An all-cash diet is pretty much exactly what it sounds like: You pay cash for all of your daily expenses. The idea is that it makes you more conscious of your spending than if you use debit or credit cards. But an all-cash diet isn’t necessarily right for everyone. Let’s go over how this budgeting strategy might work for you.
How Does It Work?
Once you’ve created a budget, you need to determine how much income you have left every month after you’ve paid your fixed expenses, such as rent, utilities, debt payments, and insurance. This is the amount of money you can use for things like groceries, gas, and other day-to-day expenses during the month. You can then withdraw this amount in cash to spend on these expenses over the next four weeks. It’s important that you allocate your cash properly so that you don’t end up spending it all in one category at one time.
To make it easy, consider splitting up your monthly allotment into four envelopes, one for each week. You may not spend all of the money in the envelope each week. For example, maybe you didn’t drive much that week, and didn’t need to stop for gas. In that case, more surplus means more for your savings.
If you are worried about leaving that much cash in your home, then just make a trip to your ATM on the same day every week to withdraw the money for your weekly spending. (See also: A Comprehensive Guide to the Envelope System)
The ultimate goal of this lifestyle change is to have cash left over at the end of the month, which you can use to pay off debt or devote to savings and investments. There is a range of short- and long-term benefits associated with the strategy, too.
1. Helps You Cut Spending
Multiple studies have shown that people spend more when they use a credit card than when they pay with cash. That’s because when you use cash, you have a better feeling for just how much you’re spending than when you use so-called invisible money (debit or credit cards).
By physically handing over cash for your purchases, you see the money leave your possession. Hence, you’re much more likely to consider on the spot if the purchase is really worth it. Alternatively, when you use a card, you don’t really feel the effect of a purchase until later, when you receive your credit card bill or see the transaction online. That can make it easier to overspend with plastic.
If you regularly go over your monthly budget and can’t seem to figure out why, then switching to an all-cash diet can quickly help you pinpoint exactly…