The Advantages and Disadvantages of Using a Cash Budget
Cash budgets are a popular device used by businesses to get an estimation of cash flow over a certain period of time. For the likes of you and me, a cash budget is a much simpler, yet just as effective, tool for budgeting cash as opposed to using your cards for everything.
Why would you want to do that, though? Using your credit or debit cards to pay for everything is incredibly convenient, after all.
Well, if you’re like me, it’s easy to lose track of how much you spend. A takeout here, a few cups of coffee there, and all of a sudden, you’re $200 over budget for the month.
Even if you’re not a reckless spender, using your credit card for your budgeting can lead to debt. When you’re increasing your spending power through the use of tools, like a credit card, you always want to be careful you don’t spend more than you can afford.
Below I’ll cover both the advantages and disadvantages of a cash budget over credit and debit cards. I’ll also cover the pros and cons so you can decide whether a cash budget is right for you and your finances.
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Why Use a Cash Budget?
For me, the advantages of a cash budget have been two-fold this year. I’ve noticed that I’ve steadily been increasing the number of subscriptions I have every month. Trust me when I say that you ‘REALLY’ don’t realize how badly all of these charges stack up.
For example, at its worst, I had:
- Disney Plus
- HBO Max
- Amazon Prime
- PlayStation Plus
- Learning Cloud
Altogether, these subscriptions added up to easily over $100 every month. Any money that I was saving on TV bills was a total false economy.
The worst part about it is that I didn’t even realize how much I was spending until I switched to a cash budget. When I finally sat down to break down my spending, I expected my love of Asian takeout to be what was killing my paychecks. In reality, it was my numerous entertainment subscriptions.
Using a cash budget can help you the same way it helped me. Being able to actively see where your money is going rather than looking at scattered names on a screen is massively helpful to adjusting your budget every month.
Add to that, the difference you feel in handling cash versus a card shouldn’t be overlooked. It’s so much more difficult to hand over a $50 note as opposed to using your credit card to pay for something that’s $50.
Being able to see and feel the physical cash makes you more hesitant to spend it. This includes when you’re operating with a cash budget system.
When using a debit or credit card, you give the cashier the card, then you get back both the card and the item. Mentally you know money was taken from your account but it has a lessened effect since you didn’t actually lose physical items.
Regardless of what method you use to budget your cash, whether the cash envelope system or otherwise, it’s going to help you be more mindful of your spending and give you more control over your spending.
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The Advantages of Using a Cash Budget
Let’s talk about some of the specific benefits you’re going to get from using a cash budget. Just like how breaking down your expenses can help you see what’s going on, looking at each individual benefit of this budgeting system is going to show you what you’re missing out on.
1. You’re More Realistic
Okay, I know for a fact that we’ve all been in this situation at one point. We know that we don’t have much money in our bank account, but we ignore that in favor of wishful thinking.
Being optimistic has helped me in plenty of circumstances in life, but personal finance isn’t one of them. When you’re dealing with cash as opposed to digital currency on a screen, you’re forced to stay in touch with the reality of the situation.
There’s no hoping you have more money than you do, and there’s no ignoring payments and bills, hoping that they’ll go away. You’re going to be forced to face your financial situation.
If you have a bunch of subscriptions that you know you should have canceled but haven’t yet, then you’re going to get a smack in the face when you look at your bank statement.
When you make the switch to cash, everything becomes tangible, leaving no room for interpretation.
This sounds scary; I get it. I didn’t want to realize where my money was going, either. However, cash gives you more control over your budget because it’s so realistic. The first few weeks are going to be difficult, but your budget is going to become much more manageable after that.
2. Control, Control, and Control
Speaking of manageable finance, you’re going to have more control. For money, the single most important thing you can possibly do for your financial situation is have control over it.
If you can scale how much is coming in, going out, where it’s going, and so on, then you can make your money do anything you want it to.
A cash budget is going to help you achieve just that. Bank statements can be a jumbled mess. I don’t know about you, but I’ve tried to budget through my bank, but I couldn’t figure out left from right.
When I switched to cash, everything was in front of me in plain black and white. It sounds weird, but there was this satisfying sense of power as I worked out the numbers and physically moved my money around to where I wanted it to go.
I knew where I was losing more than I should have been, and I fixed it, and I knew if I needed to do some overtime hours to make up a short bill.
I was able to prioritize. There was no more letting subscriptions and bills run through my account because I didn’t want to deal with it. It gave me full control over my money, which is priceless as far as I’m concerned.
Even if you’re better at dealing with your bank statements than I am, a cash budget is still going to give you more control over how your finances are being managed.
3. You Cut Out the Waste
This very much ties into my point about control over your budget. When you can see and control where your money is going, you’re able to cut out any potential waste in your budget.
This can even help when you plan for the month and see that you’re coming up short with a specific payment. You can set an order of priority for the money coming out of your account and work your way up from the bottom, slashing as you go up the ladder.
By eliminating as much of the fat from your budget as possible, you’re going to end up with a lean financial stream that is nothing but raw financial power.
You don’t have to use a cash budget to do this, of course, but again it’s much easier when you can see where the money is going in front of you rather than reading through months of financial paperwork.
4. Clarity is King
With a cash budget, your financial situation is going to be clear and easy to communicate. If you need help with your budgeting from a friend or family member, a cash budget is going to give them a much better insight into your situation than a jumbled mess of bank statements can.
Not all of us can be wizards with money. Trust me; I have plenty of experience in that regard. Just keep in mind that all it takes is one friend who is responsible to lend you a hand.
For me, that was a friend who also happens to be in insurance, so I had an advantage you might not. A second set of eyes on your budget is always going to be helpful regardless.
Disadvantages of a Cash Budget
Cash budgets are great. There’s a reason that there has been such a trend recently of people switching to them. However, like everything money, it’s not all sunshine and daisies.
There are a few disadvantages that come with using them, so I feel obligated to point them out to you so that you can weigh up the pros and cons for yourself.
1. Risk of Theft
The fact of the matter is that it’s much easier to rob your home than it is to rob a bank. I don’t care if you’re Macaulay Culkin; a burglar is going to have an easier time getting access to your cash when it’s in your bedroom and not a vault.
Given that your cash isn’t easy to trace, this makes it difficult to acquire in the event of theft.
Of course, there are ways to minimize the risk. Investing in a good safe or hiding your cash away in something like a fake power outlet is something that you should be doing regardless of how you budget your money.
If you have a good alarm system or cameras installed in your home, this is also going to help. If you’re taking precautions against theft that you should be taking to protect your home generally, then you’ll feel much better about the situation. You do need to be hyper-aware of just how much cash you’re storing in your home, though.
2. You Can Lose it
Here’s another one that we’ve all experienced but don’t want to admit.
Whether you like it or not, you’re going to lose some cash at some point. Regardless of whether it falls out of your pocket onto the street or down the back of the couch, it’s going to happen.
Be careful when you’re carrying money around with you. Wallets, purses, and bags are all necessities when cash is your primary method of spending.
3. You Miss Out on Credit
You’re going to be cutting down on debt when you switch to a cash budget. This is great for when it comes to saving money, but not so much when it comes to building a credit profile.
If you plan on getting a mortgage anytime soon, you might want to consider finding an alternative way of generating credit so that you’re still building up your score. Just keep in mind that there are ways to live without a credit score using manual underwriting and other methods you can ask your lender about.
4. No Online Shopping
We live in an age when Amazon is the leading global retailer. Everyone’s buying from it, especially when you consider the lack of physical shopping that came about.
When you switch to cash, you’re limiting your ability to shop with large retailers who only have an online presence.
You can’t use cash to buy things online, so consider that before cementing your budget choice. One option is to buy gift cards with cash that you can then use online.
5. It Makes Investing Difficult
This point bounces off of the last one, but this time we’re talking about investing your money as opposed to doing some online shopping.
Everyone should have an investment plan, even if it’s just a loose one. $20 here and there can make a massive difference over the span of two or three years.
Almost every major investment option these days is accessed through the internet. Crypto brokers, stock markets, commodities, and more are all bought online. Without digital cash, you’re not going to be able to make any of these investments.
All of these disadvantages, for the most part, can be mitigated with some careful planning. There are ways to get around it by buying gift cards or even making an exception for certain recurring purchases to be linked to a debit card.
The biggest drawback to using cash is that it’s inconvenient. The biggest benefit is that it is going to help you save more money.
If a few walks or drives down to the bank every week is what it takes to build up some savings, then that’s something that I’m all for.
You might be of a different mindset, though, and that’s fine. The whole point of there being different budgeting systems is so there is something for everyone in every situation.
While I personally love cash budgets, you might not, so take some time to think about what suits you.
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