Cash budgeting…

December 6, 2012

Isn’t a cash budget so “last century?”

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I know what some of you are thinking when you read blog posts or articles about using a cash budget. “Why would I do something so archaic when there’s an app/software/tool/etc. for tracking my spending? Get with the times!” I know this because that same thought has crossed my mind more than once. I’ve experimented with other methods of budgeting that don’t require asking the teller for a particular number of 20’s, 10’s, 5’s and 1’s. I’ve tried both online tools and computer software and have also kept a handwritten ledger to record our debit card transactions in their respective categories. But each time, I’ve come back around to using cash again.

Now, there are definitely categories for which we do not use cash. With the ability to pay bills online, it’s far more practical to set up those predictable recurring expenses to automatically come out of our account. And there are also budget categories for which it doesn’t make sense to withdraw cash from each deposited paycheck, such as saving for a vacation or home project. We choose to keep those amounts accumulating in the bank until we need them.

I’m talking about those variable expenses that can be budget busters: groceries, entertainment, clothing, and eating out, to name a few. Even gas can throw off a budget if one isn’t intentional about combining errands, carpooling, or employing other strategies that reduce driving distances.



While there are some people who have no more of an issue with overspending when they use debit or credit vs. cash, even disciplined people will acknowledge that when they pay with cash, they spend less. If I bring $100 with me to the grocery store, guess how much I will spend on groceries? $100 or less. If I go into it planning to spend about $100 with a debit card, I can almost guarantee you that I will find a way to justify spending $125.

An interesting study conducted by researchers at Carnegie Mellon, Stanford, and MIT used magnetic resonance imaging (MRI) to study which regions of the brain activated when participants had to make decisions about purchases. The insular complex—associated with pain—was activated when people viewed prices of goods and were faced with the decision of spending actual money. The conclusion?

“Credit cards effectively anesthetize the pain of paying,” said George Loewenstein, Carnegie Mellon professor of social and decision sciences (SDS) and co-author of the paper. “You swipe the card and it doesn’t feel like you’re giving anything up to make the purchase, unlike paying cash where you have to hand over bills.”

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Another benefit is that there is no risk involved. If you use cash, you remove any chance of not being able to pay for your purchase when the bill comes due. What if you make a habit of using a credit card but then you lose your job or face a major crisis between your shopping trip and when your statement arrives? At the very least, you’ll be paying interest on those charges, possibly for a while.

{Interesting side note: As part of a multi-billion dollar settlement this summer, Visa & MasterCard agreed to lift their longstanding policy against businesses passing along credit card “swipe fees” to their customers. Kroger even considered either charging two separate prices for groceries (a card price and a cash price) or giving a cash discount at the register. It could be just a matter of time before this becomes reality at some stores. Another reason to use cash!}

But there’s a lot of risk involved in carrying around a whole bunch of cash! you might protest. This is true. So only carry with you what you expect to spend, with a little cushion. For example, if I’m going grocery shopping, I’m not going to bring along the entire amount that’s budgeted for that pay period. I’m going to make a list and bring what I believe I will need.


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I’m not saying that operating with a cash budget is without its drawbacks. It takes a little bit more planning and a trip to the bank or credit union, and you have to be committed to not steal from one envelope to cover another. But I challenge you to try it out for a few months and see if it helps to temper your spending and save you a little money. You have nothing to lose!

Find out more about Melissa at her blog

& visit her etsy shop (here)

32 comments on “Cash budgeting…

  1. daisy says:

    Thanks for posting such a wonderful and timely article. I have been wanting to convert back to a cash system for a year now, having tracked our spending on paper in 2012. I think this will be one of my goals for 2013. It does feel different when you pay cash for something, so those study results don’t surprise me. It’s almost a feeling of accomplishment when you know your gas or groceries are already paid for and there will be no bill coming for them.

  2. Mlchelle says:

    I just started cash budgeting last week and can already tell a difference in what I spend. Money seems real and not some vague concept of what I might have left in the bank. I adore your wallets and have been trying to wait patiently until after the holidays so I can order one in the fabric I want…. I suppose it’s good practice for waiting on purchases until you can afford them! It’ll be my reward for sticking to my cash budget. 🙂

  3. Anja says:

    You are completely right about not spending more than you should. I only use credit cards for things that require them, such as booking flights or hotel rooms. But I do find debit cards (I guess that’s what they’re called in the states – the cards that charge the amount to your bank account immediately, so you have a complete overview over your costs, too) very practical. In Germany, paying cash is still very common, lots of smaller places or restaurants don’t even accept credit cards.

    • My husband and I visited Germany a few years ago, and I remember some smaller establishments being cash only. That’s actually very smart of them considering the fees that are charged for accepting credit cards. Our American culture is so conditioned to pulling out plastic that you hardly ever come across a business any more that doesn’t accept them.

  4. Kelly says:

    How very Dave Ramsey-ish of you!! I love it! We have been using cash only for a number of years now. It has definitely corralled our spending in areas that were previously running wild! Thanks for a timely article!

  5. Angela Kelly says:

    This is very true and great advice. I have started reading and using TONS of your information for budgeting and organizing, and this is a fact that I have known for quite some time (that spending cash affects you more than using a card). My problem has always been the envelope part, I work for tips partially so using that money intentionally and purposefully (versus recklessly) is a challenge.

    • Angela, that would be a challenge when you’re working with income that comes to you in two different ways. Perhaps you could immediately put aside the tips after each shift and then divvy them up into different spending categories on a weekly (or bi-weekly) basis. I can see how it would be so easy to just spend that cash here and there if you’re not careful!

  6. Holly W says:

    Great article! We have been using the cash system (thanks to Dave Ramsey) for about 2.5 years and will probably never look back. It has really kept us in line and allowed us to become debt-free!

  7. michelle says:

    So where can we find those cute dividers for use in our cash envelopes? 🙂

  8. Jessi says:

    Thank you so much for posting this! I much rather use cash. It is easier to see what you have left plus it keeps me (mostly) on budget. I budget us $100 a week for groceries. I always plan out my grocerie. Some weeks we don’t need to spend the whole $100 but I always bring it all with me. What I will be doing differently for this challenge is bringing only what I’ve budgetted based on my gocery list instead of the whole $100 I budget us for each week.

  9. Kristine says:

    I have been using a cash system for a couple of months now. I still use credit cards for gas, prescriptions and doctor appointments. I am noticing I am not buying online as much as I used to. I have even been paying for Christmas gifts with cash. I also started keeping coupons in the envelopes too. I just ordered a cash wallet. It looks lighter and smaller than the long plastic wallet I have been using. I still need to reign in some spending but I am seeing a big difference. Awesome article!

    • Come January, you will be so happy that you’re paying for Christmas gifts with cash. 🙂 What a clever idea to put coupons in with their corresponding cash categories. I’ll bet it helps to keep you from forgetting about them.

  10. Gina Helton says:

    Love this post and totally agree! We use cash envelopes as part of the Dave Ramsey Total Money Makeover plan. Best thing to happen to us!

  11. Toni says:

    We’ve been using the cash system for almost 2 years now and it has really helped us stick to our budget. A couple of months ago, I wanted to see how we would do if we used the debit card instead. It was so much harder to stick to the budget and to remember how much money had been spent out of a certain category. Also, having to keep up with receipts until the transaction cleared the bank was a pain. My husband and I think it’s so funny that when we pay with cash, the clerks scrutinize the $50 and $20 bills, hold them up to the light, and use some kind of maker on them to see if they are counterfeit. However, when we use a debit/credit card, no one seems to think that it could be stolen/fake! Thanks for the great article!

    • I know what you mean about the debit card. Even though it comes out of checking and you don’t owe, it introduces more steps to keeping track of what you spend. And it still doesn’t have the same impact as handing over the bills!

  12. Peggy says:

    It feels great to “live within cash flow” which I only learned in the last 10 years (i’m in my 50s) – so good for you! Thanks for posting this during December – good to hear how others are doing it.

    • I was intentional about writing about this for my December post since January can be so overwhelming with all the “should’s” that start running through our heads. I thought it would help if people could start mulling it over now and (hopefully) already have the mindset and be ready to put it into action when the new year comes.

  13. Kara says:

    I just found your site (thanks to pinterest!) & I’m loving it! I have seriously been navigating around your blog for the past 2 hrs! Before I got married I used this system. I have read Total money makeover & loved it. This system was GREAT! The issue I am facing is my husband does not like the idea of cash being left in the house. Any advice?

  14. Very wise advice! Dave, my husband, died suddenly, in 11/11 and in 10/12 I took Dave Ramsey’s Financial Peace University. It has helped enormously although I still use one credit card. If one needs a basic course in finances, I highly recommend taking the class.

  15. Viviana says:

    It is such a basic idea but it seriously works. I am anxiously waiting to order one of your cute divider wallets on Monday. I am hoping that cuteness will keep me disciplined to use the cash method consistently.

  16. Lindy says:

    I have been using this system for almost 50 years, and have (lovingly) been made fun of by friends and family. I rarely use a credit card, which keeps me from impulse purchases. If I truly want or need something important, I either pay cash, or if I have to use my credit card I try to pay it off when the bill comes. When we were first married my husband would save up for an item like an appliance, a trip or down payment on a car. I have never used a debit card and I use a check to get money from the bank. I use a check at the doctors office, for prescriptions, car repairs, and I mail my bills. This also gives me a record of what I spent money on. When we retired we had no car payment, no mortgage payment (due to paying it off in half the time by paying extra every month), and no charge accounts. We budget cash for gas, food (and I save enough money buying regular groceries to enable me to also shop at Whole Foods because I prefer organics), stamps, restaurants, movies, etc. We have never gone without anything we wanted or needed,and our children weren’t deprived of a great life. Your children will benefit from learning how to handle money too. There is, however, another part of this plan that works well. Think about what you want as opposed to what you really need. Can you make do with your present computer, TV, cell phone, appliance, furniture, or anything else for a little while longer. If so, then save some money and wait for a sale. You may even decide that you have changed your mind by then. Sorry if this is lengthy. I just wanted everyone to know that this is something that can easily be done for for a lifetime. Anyway, Melissa, this is a wonderful article and I am happy to see that you are letting people in on this great way to have an easy life and save money at the same time.

  17. Lisa says:

    I just stumbled onto your blog last week through pinterest! It’s amazing and highly motivating- so of course i jumped right into creating an envelope system, got my husband on board and started trying to figure out how much i needed to budget for each envelope- Well- what a rough weekend to start! I hosted EAster dinner for about 20 people- and spent $100 on food for dinner before I even went grocery shopping for the week. How do you budget in holiday family gatherings? between my husband and I we have a pretty big family and we end up hosting most holidays- Everyone brings stuff but we still end up spending more than we’d like. Any recommendations!?

  18. Harini says:

    I loved this article. I am a cash budget person myself. I have my version of the cash envelopw system. I use a expandable mini file for the enveloping and budgeting. Please read my blog here—> and give me some feedback on where I could improve it more

  19. Heather says:

    I love this blog entry. I get too caught up in the bells and whistles of a phone app or software to track spending. I end up wasting so much time and money on these systems that I forget the real purpose of them which is to save money! I am definitely going to try this cash system!

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