A popular debt reduction strategy that is often repeated by the finance celebrities involves putting away the plastic and starting to pay for EVERYTHING with cash. This thought is parroted by everyone from Dave Ramsey to Suze Orman, and is based on research suggesting that the handing over of actual dollars has more of an emotional effect than swiping a card. Studies by MIT and the Journal of Experimental Psychology support this idea, but in fairness; they all focus on the “Credit vs. Cash” side of the equation. In these discussions, they seem to avoid mentioning debit cards altogether.
If you are trying to get rid of debt, ANYTHING should be preferable to using credit cards. Cut those bad boys up, or at least freeze them in a block of ice. It is my belief that the debt experts are missing the fact that using exclusively cash is also a strategy that can be fraught with problems. It all comes down to accountability. When you use cash, you leave behind no crumbs to explain where that money actually went. Budgeting is all about painting a clear picture of your money flowing in and out, and the use of cash can make this very difficult to track.
In fact, I deliberately try to AVOID using cash whenever possible, for this very reason. I don’t know why, but whenever cash enters my wallet these days, I seem to burn through it super quickly. I try not to take the attitude that cash is ‘free money,’ but perhaps something in my subconscious interprets it that way. I apologize ahead of time to the vending machine owners and panhandlers of the world, but I prefer that cash pocket in my wallet to be completely empty. If someone pays me for something in cash, I will take it straight to the bank and deposit it, because I know that otherwise it will soon vanish into the wind.
The better solution that this cash-only nonsense is of course to become best friends with your debit card. Using a debit card is just like using cash, because money comes straight from your checking account, and you can’t spend what you don’t have. Virtually every bank offers electronic banking at this point. This means that just by using your dedit card, you will automatically get a record of every purchase that you have made. You can even likely sync your accounts up through an online product like Mint, that will automatically drop the purchases into the appropriate category.
Of course the real reason why the all debit strategy, is the automatic accountability that comes with it. If you stop by McDonald’s on the way into work, there is no hiding it from your budget. The record of your purchase is there, carved into digital stone. To many, this level of financial micromanagement may sound like a bad dream. For those folks, I wouldn’t suggest abandoning the idea, just build a little bit of “fun money” into your budget to spend on whatever tickles your fancy, no questions asked.
Ramsey and Orman will tell you that the best part of going cash-only is how well it slots into an “envelope system.” This is where you place the budgeted amount of money for each category into separate envelopes at the start of the month. This effectively keeps the piles of money separate, and forces you to stick to your limits. For each category, once the money is gone, it’s gone. I understand the concept here, but an unfortunate side effect is that you have no tracking of where the money goes within a given category. You will certainly notice if your grocery envelope is empty on the 20th of the month, but how can you make sure that you plan better the following month without a trail of bread crumbs to follow to understand how you spent that money?
The truth is, you can accomplish the same sort of envelope system using a combination of savings and checking accounts. I documented how we use multiple savings accounts in this fashion in a recent article here at See Debt Run. To make this work, you simply need to put the budgeted amount of money for a given category into separate savings accounts, and then transfer money over to your checking account when needed.
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Back when we were up against a massive debt mountain, going debit-only was a big part of our strategy for getting debt-free. In full disclosure, I am a big time numbers guy and a technology nut, and having electronic records of everything really does work the best for me. I understand that this may not be the case for others and a cash-only plan may be a better solution. The important thing is that you decide to try something to find your better financial future.
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Photo From Ryan Loos
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I totally agree on accountability, for me debit card is very convenient.
Every week it’s super easy to check the spendings for each category. And by making budgeting so easy (when you base yourself on real data), it helps to plan for the future and have realistic expectations…
One way to limit the impulse spending could be to have an automatic alert whenever an expense is made.
This is a decent idea, JP. Debit cards are super convenient for usage and for tracking.
I couldn’t agree more. Cash in my wallet disapears! We also debit everything so we can track better.
Where does all that cash go? I think there must be a hole in bottom of our wallets.
I’m with you on this one. To track my “envelopes” I use YNAB, which lets me feel like I’m using cash but, like you say, with more accountability. Best budgeting software I’ve ever used!
I really need to try YNAB.. I have heard great things. I have a feeling it would make my life a lot easier than my current massive spreadsheet.
I have to say that I do the same as you. I have multiple checking and savings accounts. As a part-time waitress I have cash, but often times I put it in the bank for groceries, gas, etc. If I don’t, it’s gone quicker than I know. For example, if I have cash I will stop for ice cream after work. If I don’t have cash I feel guilty that it will show up in my budget, so I won’t get it. I think that each person is unique, so is their method to debt payoff, but like you I am into the debit card, technology driven side of it.
Yes, Mary.. Different strategies work for different folks. But if you come across some cash income, you need some sort of record to document that you had that cash at all. Otherwise, it is far too easy to not be accountable.
I don’t have a credit card and don’t plan on owning one anytime soon.I use mostly cash nowadays and a debit card, tied to a zero overdraft account. I still spend responsibly, since it’s they way I ‘play’ now anyway. Card or cash, I don’t spend money as I used to and update my ‘tracking’ software frequently, so that I can still know what I’ve spent. I really dislike any idea of debt after having my ‘stint’ with it, so there’s no reward in this world that would make me choose a credit card 😀
I am right there with you, dojo, and feel exactly the same. Debt has already taken its toll. We aren’t going back.
I agree – cash just seems to burn a hole in my pocket. I know if I left myself envelopes of cash just lying around, I would blow through it way before the month was over. I do use a credit card for the reward points, but I am MUCH more careful (and thoughtful) about my purchases when I swipe than when I hand over cash. People like Ramsey say it makes you less likely to spend because you can see it leaving your hand.. but seeing that cash just makes me feel like I suddenly have more money. I’m glad I’m not the only one the cash-only system would NOT work for!
Yay!.. Glad to hear another person who has had the same experience. Using debit and having that record set in stone definitely helps to keep my spending in check.
I rarely ever carry cash for this reason. You have no idea where it all goes. Since I have been out of debt for a year, I am back using credit cards, but for all of my purchases. I can easily track everything and I haven’t spend more than I normally do, because I learned control. I only buy the things that I normally purchase and no more.
As long as you dont have any debt, credit cards can be very useful for their rewards programs. You just gotta be careful, brother.
As with most things, one size does not fit all when it comes to cash vs. debit. What works for me probably isn’t what works for you. I think it’s great that the personal finance blogging community presents a wide range of systems and methodologies for people to choose from.
Personally, I always have cash in my wallet but I forget about it and so it stays there untouched for weeks at a time. I use travel reward credit cards for the majority of our monthly expenses and pay off the balances in full at the end of each month. No interest + free money in the form of airline miles.
I have heard others state this as well, Richard, that cash tends to stay in their wallets forever. There certainly is no total truth that fits everyone’s situation.
I don’t like spending in cash, either. I always forget to keep track of the smaller purchases, which bothers me. I use my rewards credit card now, but before I had one, I always used my debit card. My boyfriend uses his debit card exclusively. It’s a good idea!
Absolutely, EM. Those smaller purchases fall off the radar with cash. It is inevitable unless you keep a wallet/purse full of receipts.
It’s interesting that no one every mentions debit cards. When I first started paying for my own things back in college, debit was ALL I used.
It still is ALL I use!
I have the same issue when it comes to cash! Having money in my wallet for some reason screams to me that it needs to be spent– on anything. Just last week I saw a commercial for a deal on pizza, realized I had cash in my wallet… and ordered pizza. I am with you on switching to an entirely electronic, debit only budget.
I don’t know what that is, Terry, but you described it perfectly. Cash money just screams to be spent as soon as possible.
Yeah, I never know where cash goes! I’m all about the debit card for daily expenses. I only use credit (for now) on large planned purchases that I have the cash to pay for.
There was a brief period where we were all credit, when trying to earn some rewards points, but we really used it LIKE a debit card in that we paid it off as soon as we got home.
I use credit for everything. If only I could pay my mortgage and property taxes on the card! I pay it off every Friday, so I look at my credit card as a slow motion debit card. Nothing goes on it that couldn’t have been paid with debit or cash. The money was there, but why wouldn’t I take the travel miles? I pay it off every week partially to keep on top of thing but mostly because it’s easier to synch up my spreadsheet with the online card list of processed charges.
I just spend what was in the plan, the method of transfering money from my account to the grocery store or gas station is irrelevant so why wouldn’t I take those free flights to Europe every year?
I completely agree – I spend cash like freaking crazy! If I use my debit card then I actually think about the money I am spending and I feel the burn when I balance my checkbook. I save much, much more money by not using cash.
It’s odd to me how the financial experts are singing the opposite tune, ya know?
Yep, I hate carrying around cash. It feels so fleeting whenever I hand it over. At least with debit, I can have a trail of spending to be outraged by. Even while we were in debt we did put things on the credit card as necessary, but I know that most people eschew that idea. It worked for us, but I think most people would be better served by just using their debit.
It was hard for us to start climbing out of debt, Abigail, until we just took away the credit cards as an option. But the debit card has been a powerful tool the entire time.
I hear what you’re saying, but I use cash instead of debit because I don’t care to have my purchases become part of the Worldwide Marketing Database. Why should my bank–and whoever it cares to sell my purchase data to–know where I spend my money and how much? And yes, I’m paranoid. 🙂
Hah.. You *are* paranoid. You are probably right that someone somewhere is storing everything that I buy.. But honestly, I’m not sure that I am all that terrified even if it *is* the case.
I’m the same way. Cash just seems to have a way of disappearing from my wallet and I won’t remember why it was spent. With a card, everything is tracked and stars me in the face every time I check Mint. If I make a foolish purchase, it will sit and taunt me, reminding me of my lack of willpower at that given moment. In addition, I think it doesn’t help teach people discipline of how to use a card responsibly. You aren’t going to carry envelopes of cash while you are on vacation. Better to learn how to use a card properly from the get go.
Well said, Micro. Those transactions will hang out and “taunt” you as you said, especially during budget time.
I try to have a little cash on me for things like laundry and other random things, but usually no more than 20. I want to track my purchases too, and it’s also handy when it comes to tax time.
I don’t really have any toll roads or laundromats that are a part of my life. There are some occasions (like paying for field trips and whatnot) that require cash, but I do think/hope that even those will fade away in the next few years.
Cash disappears for me too really quickly. I’d rather use credit cards for everything, reap the rewards, then be able to compare with my budget.
Yeah, but for many folks.. Using credit cards is really playing with fire.
Agree wholeheartedly. Another problem with the envelope systrm is that if yo run out of that grocery money on the 20th bc you haven’t been tracking it, odds are you will steal from another envelope. Gotta eat.
No doubt, FF. You’ll just raid other envelopes or start thawing your credit card.
“When you use cash, you leave behind no crumbs to explain where that money actually went.” SO true, Jefferson! For this reason, we too use our debit card primarily, and then make sure to write each purchase down on our Excel Spreadsheet. Like you said (paraphrasing here), if spending is a problem, cash can be trouble. Thanks for dispelling a common “getting out of debt” trick that can cause trouble for people.
I use the massive excel spreadsheet as well.. I plan on detailing that more in a post coming up soon.
Well cash, is cash 🙂 It has an allure to it, it seems to grant the wielder unexplicable powers and there is nowhere this is mostly manifested than in its spending. Its not just you…I also can barely seem to keep money stashed in my wallet…things just crop up that require my attention and my money
I certainly like the concept of using a debit card instead. Beyond the added accountability and ease in tracking expenses, there are also security mechanisms built in place. You can lose solid cash or it gets stolen but at least with a debit card you have some slight security buffer
I see your point about cash leaving no breadcrumbs behind, but I do disagree slightly. We pay all our bills using our debit card (you kind of have to when you pay online), but every penny we spent is tracked before we spend it. We know that N dollars is going to be put in the gas tank on Friday. We know that X amount is going to be spent on a costume for our daughter’s dance recital. Once we get all those “Have to” things paid for (which is tracked in our monthly budget worksheet” The rest of our spending is sort of a big “don’t care.” What I mean by that is, as long as we’ve fed our Efund, paid all our bills, and taken care of the necessities (which, again, are tracked explicitly), I don’t care what the rest was spent on. What we do care about is that we paid for it with cash, and thus we know we didn’t overspend….
I used to be all for cash only spending, but I’ve found that it’s much easier to track your spending when it’s all on a card thanks to online statements.
A big part of my journey to being debt-free and financially savvy is to figure out what works for me. Richard Jonas is right, it’s not a one-size-fits-all. I find that debit cards work best for me because I have that subconscious “free money” attitude too! But the trick for me is making myself LOOK at my bank statement. Sometimes I don’t like to see how often my money has gone to a Starbucks run. 🙂
Completely disagree, on all levels.
You end up in debt because you’re lazy, unlucky, or both. Using cash forces you to be disciplined about your spending, but more importantly, be disciplined about tracking your money.
Debit cards rob you of the visceral feeling of handling your money and watching it go away.
I disagree with the experts about many things. Not this one.
Cash is king. You want to get out of debt? Cash, cash, cash, cash, cash.
Hah.. You certainly have a right to your opinion, Jack 🙂 I know that the cash-only system certainly works well for many people.
One thing no one has seemed to mention about debit cards… don’t absolutely count on the debit card to record each transaction for you. You may still want to hang on to those receipts.
It may take 3 days for a vendor to finalize an amount, especially over weekends and holidays. If you forget a couple of transactions, checking your account may show you money you don’t have. Depending on your bank, if you then stop for a gallon of milk, and then a donut, then buy a little gas, you could incur $95 in overdraft fees (even after opting-out of the bank’s overdraft “protection”) when your spouse’s trip to the gas station finally posts at midnight while you’re both sleeping.
I think the visceral feeling comes from KNOWING how much money you have, will lose, and be left with.
Standing in the check-out aisle, watching the cost increase on the computer screen with each bar-code scan, and hoping you counted up the total of your grocery cart right, and then the internal Phew!-I-have-one-dollar-left! can be just as visceral whether you’re about to draw one ten-dollar bill, two twenty-dollar bills and three pennies from your wallet or hand over a red card good for $50.03.
You know how much you have because you counted your green bills and your pennies or you checked your mobile app “wallet” before you went in the store. You know how much you have left after because you’re handed $1 change or you confirm, in your mobile “wallet”, that you have $1.00 left, as you expected.
If you don’t check, whether by counting your money or looking up your card balance, you’re going to be in for grief.
I do recommend NOT opting for overdraft “protection”. If you don’t have money in your account, let your debit card be declined. That gives you the same reinforcement an empty wallet would.
Undisciplined spending is older then debit cards, sadly. Each of us has to consider our circumstances (such as time, health, skills, strengths, whether bills and coins or apps and spreadsheets makes more sense to us, etc.) when deciding which tool to use to help us be good stewards.
I agree with your reasoning wholeheartedly, but I do have one concern about using debit cards. If your debit card information is stolen from a business and transactions are made, you are not insured for that loss like with a credit card, your bank account could be drained and you have no recourse.
I enjoy reading your story and following your blog. I think the decade you grew up in has a lot to do with the money management way that works for you. I grew up in a time when there were not debit cards. Cash and checkbooks were what I saw used in my home to pay for items.
For me, my stomach aches when I have to hand over cold hard cash. This is a good thing, because I see hard earned money actually being processed through my hands. I like the envelope system because it requires me to see and budgeted items. For example, if I budget $250 for food, I take the entire envelope with me to the store. When I take money out of the envelope I immediately itemize it and subtract it on the front of that envelope. I also immediately put the receipt in the envelope so I know where the money went and what my remaining balance is.
Why I don’t like the debit card system is because I don’t want to be inputting money transactions on a computer everyday or every week. I like to budget once a month and recheck things halfway through the month. I just don’t have the time.
I am not much of a record keeper and am not into electronic accounting and software. Loose cash in my wallet can disappear if I am not careful. Swiping my debit card can empty my checking account in the same way. However, if I physically put cash in a dedicated budget envelope I don’t spend it on anything else.
I just started trying to stick to a written budget with envelopes two months ago and am not good at it yet. For now I am only using a couple budget categories and plan to add 1 or 2 a month as I get a handle on things. By the end of summer I should have a fairly accurate budget.
I’m new to your blog and I am very excited to read through it. I do have a question though, with all the security breaches (use of skimmers) these days I was told by my own bank by two different bankers to stop using my debit card. Since it is tied directly to my cash they warn of the thieves stealing my debit card information and.having access to my money. And even though I would get my money back eventually, the bank still needs to investigate and I could be without my money to pay my bills. What is your take on this?
I am coming from finally being free from debt (except the mortgage). I love using cash. Here is something I didn’t see you address. We saved up enough money to build a fence for our backyard. Our nephew was going to do the work. He figured the materials would cost between $600 and $650. We gave him $700 in cash to take to Home Depot. When he loaded up all the materials it came out to $780. He asked if they could work some thing out with him because he had $700 in cash on him. They gave him a discount to make it come out to $700. It would not have happened if he paid with a card. Debit or credit. They were glad to work with him for the cash he had in hand.
Sounds interesting!
I have to do something cause cash in my wallet disapears 😀
I became debt-free last August 2016 by not using my credit card and combining debit card and cash transactions. I guess it just depends on what method works on every situation and sticking to it until financial freedom is achieved. 🙂
Using debit cards to pay for everything can still lead to overspending. It’s true you can track each expense, it’s true you have limited money to spend (as opposed to credit cards), but it’s also really easy to exceed your budget if you don’t check your available funds often.
I do use the debit card to pay for some purchases (groceries, for instance), but I do prefer having limited cash in my pocket. If I know I only have $20 left for the week, it’s easier for me to refrain from spending it.
Developing a budget often depends on how clearly you understand your financial situation. Budgeting has to be a consistent process and you can’t gain out of it when you aren’t aware of your necessities.I still lead a debt-free life as I learned to manage my finances at an early age. I began by paying for my own auto insurance and I thank my parents for that.
Debit cards are easy carry option for any place other than cash. But debit card stop limiting our expenses until its empty. If the amount of cash is easy to carry, better to carry money than taking these cards and spend lavishly.
The limited cash will surely limit you to your expenses. And prefer the card only for long distances and that too use it as a last option in emergency.
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A debit strategic you mentioned is a very good method of payment with using a debit card, it’s really helpful than using cash. I love your article and really useful for me to understand this. Thanks for sharing!