In this article series of articles, I have recorded somewhat of a manifesto for using cash in your budget. You can listen to the whole thing in my podcast for week 4 of my 12 Weeks to Fiscal Fitness program, Using Cash In Your Budget.

In week 3 I talked in considerable detail about how to create a budget that works. In week 4, I’m going to talk about a tip that has been crucial in helping my wife and I stay within our budget. It has also helped us decrease the total time we spend on budgeting from month to month.

That’s right, I’m talking about using cash in your budget.

If you’ve been following this program faithfully, you’re already using cash in your budget. In week 1 I challenged you to use cash for your groceries and to choose to other problematic categories to use cash in. Now, I’ll finally go into the reasons for using cash.

Using cash in your budget is a tough topic. People shy away from it and toss it aside as being too much of a hassle. I want to challenge you to put those beliefs aside for a moment and let me make a case for using cash.

The fact is, I know how you feel. Using cash in our budget was one of the things I fought against most. We started using cash as part of Financial Peace University. It was one of those concepts I was ready to ignore and tried to convince my wife that we shouldn’t use cash. But she wanted to give it a shot and since I’d agreed to follow the program, I reluctantly went along.

I’m glad I did.

It quickly became clear how powerful using cash in your budget is. I was quickly converted and became a big advocate for using cash. In fact, I now consider it a requisite for having an effective budget. REALLY! I don’t know a single family who considers themselves successful at budgeting that doesn’t use cash. On the flip side, I know plenty of people who struggle with their budget or struggle staying within their spending limits and are always trying to figure out why. Yet, they resist using cash. They just won’t give it a try. Or they give it a half-hearted try and quickly give up.

How We Saved $6,000 In One Year By Using Cash

So what was the result of using cash for me and Emily? Not only did we stay within our budget consistently for the first time in our marriage, but we actually spent $6,000 less the year we started using cash with no perceived decrease in lifestyle. It was mind boggling that we saved so much. We saved an average of about $500 a month. We spent less on groceries, ate out much less, and no longer made impulse credit card purchases to the tune of hundreds of dollars a month. But I never would have thought those seemingly little things would make such a big difference in our savings.

The Advantages Of Using Cash

There are several advantages of using cash in your budget, but there are mainly two that I want to emphasize.

First, using cash makes it easy to control your spending and to keep within your budget.

Second, using cash will cut as much as 80% of the time spent reconciling your budgeting at the end of the month. While I’ve already showed you how to speed up your budgeting process, using cash is the thing that will have the greatest single impact in decreasing your budgeting time. My wife and I spend 30-60 minutes a month budgeting. THAT’S IT!

In this article I’ll be addressing the first advantage of using cash.

Before I jump in let me point out that I’m not saying you need to use cash for your WHOLE budget. In fact, there are some cases in which using cash doesn’t make sense. You’ll mainly want to use cash in those categories in which you tend to overspend. This may only be 2 or 3 categories.

Controlling Spending With Cash

The Power of Instant Feedback

Cash is the perfect instant feedback mechanism. It easy to keep from overspending because when the cash is gone, you know you’re done spending. It’s really as simple as that.

Alternative Ways to Track Your Spending

When using credit cards you are totally disconnected with how much you’ve spend and how much is left to spend. Some people try to track their spending by writing everything down in a notebook, but in my own personal experience and hearing experiences of others it’s very difficult to be consistent with a system like that. Inevitably you stop keeping track.

Even using debit cards to keep track of spending doesn’t work because you’d have to constantly check your account balances. And when you do check your account balance you’ll just see a lump sum in your account and won’t know how much you have to spend in a particular category.

A third option of keeping track of how much you have left to spend would be to update your personal finance software. YNAB is particularly good at showing you how much you have left to spend. But again, this would require updating the software daily. It’s also prone to errors if you update it daily because you might miss purchases that haven’t posted to your account yet or purchases your spouse has made that you don’t know about. Not to mention it would take a lot of time and effort to keep things updated on a daily basis.

So after eliminate all those possibilities, cash stands as the ultimate way to control your spending.

Lead vs. Lag Measures

Let me explain in another way why cash works so well. There’s a concept I learned about while working at a former company called lead and lag measures. Please bear with me because this is a somewhat geeky concept, but it illustrates an important point.

Lead and lag measures are simply things we can keep track of to help change our behavior or reach goals. A simple example of a measure would be weighing yourself if your trying to lose weight.

The key here is that Lead measures are much more effective in helping us change behavior than lag measures.

Let me explain the difference between the two.

A lag measure shows what has happened in the past, whereas a lead measure is predictive as to what will happen in the future. Let’s use football as an example. A lag measure in football is the score. The score shows you what has happened previously in the game, but really doesn’t predict what will happen the rest of the game.

In contrast, a lead measure might be first downs. If you want to score, rather than simply focusing on scoring, you can focus on first downs. The more first downs you get, the higher your probability of scoring. Therefore the number of first downs are going to be at least somewhat predictive of the future score. Now obviously there’s not a 1 to 1 correlation between first downs and scoring, but there is a strong correlation nonetheless.

So instead of focusing on just the score, you can break down your goals into more accomplishable steps and measures that will help you reach your goal.

Now there’s one other type of measure called a quick lag. A quick lag looks like a lead measure, but really isn’t. The best example of a quick lag weighing yourself if you’re trying to lose weight. Many people try to use this as a type of lead measure. They use this as the primary measure for losing weight. It seems like a lead measure because you get instant feedback. However, if you think about it your weight is just showing you the results of what happened in the past. It gives you no indication of what you’ll weight tomorrow or next week or next month.

So what would be a true lead measure in this case? Well, the number of calories you eat every day would be a good lead measure. The number of calories you eat WILL be a predictor of how much you’ll weigh in the future. This also points out one more thing: good lead measures need to be controllable. Some lead measures may predict future performance, but are hard to control. Counting calories is a good lead measure because it is very controllable in addition to being highly predictive of future results.

So let’s bring this back to personal finances. Most people using their credit card or bank statements as a measure for controlling their spending.

Is looking at your statement a lead or lag measure?

It’s definitely a lag measure because it shows you what has already happened. Plus it has absolutely no bearing on what will happen next month. By the time you look at your statement it’s already too late. You’ve already over or under spent and there’s no going back. This is actually about the worst way you can try to control your spending yet it’s the method most people use.

In contrast, taking cash out to use for a budget category is like the ultimate lead measure. It’s a perfect predictor of how much you’ll spend in that category this month. Of course that’s assuming you and your spouse are truly committed to using exclusively cash for that category. If you take out $400 for groceries, you won’t be able to spend any more once the money is gone. There’s no more accidental overspending. Using cash may not perfectly predict the exact amount of money you’ll spend because you may underspend, but hey, that’s a good problem to have.

The bottom line is: Cash is a great instant-feedback mechanism that allows you to see instantly how much you have left to spend. This leads us to another reason why cash helps us control our spending.

Re-calibrating Your Relationship With Money

Cash renews or re-calibrates your connection with money. Let me explain. The use of credit and even debit cards has really disconnected people from their money. It’s easy to overspend and go into debt with credit cards because it’s like play money. You don’t actually see the money leave. It’s so abstracted that you don’t FEEL the money leaving.

Cash restores this connection. When you use cash you can see instantly at anytime how much you have left to spend. As you spend cash you see and feel it leaving. You see your wallet, or budget envelope, get smaller. There’s a critical emotional piece to having this physical, visceral experience. Cash becomes something tangible and real. You get to experience that there is an end to money when it runs out. This has a big impact on how you spend money, even if you don’t notice it at first.

As you start using cash, you’ll begin to develop a type of intuition regarding spending. When you go to the grocery store and look at your remaining cash for the month, you’ll start to get in tune with how much that will buy. If your wallet it thin, figuratively or literally, you’ll know that you need to buy only essentials; it may be bread and milk and not much else. In contrast, if your wallet is thick, you’ll know you can be more liberal in buying additional items. Either way, it definitely will INFLUENCE YOUR DECISIONS and that’s something that rarely if ever happens when using a credit or debit card.

The Big Question

There’s one last reason why using cash helps to control spending. It help you ask what I call the BIG QUESTION and that is “where is this money coming from?” When using cash, it becomes clear very quickly that you can’t be too squishy in your spending. In fact, you can’t be squishy at all. If you spend money it has to come from one of your categories and/or cash envelopes. Once we started using cash Emily and I found ourselves asking each other quite frequently “where is this money coming from?” If the expense comes from a well-defined category and we have money left for that category, the answer is self-evident. However, if we need more groceries, for example, and the cash is gone, we’d have to decide what other category we were going to take it out of.

This simple pause in the decision-making process is responsible for Emily and I saving $6,000 the first year we started using cash. By making our spending conscious we often changed our behavior not out of self-deprivation, but out of common sense.

For us, the big question seems to come up most often when eating out. Are we going to use “date night” money, “grocery” money, or “personal” money? The fact is, we will sometimes use money out of all those categories for eating out, but we still have to ask the question. Sometimes, if we’re really tight and all those categories are empty, or we need the money for something else, we’ll decide not to eat out.

Some people may view this as overly strict or restricting. But asking the big questions creates the exact decision we should be making when we spend money. Spending money is ALWAYS a trade-off decision. If you spend money on one thing you simply can’t spend it on another. Using cash just makes this decision explicit. While that can come as a harsh reality for some, it is reality nonetheless.

Now I’m not saying using cash has to force you to live a life of self-imposed restriction. If you have more money to budget to various categories and you choose that you value those categories over others, by all means increase your cash categories to the point where you almost always have money left over. I really don’t care how much you allocate. The main point is to simply live within your means and to reach your important financial goals.

But for those who are on a tight budget, using cash and learning to ask “where is this coming from” will become the key to surviving and eventually thriving.

Well, hopefully I’ve convinced most of you that using cash in your budget is worth a shot. In the next post I’ll talk about the second main advantage of using cash in your budget…decreasing your budgeting time.

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• Benefits of a Cash Budget – Part 2
• How to Create a Master Budget
• 3 reasons most budgets don’t work and how to fix them (a.k.a. How to create a budget that works)

This week I’m going to talk about using cash in your budget. I was once a skeptic of using cash and didn’t want to leave the convenience of using credit cards. Now, I’m a huge proponent. Maybe that’s because we saved $6,000 the first year we started using cash. But there are other reasons as well that are detailed in this podcast.

Cash is so powerful because it will not only help you control your spending and stay within your budget, it will also help you decrease the amount of time you spent reconciling your budget at the end of the month. In fact, it’s probably the single biggest factor in decreasing the headache of reconciling your budget.

I’m going to be posting this content in a text format as well throughout the week so look for that if you’d like to read rather than listen.

 

 Week 4 - Using Cash In Your Budget: Play Now | Play in Popup | Download

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I usually don’t promote other giveaways much, but it just struck me that this one at the site Money Crashers comes at a perfect time of the year that many of us dread – tax time. And what better prize than the hottest electronic gizmo out there, the iPad.

There are multiple ways to enter including subscribing to the site, following them on twitter, and filing your taxes via one of their recommended sources.

Someone’s taxes will be worth celebrating this year.

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I recently received a request to answer a few questions about frugality. The request came from CESI Debt Solutions who had posted quotes from 19 other personal finance bloggers that you can read here. That article was then picked up by Time magazine and as a follow up CESI Debt Solutions wanted to publish even more tips from more bloggers.

So here’s my little contribution.

Question #1 – What’s your “frugality story?” In other words, how and why did you become frugal?

My wife and I had recently moved into a house, adopted a child, had a number of surgeries, and transitioned from two incomes to one, all within a year. We were forced to get control over our finances quickly or have a major lifestyle adjustment (like moving out of our house). We had a strong incentive and knew we could survive by taking control of our finances. As a result, we worked our way through it and created our own system that has allowed us not only to survive but to reach our financial goals with increased speed and focus.

Question #2 – What, if anything, tempts you to overspend, and how do you resist?

I’m always shifting from one hobby to the next so there’s always an excuse to spend. My two biggest weaknesses right now are books and board games.

One general technique I use is to imagine what will happen after the purchase is made and I’m at home. For example, if I buy the book, will I read it when I get home or will it go into my pile of unread books on the bookshelf? Just getting that picture in my mind helps clarify if I REALLY want it and will use it or if I’m just in the moment and getting sucked into a purchase I won’t get any real enjoyment from. This trick works particularly well with board games since they’re social. Sometimes I almost get sucked into buying a game that I know my friends and family won’t be interested and will never get played. Projecting into the future helps me make a good decision.

Another trick I use is to see if I can rent or borrow the item. With books, you can borrow them from a library. With board games, you can often find a friend that has the game you can borrow. My local game store even has rental games you can check out for 10 days and the rental price goes towards a purchase when you return it. I’ve often taken that option and find after playing the game that I don’t really care to own it.

One interesting side note is that I bought a Kindle last year and have made no physical book purchases since then. In fact my overall book purchases have gone WAY down. I attribute this to the fact that I can get any book I want instantly through my Kindle. This eliminates the psychological response of wanting to get a book just to have it when I need it or because I’m afraid it won’t be there later when I want it. I only purchase the books I’m ready to read NOW which is a much smaller number than the books I WANT to read. It has probably saved me a couple hundred dollars in book purchases.

Question #3 – What personal finance or frugality habits were the hardest for you to adopt and why?

Using cash was probably the hardest because credit cards are so convenient. But whatever inconvenience you suffer on the front-end making purchases is more than made up for on the back-end when reconciling your transactions. One cash withdraw entry vs. 40+ miscellaneous purchases and entries.

Cash has also been the single biggest thing that has helped us to control our spending. It’s an instant, compelling feedback mechanism. It makes you feel a much stronger connection to the money you spend versus credit cards which make you feel disconnected and therefore make you more likely to overspend.

Question #4 – Have you ever taken frugality too far? How so?

You know, I don’t think I ever have. I tend to always push the limits of spending more than I should. My wife used to do things like rinsing out ziploc bags to use them later, but I convinced her it’s an unnecessary if not unsanitary habit.

Question #5 – What resources (blogs, books, websites) would you recommend to someone who’s newly frugal?

• Anything by Dave Ramsey but, in particular, his Financial Peace University program
• The Richest Man in Bablyon
• The Millionaire Next Door
• Rich On Any Income
• My 12 Weeks to Fiscal Fitness program, of course

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• Benefits of a Cash Budget – Part 1
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This video shows how to create your first working budget with excel. If you want to use pen and paper I would recommend printing out a blank copy of my Working Budget Excel spreadsheet. You can get a free copy by subscribing to my newsletter on the right. You could also create your own spreadsheet if you know how to use Excel or another spreadsheet program.

The advantage of doing a budget exclusively in Excel is that it’s pretty straight forward and you only have to deal with a single software tool. The downside is that you have to calculate and enter all your expenses manually which not only takes a long time, but can result in mistakes. But if this approach works best for you, check out the screencast below.

Overall, I recommend using You Need A Budget (YNAB) software for your budget. Check out my YNAB review or my YNAB overview screencast for more information.

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