October 11, 2019

Which Payment Type is Best if You Are Trying to Stick to a Budget?

Sticking to a budget can be challenging, especially if you’ve only recently decided that you need to save money. Trying to alter the spending habits that you’ve become accustomed to can be quite hard, after all. However, there’s one trick that can be very beneficial in helping you to keep your spending habits in check so that you can stick to your budget and save money.

That trick is to stop using your credit cards and to stick to using cash. The following are some of the reasons why you should use cash instead of your credit cards in order to stick to your budget:

1. There’s No Interest Charged on the Use of Cash

Every time you use your credit card, you’re charged interest. Not interest on the purchase you just made, but accrued interest on the balance that you owe. If you have a significant balance on your card, that interest is going to only make you go further into debt. Interest rates on credit cards tend to be some of the highest interest rates in general, after all. The average APR (annual percentage rate) on credit cards tends to be around 19 percent. The average APR on cash is zero.

2. Using Cash Means You’re Only Spending What You Have

It’s a lot easier to track how much you’re spending when you’re using cash. When you run out of cash, you’re out of money — it’s as simple as that. It’s a lot more difficult to keep track of how much you’re spending if you’re putting everything on your credit card. This is because the credit available on your card may far exceed the actual amount of money you have in your bank account. Essentially, you can easily go past what you can afford to pay back and end up in debt, thereby destroying your budget and your attempt to save money.

3. Spending Cash Has More of a Psychological Impact

When you spend actual cash, you’re seeing how much money you’re handing over in the form of ones, fives, tens, twenties, etc. This ability to see what you’re spending has a psychological impact — it hurts to see the money you’ve earned go away like this, especially if you make a large purchase. When you pay for something with a credit card, you don’t have the same feeling. You don’t see the numbers being handed over, you’re just swiping a piece of plastic. There’s less pain. A lesser feeling of responsibility for the money you’re spending.

4. Using Cash Makes it Easier to Plan Out Your Budget

It’s not just that it’s easier to keep track of your spending habits when using cash instead of credit cards. It’s that if you stick to cash, you can plan out your budget more effectively. For example, you can figure out what your budget is and take out the money that you can use within that budget at different cycles. If your budget only allows you to spend a certain amount of money per week, then you take that specific amount out of your bank once a week. Once you run out of that cash, you can’t spend more without going over your budget. This kind of planning is very difficult if you’re using a credit card because of how easy it is to lose track of what you’re spending.

These are four reasons why you should use cash instead of credit cards when attempting to stick to a budget. However, this will only work if you are able to practice self-control. You can always take out more cash from your bank, after all. For more professional tips on how to stick to a budget and save money, contact us at Safe Money Partners today.

photo of Jeff Mohlman

By Jeff Mohlman

Jeffrey has developed a comprehensive network of financial planning and estate planning experts who work for their client’s short-term and long-term goals. Today, the approach he incorporates for his clients follows three basic tenets: 1) being debt-free, 2) maximizing after-tax retirement income, and 3) protecting their estate from unforeseen risks.