By Carmen Chai, Money Mentors
Swiping a card is almost akin to eating fast food: it’s easy, it’s fast, it’s convenient and, if you don’t control yourself, the pounds, er, debt will start piling on.
A wise decision, experts say, could be a cash-only “diet.” “Usually people switch over to a cash-only diet for two reasons — to control their expenditures and to help enforce discipline in their spending,” says Brian Betz, a Calgary-based debt counsellor with Money Mentors.
“Once you’ve created a spending and savings plan, you pull out enough cash to satisfy those monthly expenses and that’s it,” says Judith Cane, an Ottawa-based financial coach. “Once the cash is gone, it’s done.”
But it won’t be a crash diet. You’ll have to ease your way in, and be sure you can maintain your new habits for a few months before incorporating other forms of payment again.
How to get started
You need to establish a budget so you’ll know how much cash you need to pull out each month. Analyze your bank and credit card statements to determine how much you spend on your fixed costs. These are any bills or expenses you pay regularly that are likely to stay similar from month to month.
Discretionary spending is harder to pinpoint, but at least try to get an average of how much you spend on entertainment or hobbies, too. Finally, calculate annual expenses, such as your vacation, Christmas and car maintenance. Divide the amount by 12 so you can account for these expenses each month.
“This is a valuable exercise and the most difficult for many people,” Betz says. Many people find that when it’s all laid out, they’re spending more than they earn.
Once you’ve sorted out a budget, decide if you will withdraw cash monthly, bimonthly or weekly. This may depend on how often you get paid.
Then, determine which expenses you will pay in cash. This shouldn’t include large fixed expenses, such as rent and insurance. Cane suggests setting automated payments for these.
Create a system for sorting money into the rest of your categories. You may choose to use envelopes, jam jars or perhaps a small divided pouch from an office supply store. Be sure to label each category clearly.
When you spend money on a transaction, replace it with a receipt to account for your purchases. When that envelope is empty, you’re done spending in that category for the month.
“This is where discipline comes in,” says Cane. “If a friend wants to go out but you’ve run out in your entertainment envelope, you can’t afford it.”
The first month or two may be tricky as you slowly perfect your budget.
You may want to call your bank to explain your plan, as they may wonder why you’ve fallen off the grid. Check to see if, once you stop using your credit cards, you’ll be charge an inactivity fee or the cards will be canceled. If you think you’ll want to use a particular card in the future you may need to set up an automatic payment for something such as a gym membership to keep the card active. You can always stow the card in a drawer to resist temptation if needed.
Why it works
For consumers who rely heavily on plastic in their daily lives, this plan will be tough. But you’ll make breakthroughs in understanding your personal finance.
For starters, you’ll understand how much money you’re bringing in and how much it costs to run your household and your life smoothly.
Cane says if you ask people at the grocery store how much they’ve spent on items in their shopping cart, chances are, they wouldn’t know. But ask her clients on a cash-only diet and they’ll know precisely how much they spend to feed the family.
Additionally, you physically see your money disappearing from your envelopes, something that’s harder to focus on when you pay with plastic.
When you pay with cash, the pain you may feel when you hand over each bill is “good pain,” says Betz. When you swipe, you buy it without seeing your money leave, and there’s no pain associated with it, making it easy for those who lack self-discipline to get out of control.
Finally, you may be more careful with spending and avoid frivolous purchases.
“If you have a last $20 in your envelope, you might think twice if you need this purchase or not,” says Betz. “It forces you to evaluate needs versus wants.”
Phasing in other payment tools
“The length [of the diet] depends on your circumstances and what your goals are,” Betz says. He’s seen some clients stay card-free for years until they’ve paid their debt and started a savings.
However, you will eventually need to use credit again to have a decent credit score, especially if you are still aiming to reach certain milestones, such as purchasing a home.
Try reintroducing your debit card first, after about six months of cash. Start small — you can try using the cards only when you’re at the grocery store, or only when you go out. Just be sure to continue to stick to your rigid budget.
Then, phase in your credit card, “used only as a payment tool, not an extension of income,” Betz says. If you don’t have the means to pay off the balance each month, you shouldn’t be using it.
Cane suggests using credit for simple expenses, such as gas. “It’s an easy one because you don’t overspend on gas,” she says. “Every time you charge your card, you get into the habit of going home to pay off the balance.”
If you’re having trouble sticking to your budget and your cards are too tempting, it’s time to hit reset again and go back to a cash-only routine.