These days, many people’s spending habits are ruled by plastic. Debit cards, credit cards and mobile wallets make transactions easy and effortless, but they can also make it easy to wind up with a mountain of debt and risky financial habits.
As of 2018, U.S. consumers owed more than $444 billion in credit card debt, and the average amount of credit card debt in the U.S. continues to grow. In an increasingly tap-and-go world, plastic may seem like the best way to spend, but could it be worth trying out an all-cash diet in an effort to help develop wiser spending habits?
Ahead, we take a look at some of the pros and cons of a cash diet plan, sharing some of the motivations behind an all-cash diet and how using cash may help you think about your money habits in a new way.
Related: 7 creative ways to save money
What Is a Cash Diet?
Today, cash can seem like a relic of the past. And yet, for people who are dealing with debt, a cash diet may provide an opportunity to develop more transparent spending, which may help on the road to getting a handle on existing debt.
A cash diet plan involves using only paper currency for all of your day-to-day expenses. This could include using cash to pay for your groceries, fill up your gas tank or cover the bill for a meal out with a friend. Fixed expenses, such as rent, bills, or any existing debt payments, generally aren’t included.
What Are Some Pros of a Cash Diet?
One of the biggest potential benefits of an all-cash diet is the opportunity to gain more transparency around spending. When using cash to pay for daily expenses, you can feel the immediate loss of a dollar spent. When using credit or debit cards, the impact of the money you are spending is delayed, potentially making it easier to overspend or rack up debt.
Another possible benefit of a cash diet is that it may provide more tangible oversight over your expenses and budget. If you take out a specific amount of money, it’s easy to keep track of how much you’ve spent by simply looking at the amount of cash you have left.
Overall, adopting an all-cash diet could provide you with more control and awareness over your spending decisions.
If you are currently experiencing debt, becoming more conscious of how you spend your money may help to create sustainable financial strategies for the future.
What Are Some Cons of a Cash Diet?
Though a cash diet plan can provide some sound opportunities for becoming mindful of your spending, there may also be some downsides. In some cities, restaurants and other vendors are increasingly going cashless. Depending on which establishments you usually go to, an all-cash diet could prove to be a challenge.
Additionally, unlike many major credit cards and debit cards, cash won’t be covered in case of theft or loss. And while this may not seem too concerning, it’s something worth considering depending on how much money you plan to carry with you at a time.
While credit cards can be a slippery slope, they often offer perks that can incentivize signing up and spending, such as reward points, cashback programs, and the accumulation of air miles.
Using cash comes with no such rewards, and if considering switching over to an all-cash diet for the long term, it’s worth considering how losing access to these kinds of benefits may impact your finances, even as can help you avoid more debt.
It’s also worth noting that an all-cash cash diet may not improve your credit score, because your credit score is derived from data on how you manage credit month to month and over time.
Starting a Cash Diet?
If you’ve decided to try out an all-cash diet, you might want to start by creating a budget. Once you’ve determined your average monthly net income, you might start by outlining the fixed expenses you know you already have, such as rent, bills and debt payments, and figure out how much money you have left over after paying them.
Whatever money is left over-represents the maximum you are able to spend on day-to-day costs, such as food and gas. Next, cash dieters typically withdraw this amount in cash. Some might prefer to budget for the amount of time between pay periods or to stick to a monthly cash diet plan, the choice is up to you.
From there, a common way of organizing a cash diet is to use the envelope method. This includes outlining each of your spending categories — such as social activities, food and groceries and shopping — and distribute your money across each area based on how much you typically spend. Each of these categories is put in a separate envelope, which may make it easier to stay on top of your spending.
Since life isn’t exactly predictable, you might want to consider creating an additional envelope for unexpected expenses that may not fall into a regular category. An emergency fund could help cover an unexpected expense like a car repair, and you might want an additional miscellaneous category for things like a gift for a friend’s wedding.
These unexpected expenses might not come up on a set schedule, but it’s worth being ready when they do. Consider setting a small amount of money aside for these types of expenses so you’re not caught off guard when they come up.
Managing an All-Cash Diet?
Though it may sound simple in principle, using a cash diet isn’t always smooth sailing. For instance, if you run out of cash before it’s time to replenish your envelopes — whether that’s at your next paycheck or at the beginning of the month — a cash diet dictates that you won’t be able to buy anything else.
An all-cash diet may be helpful in improving your understanding of your spending habits and helping to curb impulse spending. It can also mean that you may have to get creative about how you deal with cash shortages without reaching for your credit card.
On the other end of the spectrum, there is a chance you may have some cash leftover. If this happens, you could consider depositing it in your emergency savings account.
If you don’t already have a fund for emergencies, like an unexpected health bill, you may want to consider starting one with any cash you have leftover. If you have enough to save and put towards your current debt, then you might consider using the cash to make an extra payment on your highest interest debt.
Understanding Your Spending Habits
Depending on your individual situation and goals, a cash diet may be a temporary experiment or a long-term strategy. If you aren’t sure which is right for you, you could try it out for a month to see how you feel. After all, weaning yourself off of credit can be a challenge.
After you’ve tried it, this might be the perfect opportunity to reflect on how you did and what you learned and assess whether staying on an all-cash diet is right for you.
Whether you’re in it for the short-term or the long haul, you may find that a cash diet gives you space to reflect on your money habits and develop a better understanding of where your money is going.
Even if you don’t stay on it forever, a cash diet plan can be a valuable experience and can make it easier to build a more sustainable financial future.
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