Taking Charge of Your Finances and Cash

finances-cashI was talking to a colleague at work a few weeks ago, and he was complaining that he would never get out of debt.  He felt flooded with his pesky student loans, exorbitant rent, and monthly car payment for his luxury car.  

 

At the end of each month, he feels depressed because his whole paycheck seems to be distributed between all the bills with nothing really leftover.  And he makes a six figure salary.  He lamented saying he would never be able to afford a home, and the thought of retirement, so distant and unattainable.

 

I wish this was the first time that I had a conversation like this with someone.  But, in the years of facilitated Dave Ramsey’s Financial Peace course at my church, this conversation is all too common.

 

First Things First: Budget

financial-checkup-finances-cashThe first thing that I asked him was if he had a budget.  When he responded with “No”, I encouraged him to set up a Personal Capital account so that he could start tracking his spending.  

 

After a couple of days, he came back with his account set up and amazed at his spending habits.  Turns out he did have extra money each month, but it was going towards leisure activities such as eating at restaurants.  Like most people I meet, he underestimated how much he actually spends.

 

Excuses

budgetThen, I brought up creating a budget with him again.  I explained that it would allow him to achieve his goals of wanting to own a home and prepare for retirement.  Not surprisingly, he was hesitant at first.  He gave all the usual excuses: “a budget is too hard”, “I don’t want to restrict myself”, and on and on and on.

 

I usually smile and nod my head in agreement.  Creating a budget can be daunting.  But then I say, “If you’re happy with the situation that you’re in, keep it up.  If you want to alter your trajectory, then you have to make some changes.”  

 

I don’t mean that once you create a budget that you must live off ramen and deprive yourself completely.  As discussed earlier, I am all about value spending and enjoying your life within your means while saving for the future.

 

Disciplined Spending

finances-cashAfter my colleague completed his budget, we discussed trying out the envelope system.  This system was first introduced to me by the Financial Peace course I mentioned earlier.  I personally think it’s an incredibly useful method for those that are in debt.

 

For those that are not familiar with the envelope system, this method encourages one to take out cash each month and place it into various spending envelopes allocated towards different areas of spending.  The individual then pays with the cash from the appropriate spending envelope.

 

Please note that some expenses you probably wouldn’t be able to pay in cash, such as mortgage, electric, gas, water, etc.  The envelope system, however, is excellent when it comes to discretionary spending like eating out, buying clothes, and general entertainment.

 

Why It Works

finances-cashThe reason why the cash system is so effective is because studies have shown that when a consumer spends cash, they are more likely to spend less with cash than with a credit card.  A credit card swipe is much easier than fishing out coins and bills.  Plus, with cash, one’s spending limit is much more tangible and real.  There is nothing more restrictive than not having enough cash to pay for something.

 

If you want to get technical, the envelope system revolves around the loss aversion theory.  People prefer to avoid losses over acquiring equivalent gains.  Some studies have even show that losses are twice as powerful psychologically as received gains.

 

It’s no wonder that businesses don’t make a fuss over credit card usage.  Anything to get you to buy more is always beneficial for companies.

 

Cash Is King

finances-cashSome believe we are moving to a cashless society.  When I was doing research, I thought I was going to find a lot of data supporting this theory as well.  Do you know what I actually found?  I was wrong.  46% of the U.S. population pays non-recurring bills with cash.

 

Do you realize that most German consumers exclusively use cash to pay for things?  82% of them to be precise!  Some researchers hypothesize this is because Germans value their privacy and don’t want merchants to monitor their credit card transactions.

 

While researching, I also found that Germans hate debt.  This is why only 35% of Germans actually own their home versus rent.  This totally surprised me, but when given the nature of the German culture, hyperinflation in the 1920s, and World War II in the 1940s, I get why cash is king to them.  

 

Negatives of Cash

Now, I’d be remiss if I didn’t talk about the three major downsides when it comes to paying everything with cash.  

  1.  Manual Entree into Personal Capital

You’d have to input all of your expenses into Personal Capital or your preferred budget software.  This can be a hassle if you are forgetful or just find it tedious.  However, if you get into the habit of collecting your receipts, taking 15 minutes on a weekend to input really shouldn’t be that bad.

  1.  Carrying Large Amounts of Cash

finances-cashCarrying around large amounts of cash makes some people nervous.  I totally get that.  One thing to alleviate that is to divide your withdrawals into amounts that you make you feel comfortable for the envelope system.  So instead of withdrawing everything once a month, you could break it down into biweekly or weekly withdrawals.

  1.  No Cash Rewards

You wouldn’t be able to earn any cash rewards like those from your credit card or gain any sort of points when you make purchases.  For people that use their points to travel, this could definitely be a negative aspect.  

 

With that said, studies done by the US Consumer Financial Protection Bureau have shown that debt decreased by about 5% for groups of people who primarily paid cash for purchases over a six month period.  

 

Have you ever tried the cash system?  What was your experience?  Share your thoughts below.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.

42 Comments

  1. You must work where I do-I know plenty of people like that guy. My favorite is the one who makes 6 figures, bought two brand new SUV’s a few years ago, goes on at least two expensive vacations each year but somehow “can’t” save 6% in his 401k to get the match.

    I like to use Excel for my budget and spending record, so the manual entry aspect of cash doesn’t bother me. I have tried the cash system but it didn’t work well for us. So we use the debit card for everything instead. It’s certainly worth trying-it works very well for many people.
    Liz@ChiefMomOfficer recently posted…Why The Bank Thinks I’m Stupid – Annuities in an IRAMy Profile

  2. Good for you being a good samaritan! I just don’t understand people with this sort of mentality. They want to get out of debt or increase savings but they don’t want to sacrifice instant gratification (luxury car) to do it. We all have a choice. He’s choosing to spend his money on toys that obviously aren’t making him happy. He could just as easily choose to forego the luxury items and focus on paying off debt and increase savings.

    He sounds a little reluctant to take on these new habits. I’m curious to hear if he sticks with it or not.
    Go Finance Yourself! recently posted…The Pitfalls of Timing the Stock MarketMy Profile

    • I think you summed it nicely. He’s buying toys that aren’t making him happy. I feel like we hear this way too often and it’s really unfortunate. Stuff does not make us happy.

  3. In countries like Germany it’s worse then that. In many areas a credit card is not accepted. It’s getting better as of the last 3-5 years, but my first trip for work 10 years ago I had difficulty using my card for meals. Your probably right about the privacy impacts though, Germany has almost draconian privacy laws. Unlike the US collecting individual information there is mostly forbidden. As a former data analyst I remember having to scrub all user identifiable data from anything internal that might involve German employees. I tend to prefer credit card transactions for cash back and for ease of execution, but I definitely see the value of cash based transactions for those whom are less conscious of their day to day spending.
    Full Time Finance recently posted…How to Calculate Net WorthMy Profile

    • Thanks for sharing your perspective. That’s amazing to hear that Germany didn’t even accept a credit card 10 years ago. I can’t imagine that. I feel like I’ve grown up all my life with companies taking credit cards.

      I’m like you in that I use credit cards for cashback transactions.

      • Germany has a very different banking system. Almost all recurring payments are wired: rent, mortgage, utilities, insurance payments, loan payments. Bills are paid for by wire. Stores usually accept cash or ATM cards. Credit cards are typically only accepted in stores that sell more expensive items, or hotels. So if you travel to Germany, carry cash (your US ATM card is useless).

  4. I don’t use cash too often anymore but I like the system for those that don’t have the spending restraint. I couldn’t agree more about budgeting. To me, it is so easy and actually kind of fun. Just make a simple Excel spreadsheet. Doesn’t have to be fancy by any means. I think people get discouraged because they think it is some daunting process. Piece of cake!
    Mr Defined Sight recently posted…Sight From Other PerspectivesMy Profile

  5. Loved the story! Seems like they are way too many “broke” six-figure earners these days!

    Personally, I don’t use the cash system. I know it works with a lot people, but I like using my card more. It makes it easier to track expenses and get rewards as you discussed. Pus it makes my wallet too bulky haha 🙂

    I rarely carry more than $40 in cash.
    Andrew recently posted…Are Collectibles Good Investments?My Profile

  6. I think this is a great start for a beginner. I too believe it is way harder to spend in cash…which is why even when I have cash in my pocket, I ignore it and use my debit card instead!! I like having all of my purchase in black and white because I often do forget receipts or dont ask for one. Thankfully, I don’t have a problem with spending so I am able to balance it all out, but for those who do, I think Ramsey’s course is a great first step to figuring it all out. That coupled with you fine counseling is hopefully what will get him to wake up. Nice work!! I can’t wait to hear if he follows through or not. 🙂
    Miss Mazuma recently posted…Pt 3 -Recovering From the Fall of My EmpireMy Profile

    • I too like to use a card to track all my purchases. Having all of my purchases show up on personal capital is such a nice convenience.

      I think he’ll get out of debt but only after he’s truly ready to make a change 🙂

  7. It amazes me that your colleague was making a 6 figure salary and still didn’t believe he could get out of debt. Awesome how you showed him to take a closer look at his finances. It’s amazing how things add up. We’ve never tried the envelope system, mostly because we love our rewards cards, but I can see how using cash for discretionary spending would be a huge help.

    • I too am a huge fan of the cash reward credit cards. Plus I like the convenience of using personal capital to track all my finances. With that said if I was in a ton of debt I would definitely switch over to cash only.

  8. I remember when I was in debt, I wanted to buy something for $10. I saw the $20 I had in my wallet but didn’t want to part with it so I used my credit card instead. At the time, I never really thought about it, but once I got out of debt and went all cash, I realized how powerful credit cards are. You can literally swipe all day and by not seeing any money leave your wallet, you really don’t think that you are spending any money at all.
    Jon @ Money Smart Guides recently posted…TradeKing Review: Is This Your Online Broker?My Profile

  9. I think it’s great your co-worker is open to taking your advice. Kudos to you for taking the time to help them out!

    I rarely use cash and typically have less than $20 on me. But I know it does work for many (particularly those just starting a budget) to use the cash and physically see the money leaving their wallet. For me, it hurts no matter how it leaves the bank account. 🙂 Thanks for sharing the statistics on Germany – fascinating!
    Amanda @ centsiblyrich recently posted…Debt Free Story: How this couple paid off their mortgage in 5 yearsMy Profile

  10. I think it is very sad that adults have to resort to “the envelope system” which seems like a game for pre-schoolers or a home economics teaching aid for children.

    If you can use a cashback credit card, it’s better than cash. If someone has to rely on this kind of reinforcement, why don’t you “enhance” the envelope system? Have them pay the bill/tab/expense with a cashback credit card and then immediately pay the credit card bill with the cash in the envelope or take the cash out of one envelope and put it into the “credit card payment” envelope. Now that I think about it, why don’t you just put Monopoly money in the envelopes and have the real cash in an interest-earning checking account? That way every dollar spent generates two income stream – interest from the bank account before it is spent and cashback from the credit card after it is spent.

    Sweden is close to being cashless. I recommend a book called “The Curse of Cash” by Kenneth Rogoff.

    If I were king of the world, I would eliminate cash. The existence of cash facilitates terrorism and criminal transactions.

    • Thanks for sharing your thoughts Dan. I think you brought up some really interesting ideas. I too am a big fan of cash back credit cards and have been using mine for years.

      I had no idea that Sweden was virtually cashless. That’s really impressive. I will definitely check out the “The Curse of Cash” it looks really interesting. Thanks for sharing!!!

  11. Great post. I rarely use cash nowadays, but then again my spending habits are much, much better than before. I can see how, behaviorally, spending your cash can be harder than just swiping your credit card. I think that the envelope system can be useful if one is having trouble sticking with a written budget.
    SomeRandomGuyOnline recently posted…We Bought a New Car?!My Profile

    • Thanks for sharing SRGO!!! I have had some friends do the envelop system that have had some really amazing transformations with their money. Now that they are out of debt they have slowly gone back to credit cards but are much wiser in how they spend 🙂

  12. We hardly ever use cash – we value our credit card rewards too highly. But if someone does want to use the envelope system without resorting to cash, it should be possible. Capital One allows you many savings accounts – each acting as a separate virtual envelope – and you can set up automatic transfers into these ‘envelopes’. I’ve also heard good things about Mvelopes (https://www.mvelopes.com/), but I’ve never used them myself.

    Good for you for helping out your clueless colleague.
    Mrs. BITA recently posted…Dear President ElectMy Profile

    • Thanks for sharing Mrs. BITA. I didn’t realize that Capital One had virtual envelopes available. This is really smart idea and something worth exploring. Thanks for sharing!!!

  13. I remember that when I visited Spain one of the headlines was that the country had the highest amount of the 500 Euro notes of the entire Eurozone. I think part of it as well is their economic background compared to the U.S. We have had economic recessions & the depression but I think two World Wars and the intermittent period has made cash more vital to them.
    Josh @MoneyBuffalo recently posted…Why I love cash back shopping portalsMy Profile

  14. I’m giving a lunch and learn on Friday and most of the time will be spent covering budgeting. I go back and forth on the cash envelope system. My biggest worry is that people won’t follow through with it, but I suppose it can’t hurt to suggest it. I think cash is becoming so uncommon these days that it “feels” like more work to do the envelope system than it really is. If you want to change, though, you have to put some time and effort into it!
    DC @ Young Adult Money recently posted…15 Healthy Habits for Success in Every Area of LifeMy Profile

    • That’s awesome that you’re giving a lunch and learn session. That’s awesome!!!

      I’ve seen people that have followed through with it and had great results. Others not so much. So it’s definitely worth exploring and seeing if it’s right for them.

      Thanks for stopping by!!!

  15. I can definitely see the benefits of cash for those that have to (re) learn how to handle money and a budget. You got to start somewhere and something tangible works best.
    For us personally, we are virtually cash-less, almost everything goes by debit card and very, very occasionally with credit card (bit of a turn around since coming back to Europe, we did everything with a credit card back in Canada).
    Team CF recently posted…Real Estate Investments – History, Yields, Risks and StrategiesMy Profile

    • I’m with you CF. I use my credit card for virtually every purchase. I like that I can quickly track on my expenses on personal capital and don’t have to worry about manual entries into my budget 🙂

  16. Great advice for your friend! Personally I use credit wherever I can to earn points. But I have friends that only use cash to help save on money. Everyone is different, and if it is hard to get control of your credit card spending, moving to cash is probably a great idea.
    Mr Crazy Kicks recently posted…Don’t Get Mad, Get EvenMy Profile

    • I’m with you Mr. Crazy Kicks when it comes to using my credit card. Now that I’m out of debt and can handle my credit card I love being able to track all my expenses via personal capital and not worrying about manual entries in my budget 🙂

  17. Although I’ve never used the cash system, I loved this post!
    Personally, I don’t think the cash system would work for me. I haven’t really used cash in 3-to-5 years. My thinking seems to be opposite. Anything that’s in my wallet just get’s spent.

    And not to sound negative, but I actually hate cash. I don’t like having change in my pockets and worry I will lose the cash. The only time I ever have it is if I’m travelling. I feel like it’s a major inconvenience to carry cash. It slows down lineups. It takes time to count and put aside in different envelopes. I actually look at people who use cash as unwilling to adapt.

    That said, this post has a lot go fantastic tips! Having a budget is super important. Instead of the envelopes and the withdrawal of physical cash, I have a ton of bank accounts. On each pay day I divide it up in the separate bank accounts, pay bills, and automatically save. I guess I do manage in a similar way but it’s all done electronically. I always try to get credit card points when I can too.
    Thanks for sharing 🙂
    Graham @ Reverse The Crush recently posted…Blog Traffic, Social Media & Income Report for October 2016My Profile

  18. I used to think it was insane to hear of people making six figures that didn’t have anything left over for savings. I think tracking spending is a great first place to start when you are building a budget so that you have an idea of where your money is going and where you can easily cut expenses. We recently started doing this so that we could start aggressively paying off our six figures of student loan debt and its helped a ton. Great explanation of the dave ramsey approach!
    Amber from Red Two Green recently posted…What a Trump Presidency Means for Our Student LoansMy Profile

    • Thanks Amber for stopping by and sharing!!!

      I totally agree that tracking your finances is the first step towards building your budget. I think it’s so easy to neglect this area and then wonder why you’re not making as much progress as you’d like.

      Thanks for stopping by and sharing!!!

  19. I also think there is a psychological component of an all cash diet. You have to physically hand over your money and watch it fly out of your wallet. That’s always hard for me, but I am pretty confident with my financial situation. I could only imagine if I were struggling and knew how much every dollar meant to my savings rate. Then I couldn’t imagine having to hand over the cold hard cash.

    It is nice that you keep trying to help your co-worker. It can be frustrating, especially if they are being stubborn and don’t want the changes you suggest and know that they need to make. But eventually, they will remember and consider all of your lessons once they determine that change is needed.

    Thanks for sharing your story!

    Bert
    Dividend Diplomats recently posted…Bert’s November Dividend Stock Watch ListMy Profile

    • I have definitely been there before and can definitely relate. Paying with plastic definitely feels less painful.

      While I know I probably won’t convince them at least I know I gave them solid advice and didn’t steer them in the wrong direction. What they do with the advice is up to them, so I don’t take it too personally 🙂

    • That’s an awesome challenge to take on for 2017. I’ve had some friends due the challenge and have some amazing results. You’ll have to let me know how it goes on your financial journey!!!

      Thanks for stopping by and sharing!!!

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