're less likely to overspend.

Most of us don't have an unlimited amount of money at our disposal. We have to make what we earn last from paycheck to paycheck. This is tough when paying by card, even a debit card, unless you keep a purchase-by-purchase accounting of what you've spent and, even more important, how much money you have left.

Use cash, on the other hand, and you'll know how much money you have left every time you look in your wallet. If it's three days to payday and you have $20, it's obvious that this is not the time to spend $15 on the newest CD.

So...if you find that your money doesn't stretch from paycheck to paycheck....if you always find yourself running short (and reaching for a credit card) a few days before payday....if you end up with a little more debt each month and can't figure out why.....try making your day-to-day purchases with cash.

Put yourself on a weekly cash allowance. (No, that's not just for kids.)

Here's how to do it:

First, sit down and find out out what you spend on non-discretionary items such as housing, insurance, loan payments,taxes and utilties. (For tips on how to do this, check out my series on budgeting. ) Then figure out how much of your paycheck you should allocate to make those payments.

For instance, if you're paid monthly and your monthly non-discretionary bills equal $1,200, you need to put at least that amount per paycheck in a checking account you use only to pay those bills.

If you're paid twice a month, put $600 per paycheck in that account.

Paid every two weeks? There is an average of 4.3 weeks in a month, so divide $1,200 by 4.3 to get a weekly figure, then mulitiply that by two and put that amount in the account each payday.

Now take the rest of your money, in cash, and divide that into weekly amounts. With a monthly paycheck, divide your take-home pay by 4.3. If you're paid bi-weekly, just divide by 2. Paid twice a month, multiply your paycheck total by two to get a monthly amount, then divide by 4.3.

At the beginning of each week, put a week's worth of cash in your wallet or purse. Each morning, take it out and count it, and recount it each time you make a purchase. That's about all you have to do. (By the way, count it discreetly. There's no sense in waving big wads of bills around...even $1 bills.)

Why does this work? Because day by day, purchase by purchase, you will know exactly how much money you have available to spend. You'll also know that if you want to make a large purchase, you'll have to tap the next few days cash, and you'll know immediately how much that will leave you to make ordinary purchases for the rest of the week.

An example?

Let's say that Georgia Spender usually deposits most of her paycheck in her checking account on payday. She makes everyday purchases using checks or credit cards and pays bills by check as they come due. She writes down each check, but doesn't immediately subtract it from what she has in the account, so she doesn't know from day to day how much she still has available to spend. She also doesn't know how much she has available to pay bills.

When she does check the total towards the end of the month, she's always shocked to see how little is left, and habitually ends up having to resort to credit cards. Her credit card total keeps creeping up and her hope that she can put a little money into savings keeps being postponed.

So she decides to try paying cash. Her take-home pay is $2,400 a month. A half-hours' work reveals that her non-discretionary monthly costs are a little under $1,000 dollars. She's paid twice a month, so each paycheck she puts $500 in a savings account she uses to only pay those bills.

To find out how much she can allow for discretionary spending each week, she divides the remaining $1,400 by 4.3, to get $325.

Now...she puts $325 in her purse and puts the rest of her cash in a safe place. (An ATM accessible savings account, her safe deposit box, a lidded, empty can of hot chocolate mix in her pantry. Wait a minute....if you know where I live, forget that last suggestion.)

On her first day on this system, she buys morning coffee, two sodas, groceries and gas for a total of $75, counts her cash and finds that she now has $250 to last six more days.

The second day, she buys morning coffee, lunch, some sandals and a plant for her house ($42 total) counts her cash and finds she has $208 left.

On the third day, morning coffee ($3) a birthday gift for a relative ($16) some toiletries ($16) and dinner with friends ($9) drops her funds to $164.

On the fourth day, she has to buy more gas ($20) she rents a video ($4) and buys paper and ink for her home printer ($36). She counts her money and finds she now has $104 to last three days.

She is going to a movie with friends this weekend, then to dinner afterward and she knows that will cost at least $30 for gas, tickets, popcorn and dinner, so she passes on buying coffee and a new scarf and spends only $4 for lunch on the fifth day, leaving her with $100.

On the sixth day, she spends $32 on her movie outing, counts her money and finds she has $68.

On the seventh day, she sets aside $30 to put into savings, spends $10 to rent another video and eat lunch, leaving her with $28 to add to her $325 for the second week. (If you have extra money at the end of the week, save it, pay down credit cards, or add it to the next week's available cash. I suggest you do the first two until you have a nice emergency fund and low credit card balances.)

Starting the second week with $353, she buys two dresses on the first day ($82) plus lunch ($7) leaving her with $264.

Then on day two, one of her tires needs to be replaced ($70) and that, plus lunch ($4) leaves her with $190.

On day three, she spends $60 on groceries and gas and $5 for lunch, counts her cash and comes up with $125.

Knowing that this has to last her four more days, she decides to bring lunch from home the rest of the week and on the fourth day, only spends money to rent a video ($4) leaving her with $121.

On the fifth day, she has her hair cut ($20) has the oil changed in her car ($30) and buys more groceries ($18) leaving her with $53.

On the sixth day, she goes to dinner with friends ($14), buys fertilizer for her plant ($6) a new filter for her vaccum cleaner ($14) and is left with $19 to spend on the seventh day. A little tight, but by knowing how much she has available from day to day, she has eased her spending back just a little during the week and made it.

Day by day, purchase by purchase, she knows how much money she can spend just by counting the bills in her wallet.

What if Georgia wants to make a large purchase, say $200 for a new chair for the living room? She can spread that through the entire month by deducting $50 from her weekly "allowance," leaving her with $275 cash spending money each week for that month. Or she can set aside money in advance, again dropping her weekly "allowance" to free up the necessary cash.

That's the system. It's actually pretty simple.

Objections? I've had people protest that it's just not safe to carry cash around. Well, its not safe to carry credit cards either. A wallet full of credit cards means the possible loss of $50 each if a thief gets hold of them, plus the hassle of trying to cancel all those cards before they're used and your credit is ruined. Me, I'd rather lose a little cash. (No one needs more than two credit cards. I'll explain why in a future article.)

Emergencies? Always carry one credit card and a single blank check just in case. Having your car throw a rod in the middle of your commute is an emergency. Buying the newest digital music player is not....and it's surprising how obvious that is when you're handing over actual money.

Actual money...not numbers in a piece of paper. Actual money....that you can simply count for an instant check on how much you have to left to spend.

Give it a try. Remember to first set aside enough to pay all your bills. Paying cash is for discretionary spending. It's a method that will really make you think about your financial choices.