How to use cash instead of credit and debit cards

Why are you switching away from debit cards? I understand the "bill hanging over our heads" feeling with credit cards, but debit cards are almost real-time pay-as-you-go. There's no end-of-the-month bill.

Yes, with cash envelopes you know when you're out of money (for a certain category).

I've been using a budget based on Larry Burkett's budget for years. And a debit card instead of cash, but yes, you do have to record everything when you get home. But, I prefer that over keeping separate cash envelopes. My wife, on the other hand, takes all her grocery, gasoline, and discretionary money out in cash when we get our checks, and keeps them in three separate wallets/coin purses.

I won't try to sell you on the 'rewards' of credit cards.

I will offer two points to consider.
(a) for certain purchases (electronics for one) many cards offer extended warranty/breakage coverage for a year (after manufacturer's runs out.) This has a value of nearly 10% the item cost, and will cover the dropped iPad Apple won't.
(b) for purchases of items to be delivered, the card protects from a company going out of business. My wife Jane bought an expensive piece of furniture as did a friend. The place went under, and the friend who wrote a check is likely never to see a cent. Jane called the card issuer who issued a credit.

Cash on all but the above, have a blast.

We have been doing Dave Ramsey's Financial Peace University at our church (which I highly recommend, by the way). He advocates using cash, but personally, I don't want to be carrying around cash. One couple in our small group decided to convert to the envelope/cash system and withdrew $1000 cash from their bank, had it in their car when they went for a jog and someone broke into their car and stole the cash. That is precisely the reason I don't want to deal in cash.

What we are doing instead is using an iPhone app called Envelopes. It is an electronic version of the envelope system and it has been working beautifully. We are using it for the certain categories in our budget (we are using a zero-based budget as Dave Ramsey recommends).

We have found several keys in using cash envelopes:

1) Combine catagories (anything we buy at the grocery store comes from the "Food" Envelope whether we eat it, wash our hair with it or use it to do the dishes) 5 envelopes is enough.
2) It is ok to make command decisions like deciding that since meat is on sale we will take $30 out of the entertainment envelope and use it this pay period for meat; saving money on meat is more of a priority than going to a movie at this moment. If you want you can put $30 more in Entertainment and $30 less in food next pay period.
3) Fill your envelopes twice a month. A month is too long.
4) Use EFT's for all recurring bills you can (Giving, Insurance, Utilities (if they offer "Level Pay"), HOA's...)
5) Set up EFT's for future needs and investment savings. We have separate accounts set up at INGDirect.com with specific names. ("Car replacement savings", "Christmas", "Vacation", "Roof" etc.)

Having separate accounts named for the intended use helps us leave them alone so they are actually there when the stated need arises. Before we had all our future needs savings lumped together it was hard to not start thinking about what all that money could buy. Now it is easier to leave alone because we see specifically what it is for and why it needs to be left untouched.
6) Have a "Blow" category. This is just pocket money for a coke, newspaper etc.

Between EFT's and Cash Envelopes the work load is reduced or automated by 90%. The great majority of transaction are done from your Cash Envelopes and there is no need to track them. As long as you don't pull out the plastic it is impossible to exceed your budget.

We just print off an excel spreadsheet to track our spending with the amounts for the EFT's and cash envelopes already entered in since they remain the same. There is no need to track what the cash in the envelopes was used for. This leaves very little to enter in (Gas and bills that can't be set up on a "level Pay" type plan) - We may enter only 15 transactions month but still keep on budget.

We post our tracking sheet where both of us can see it. On the fridge works well.

Using cash Envelopes greatly reduces the need to tediously track expenditures but better yet multiple studies have shown that when people use cash they spend 11-33% LESS that with a credit card or even a debit card. Standing there at the register counting out "$20, $40, $60.. Wait a minute $60?! Thats too much!" You "feel" it more than with a plastic card and will make different spending decisions

When the envelope is full we can buy it - when it is empty we can't. This makes spending decisions very simple and there is never any doubt where you are in spending for the month. Using a debit or credit card you never know till the end of the month unless you sit down every night and enter transactions AND communicate it to your spouse.

In most marriages financial communication is a challenge because one spouse is usually doing all the tracking leaving their mate frequently in the dark (or the doghouse). With envelopes the one that generally spends in a specific category carries that envelope so they always know what's left. We have found this makes life and marriage much more enjoyable.

Cheryl - I can understand theft as being a concern. I guess it's a risk we're willing to take to reduce spending. But it is definitely a risk. I'll check out the Envelopes app.

Robnkitti - I often say that late Larry Burkett (from Crown Financial Ministries) was Dave Ramsey BEFORE Dave Ramsey was Dave Ramsey... and he'd long been preaching the effectiveness of the Envelope System. In fact, I believe they use to sell an actual wallet/folder, though I could be mistaken.

SMI has often touted the merits of the Envelope System as well. In fact, here's a FREE article (ie, no membership required) that mentions the concept: http://www.soundmindinvesting.com/visitor/2009/apr/level1.htm

Mark - Thanks for the thorough response! I agree, there is such thing as too many envelopes. We too have ING sub-accounts and auto-depositing into those is a wonderful tool for building savings for various goals. I like your idea about filling your envelopes twice a month rather than monthly. Not only is it a little safer to carry around less, but it may help ease cash-flow scenarios.

We have been using the Dave Ramsey Envelope system for years and have enjoyed great success in limiting our spending when it was much to easy to whip out a debit or credit card. For us the envelopes are another layer of self-control built in to our budgeting. You can be just as frivolous with cash- but the studies cited in Financial Peace University imply that psychologically it is harder to spend cash on the same item. I know that I have to think about my purchases in the grocery and miscellaneous category if I am only using cash. There is less mindless dropping it in the cart because I want it. . . or the whining child does. We do still use our debit cards for gas.
Before I make our envelope withdrawls I call our amazing bank (we have USAA) and raise our daily ATM withdrawl limit for the day. Alternatively, some months I just withdraw over the course of a couple of days.
Initially I was frightened by the prospect of carrying that much cash in my purse- now however I am not only used to it- I prefer it. When we evacuated from Japan I had enough to cover our portion of the trip and did not have to hope that the ATM's were powered up before we left.

Joe,
I decided to look for studies that show people spend less using cash. Lots and lots of articles mentioning studies. But few site them. I did find one.
http://www.physorg.com/news139977942.html

I lead a team of stewardship trainers for a large ministry. All of whom are very disciplined and experienced at budgeting. Two were having a recurring problem with overspending on food by about $200/month. Both thought I was somewhat behind the times (even though I am younger) but out of desperation decided to try it for their groceries budget.

Each was able to bring things back within budget. One even is routinely coming in $200/month under budget now (they have 4 children at home and a huge food budget).

Personally we have experimented over the years sometimes using debit cards other times cash. My wife has shared when using debit cards she would find herself putting more things in the cart - "Thats a good buy... I think we are nearly out of that..." When using cash her behavior reversed. "I think we can get by another week without that...".

People are wired differently. At the end of the day it is what works for them.

May the Lord bless you,

Mark

It seems everyone is wired a little differently :) For me and my husband, envelope-style software (nothirst.com) works best, and it's less painful to go through cash than our virtual envelopes -- we log every cent we spend with our credit cards (treated like debit cards) and see how quickly a dollar here and there add up. Perhaps it's a generational thing, although I'm sure financial background and goals come into play.

Software also lets us both see at a glance whether we do or don't have money for something. We set the budget together, and the program tells us exactly where we stand, so we don't have to wonder or argue or ask the other for money. Plus we get the "instant gratification" of seeing the progress toward our goals.

And I like being super-detailed -- savings for travel, home payoff, emergency fund, car replacement, retirement, Christmas gifts, big-year anniversary vacation, etc. -- but wouldn't enjoy reconciling and managing a lot of accounts. We put the money where it makes financial sense, as our budget software separates it out for us.

For us, software is easier to manage, easier to stick with and more motivating.

I've been a Burket/Crown coach for many years and find that those who have trouble staying within a budget generally NEED to go to a cash system. The physical handling of dollar bills has an effect that plastic does not! (In addition, statistics say that those who use plastic spend an extra 20% on average.)
That said, my wife and I charge every possible thing using a credit card for all the good reasons that other posts mention.
Another reason is that since we travel a bit, we have utilities such as electric and phone automatically paid by credit card.
How do we manage it? We have a budget that covers all our different expenses in detail. We have totaled all the line items for which we use a credit card; so we know what our monthly "credit card budget" is. We keep track of our expenditures during the month. If we get close to the "c.c budget" toward the end of the month, we shut off the discretionary items for the rest of the month. We never exceed our total budget and never carry a c.c. balance. Works like a charm!

I think when it comes to cash, it helped me, but didn't help by husband. When he has cash, it disappears, and he doesn't remember what he bought with it. He's able to be far more disciplined when he uses the debit card. Me on the other hand, I know I spend a bit more using the debit card because I don't like spending cash.

We're very busy and it was hard getting to the bank every week for the grocery money. We also didn't like bringing around the envelopes and frequently forgot them at home, especially the blow money. It was like we'd plan to go grocery shopping, and bring the grocery budget, and then feel like grabbing a bite or something and not have our blow money along. Also we too like using more money this week than last week at the grocery store if there's a good sale on something we already regularly use and can store. In general having a weekly budget amount at the grocery can help more than a monthly one in my opinion. I personally find sticking to the list the most effective grocery budget tool.

We've been budgeting using YNAB as the internet based envelope budgeting software which has really helped us. We've trained ourselves to check in the budget before buying things.

One other benefit of using cash that I forgot to mention is it makes reconciling the budget simpler. Take out $80 for food, it doesn't matter if you went to 3 different grocery stores. Use the debit card for 3 different grocery stores and you have 3 different transactions instead of one.

Hi Matthew.

I've been using MoneyWell for two years, and I have recently noticed something very interesting about the way I spend money: since I only spend money out of buckets (this is what MoneyWell calls envelopes), the means of payment no longer matters to me. It doesn't matter to me if I use a credit card, a debit card, cash, or a check. I also find that I spend cash more than anything else - I find that I prefer greenbacks now.

Now, it's different for my wife: she needs to spend cash, because she needs to be able to see the pile get smaller as the month goes on.

As for what we do, we literally use envelopes for only a few categories: food, miscellaneous, and my wife's spending money. I get that money on the last day of the month (pay day), and she has to make it last for the entire month. It took a few months, but now she is very good at it.

I use cash for most things, but I use a debit card for my gas purchases, because I need 10 purchases in a month on it for my credit union to give me the 2% interest they pay on my checking account. I use a rewards credit card online and for the times I don't want to pay cash in places that I also don't trust enough to give my debit card (restaurants, for example).

What I do when I occasionally use a credit card is pay each transaction independently as soon as I charge. That way my spending in each category is accurate. Yet another reason to not use the credit card!

We've had 2 times our debit card has been compromised but in both cases it was resolved quickly and we didn't lose any money.

One other reason, for me, for not using a credit card is that I have used credit in the past, when I should have relied on God. A couple of times. Didn't have the money (in all categories combined) to pay a bill, and no "rainy day" fund. I used the card. After a couple times of that, I canceled the credit card account.

I'm curious now. It seems there's no distinction here between using a card for convenience (i.e. "I have $xxx saved in cash for the new purchase, so today I will charge the item and issue the payment tonight, to get the extended warranty and not risk d=carrying all the cash") vs credit that gets carried month to month.

Barry - it sounds like you see the credit card as a temptation to buy what you can't afford. If that's the case, I'd agree, killing the card was the right thing to do.