Making Plans and Achieving Goals

Cash Budgets Don’t Work

Cash Budgets Don’t Work

A cash budget means that you make all of your purchases with cash and never use a credit card.  This is a method commonly touted by financial gurus such as Dave Ramsey.  He calls it the “envelope system”.  You may have even heard of some of the studies showing the money-saving benefits of using only cash.  I was a big Dave Ramsey fan when I first started working “in the real world” and took all of his advice.  I tried going to all cash but found the system impractical, at best.

Difficult To Track

Now, I’m not opposed to hard work but I am opposed to unnecessary hard work.  I found it very frustrating to manually keep up with all of my purchases.  At the end of the month, my checking account just showed “ATM Cash WithDrawal” over and over.  Therefore, I had to keep physical receipts to input information into my monthly income/expense spreadsheets.

When using a credit card, you get all the information for every purchase already broken down into categories and ready to be exported.  If using Personal Capital you don’t even have to export.  The “Tracking” feature gives you a detailed look at your spending habits and shows you opportunities for improvement.  Credit cards give you that information in real time, are more accurate and require less work compared to using cash.

All The Change!!!

So you set your budget, you head to the ATM/bank, you get your cash and load up your envelopes.  Everything looks perfect.  $40 for eating out, $200 for groceries, $60 for gas.  You are ready to go.  However, three weeks in and you no longer have envelopes with three twenty dollar bills in them.  They have a bunch of one’s, five’s and three dollars worth of change.  This is no longer practical to carry around with you.

This was honestly the most frustrating thing about trying to use only cash.  The coins were physically too cumbersome to tote around so they just went into a jar.  This, however, meant all my expenses would be off by some small amount each month.  I challenge you to find a finance nerd who is okay with just saying, “no big deal, it is off but I’ll just add a line for Random.”

Besides the annoying coins, it also felt stupid paying with a bunch of one’s.  I always feel this pressure to move through lines quickly and counting out twenty dollars in one’s and five’s felt rude.

Again, credit cards remove this problem.  It is one small physical thing to carry around and it stays the same physical size as the month goes on.

It Wasn’t Making A Difference

The above two points are annoying but would be well worth the price if I was saving 20% each month.  However, I experienced zero difference.  I always grocery shop with a list and the list was the same, I was still driving the same number of miles each week and I was getting the same Papa John’s pizza each week. The money spent was not changing.

Even when shopping for clothes, the limited cash in my envelope still wasn’t affecting my decisions.  I rarely buy clothes, but when I do, I am not very price-conscious.  I am far more concerned with quality than price.  I am more of a minimalist than frugal in terms of clothes.  This didn’t change because I had to pay with physical cash.

*Funny side note, Theresa just bought me a pair of jeans and that was the first new pair in over 7 years.  Over the past 7 years, I had only one pair that my mom bought me in Grad school.  As I type this, I’m wearing a hoodie from high school that I wear almost every morning.*

Amazon, Anyone?

Amazon wasn’t as huge, back when I was doing my cash budget experiment, but I was still buying a lot online.  Unfortunately, there is no way to pay cash for your online purchases.  This made things tricky for a variety of obvious reasons.  Even if I used my debit card, I’m not getting the supposed psychological money saving benefits of taking cash out of my pocket.

What if I buy something online from a category that I already have cash out for.  Do I take $18.65 to the bank to deposit it for next month?  Or do I keep it for next month and just withdrawal $81.35?  Every time I would buy online, it made me feel like giving up because it felt like I wasn’t following the program.  What is the point if you can only do it half way?

Times Are A Changing

Two years ago, Chase Bank stopped allowing cash deposits into accounts.  Sweden has gone almost completely cashless.  In fact, this report says panhandlers are accepting credit cards (just stop to picture that).  My point is we need to accept that things are quickly moving towards all digital currency.  Soon, there will probably be penalties for paying in cash as there use to be for paying with credit cards.

If the only way you can control spending is by seeing the cash run out of the envelope, you might be forced to develop a new method soon.

Cash Back

I mention this last as it is a rather small benefit.  In fact, it might not be a benefit at all and is probably the greatest con ever developed by credit card companies.  So many people get credit cards with a great rewards program for cash back or travel points and will actually spend money just to get the points.  The commercials even market the cards that way.  They show people arguing over who can pick up the check because the reward points are so amazing.  I wish I had more friends like that 😉

That said, if I am going to buy it anyway I would rather get the 1-2% cash back every month.  I have two credit cards and I don’t want any more.  I know some people make a killing chasing the signup offers but it just feels like too much to manage for me.

When A Cash Budget Is Amazing!

Okay, I’m done hating on cash and acting like it has zero benefits in this day and age.  There are a few people that I would highly recommend this type of budget to, and a few areas where I love to use it myself.

If you have a spending or budgeting problem, you should give it a try.  If at the end of every month you are wondering where it all went and checking the calendar for your next pay period, then you need to make some changes.  A cash budget might not be the final answer for you but it will probably help you to wake up.

If you aren’t paying off your credit card every month, then go all cash.  If you have ever once not paid off your credit card at the end of the month, you need this.  Hide your credit card and only use cash or your debit card.  Don’t kid yourself about not wanting to miss out on the reward points.  If you miss one month the interest will wipe out an entire year of reward points.

For myself, I love going all cash when on vacation or whenever I’m drinking and spending (bar, concert, baseball game).  I have definitely seen a big benefit when going all cash for these type of events.  I can get a little loose with the credit card after a few good IPA’s and have been shocked to see the damage after a few nights out.  Going with cash allows me to set my budget before I leave the house and then I can visually budget as I buy.  When it is gone, I’m done; saving money and brain cells.

Wrap Up

I tried going to all cash but found that it didn’t work for me.  I understand how it could be fantastic for people with credit card debt and with spending problems, AKA, the average person.  If you are someone who knows their net worth, savings rate and routinely track expenses you are probably past the stage of seeing much benefit.

As with a lot of things, it is now just another tool in the toolbox.  Most all purchases are made on a credit card with the few exceptions mentioned above.

Do you use or have you ever used a cash budget?  If you use a cash budget, how do you get around some of the things I mentioned?



23 thoughts on “Cash Budgets Don’t Work”

    • I haven’t tried mint. I’m really happy with personal capital but I have heard good things.

      We only have two cards and it isnt a ton of reward points but I would rather have than not have it.

  • I hardly ever carry cash on me and when I do, it tends to stay in my wallet for long periods of time since I use the card for most everything. Like you said, there are times when cash is nice but it seems less and less all the time.
    Mr Defined Sight recently posted…Montana Vacation 2017My Profile

    • Some times the convienence out weighs the cost. For now owning two cars is worth the convienence it provides just like credit cards do too. Like I said if you have spending problem, have no budget and never tracking spending it is probably a good idea.

      I’m glad to hear I’m not alone in my credit card use in this topic amongst the financial folks.
      Grant recently posted…Cash Budgets Don’t WorkMy Profile

    • We don’t have a traditional budget either. More of an automate the savings and track the expenses. I don’t plan on retiring off my 2% cash back but I would rather have it than not have it.

      Thanks so much for reading and sharing.
      Grant recently posted…Cash Budgets Don’t WorkMy Profile

  • It’s good to hear someone else describe the same problems we have encountered trying to live on an all-cash budget. There are times when it is just not practical (online orders, gas stations, etc.) and using a credit card is so much easier (and safer than a debit card).

    We have adopted sort of a 75/25 approach to budgeting – we try to save and invest the first 25% of our income and live on the remaining 25%. We don’t necessarily care where that 25% goes, but we are at least mindful of opportunities to save where we can.

    • Hey Jason,

      Sorry for the late reply. For some reason, your comment went to spam.

      That is kind of how we budget too. Save first and then live off the rest. I do still track where it went at the end of the month though.

  • I’m not a big cash person either. But I can think of one reason it’s a good idea to try it at least once…it’ll help you realize how much harder little things can be for those who don’t have bank accounts. As much of a hassle as that seemed, think how much worse it would be if you had to pay your electric bill, rent, etc in cash.

    That said, I do make sure my 7-year-old sticks to a cash system with her allowance. We tried her having a running balance (in my head), but it didn’t help her get the sense of what things cost, how long it took to accumulate money, etc until I started giving her a cash allowance. That means I have to have at least $7 in cash on Fridays.
    Emily @ JohnJaneDoe recently posted…Financially Savvy Saturday #204My Profile

    • Hey Emily, thanks for sharing.

      I agree that you will gain a greater appreciation if you try it for a month or two. Kind of treat it as a fasting from credit cards.

      At seven I think cash is definitely the way to go. I remember thinking the ATM machine and credit card were like these magic money machines when I was a kid. I remember asking my dad why we didn’t just go to the ATM to get more money out. Kids are so innocent.

  • Hey Grant
    I visited your blog first time, and open the first article, i really enjoyed it, because it’s very informative about cash budget don’t work, now i bookmarked it hope so you are update your blog soon 🙂

  • I tried it once and it worked for us. We spend less money overall because cash is a bit more difficult than credit cards. Tracking isn’t a big deal. We just take out $200 and use that until it runs out. As long as we don’t take out more than $400/month or whatever amount, then we’re okay.
    Once we’re used to spending less, then we switched back to credit cards. I think we spend a bit more now than if we use cash, but it’s just too convenient. And the points are nice too.

    • Hey Joe, thanks for sharing.

      The tracking thing bugged me because I wanted to know how much I was spending in each category not just a total. Knowing the breakdown per category allows me to identify weak points and focus on that area.

      Like I said I use it as a tool when I know I’m going to be in a non critical spending situation. Vacation, concert, festival, bar. Buying groceries and gas in cash just doesn’t make sense.

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