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.

A Matter of Habit

The other day, I experienced an odd and quite uncomfortable twinge of pain low in my torso.

It happened again yesterday. I didn't like it.

Then, this morning,I sat down in my usual booth at Duke's Chevron, opened my paper, took a swig of my morning diet cola, and read a little item about a study done by the National Institute of Health, about the effect of cola on kidneys. Here's the original story, from the New York Times:

Oh, darn. I'd already read that the acid in sodas thins tooth enamel (I still have all my own teeth and I'm hoping to keep them for four or five more decades) and that sodas also leach calcium out of your bones. I'd like to keep my bones reasonable functional awhile too. Ditto my kidneys. Particularly my kidneys.

So I've decided. It's time to kick the cola habit. Which, since I usually end up buying two a day (my cola ritual requires that I drink only from ice-cold cans purchased individually) costs me $1.50 a day. I did a little math, got a $45.62 monthly average expenditure (yikes!) and plugged that into the calculator in this website's sidebar to find out how much I might save over 10 years if I invested that at 6%. The answer? $7,513.56.

Hmmmm. Knowing that is,I hope,going to make giving up this little habit a bit easier. (But, oh, that first hit of carbonation! That sweet first slosh of bright, fizzing acid!)

How do you get rid of a bad habit, whether personal or financial? Most of us have a bad money habit or two, whether it's an uncontrollable urge to run amok at the mall or an inability to resist every "buy one, get one free!" pitch we see.

First, recognize that you do have a problem. (It's almost taboo to use the word "problem" these days after business consultants sold corporations on the idea that people would work so much harder to solve problems if everyone used the so-much-more-motivating word "challenge." Oh, please. A problem is just something you solve. But first you have to recognize you have one.)

Then do a little analysis. Figure out the negatives aspects of the habit, and the postive rewards of changing it. In my case, the negatives are stained, thinning teeth, bones that look like Swiss cheese and aching, inflamed kidneys that are....okay, I'm getting much too graphic here, I know. Sorry.

Positives? I'll be able to really chew, and walk and....uh...
Okay. I'll just be healthier. Much healthier.

Next, figure out what triggers the habit. You may realize that you feel that irresistble urge to spend whenever you find a new "discount" store. Or after you have a really lousy day at work. Or see a commercial on a shopping network for the newest "cool" product, or when you go to a movie with friends and they want to stroll the mall afterwards. For me, the urge to knock back a cold one comes when I sit down to read that paper each morning and when I drive.Especially when I drive. I want an ice-cold aluminum can of cola in my cupholder.... just opened, sweating a little in the hot Texas sun, cold in my palm as I tip it and take that first, long, sharply-sweet swallow...

Sorry. I really am trying to control myself. Really.

The next step is finding some way to avoid reponding to those triggers. Just going without--the cold turkey technique-- can be tough. Very often, the best way to stop a bad habit is to replace it with a good one. So I need a new reading-the-paper or driving-in-the-Texas-heat drink ritual.

I've already found one of those popup drink containers made of the kind of plastic that doesn't leach chemicals into whatever liquid it holds.(Mine features a Texas Rangers logo, and was bought at a garage sale for ten cents.) I'm also stocking up on instant tea and apple juice, (I'll cut the apple juice with ice to shrink the calories.) Now I just have to GET IN THE HABIT of going to the kitchen each morning and grabbing that beverage container, because if I get over to Duke's and don't already have something to drink, the siren song of the canned cola will be nearly impossible to resist.

To make sure I remember, I'm placing my keys each night on the kitchen counter by the Texas Rangers drink container.(Or in the refrigerator, if I've got my drink chilling.) Silly, yes, but it works.

Come up with something similar to help you break your bad financial habits. If pulling out a credit card has become a reflex action, get in the habit of carrying a small notebook and writing down every purchase you make...just before you make it. Seeing that dollar amount in black and white may make you think twice...and keep from you reaching for that credit card.

If you get lunch at delis or drive-throughs each day, cook triple batches of your favorite foods on the weekend, freeze individual portions and heat and eat those at work, then spend the rest of your lunch hour taking a walk, listening to music, or reading that book you never have time to read at home.

And focus on postive results, not negative consequences. Instead of imagining yourself going broke if you spend unchecked, imagine feeling more secure as you add to an emergency fund each week, or grinning as you open up a credit card bill that shows a steadily shrinking balance.

In my case, I'm imagining bright, strong teeth, little white flecks of calcium thickening and strengthening my bones, and kidneys that can take that apple juice and....

Sorry.

Finally, remember that no one is perfect, and new habits take a bit of time and effort to establish.If you occasionally "fall off the wagon"--just get back on!

Let's see how I do. I'll add "days without cola"--DWC--at the bottom of each post for awhile, as a motivator. Meanwhile....

....I wonder how apple juice tastes if you drink it from a well-chilled aluminum can?

Budgeting, Part IV

Having spent some time tracking your cash spending, you now have a lot of information on how you spend your money. Now it's time to start fitting the pieces together.

I'm assuming you're putting together a budget at least in part because you aren't happy with your current financial situation. Maybe you're getting deeper and deeper in debt and you're need to know why. Maybe you're just coming up a bit short every month and you'd rather break even. Or maybe you have enough to live on, but you'd like to put some money into savings. A budget is a great tool to help you towards your specific goals. I'm going give you suggestions on what you should do with all this information, but feel free to do things differently if that better fits your situation.

I suggested at the beginning of this series that you start by putting your income and your checking and credit card expenses on a monthly basis. Do the same with your cash purchases. Months vary in length, so a good formula is to count an average month as 4.3 weeks.

Add your reliable income sources up to create a monthly total. Is it what you expected? Are you sure you've included everything? Did you leave out income that you can't really count on, such as certain types of bonuses and commissions?

Then add up your "must pay" and unalterable expenses, which basically are income and property taxes, plus any court-mandated payments such as alimony, child support or judgements you must pay. These are checks you must write each month.

Next comes what I call "semi-discretionary" expenses. These are items that are difficult but not impossible to change. Mortgage or rent payments, basic utilties (this does not include cable or satellite TV!) Health, life and car insurance, car payments, landline phones, day care expenses, credit card payments, car maintenance and so forth.

Next comes "discretionary expenses." These are things you can change relatively easily. Food,clothing, entertainment, vacations, furniture....

When you've placed everything in a category, add up all your monthly totals and compare that to your income. Hopefully, subtracting your expenses from your income leaves a postitive number. If not, and increasing income is not an option, it's time to start looking at how you can cut your expenses. How big is the deficit? A few bucks short each month is an easy fix, but a significant amount will require some serious changes. Again, only you can determine what your needs are.

This is why I suggested you sort your expenses into the categories above. If, for example, you need to cut expenses by less than 10%, its time to start looking at ways to ease off on your discretionary spending. (You'll find some suggestions on this blog.) For example, you might start checking out books and videos from the library instead of buying them, or drop to a lower tier on your cable. If you find that you're spending a lot of money dining out, start eating at home more often or taking lunch to work. If you have a lot of overcharges on your cell phone, check for a better "unlimited" deal...or figure out a way to use your phone less! The savings from a few changes like this might be enough to get you back into the black.

If you're in real trouble, though, you may need to go to the "semi-discretionary" items. It may be time to trade your gas guzzler for a good, used gas-sipper, or if you have two cars, see if you can get by with one car and public transport. (Remember, one less car also means less insurance and maintenance costs.) If deeper cuts are necessary, can you move to a cheaper apartment or smaller house? (Check what expenses may be involved before making this decision.)

Talk with your family to come up with ideas. It's best not to play the "blame game" but instead work together to see who can cut what. If everyone can pitch in, it will be much easier to reach your goals. Good luck!