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How to Spend Cash to Save Money

We’ve all heard the phrase, “you have to spend money to make money.” But what about spending money to save money? Sounds counterproductive, so let’s make a small adjustment: You have to spend cash to save money. It’s called the Cash Diet, and it can actually help keep your wallet quite thick. Learn how you can save more than a few loonies by switching out your plastic for cash.

What is The Cash Diet

Simply put, the cash diet works like this: Instead of using your bank card to make everyday purchases, you use only cash. There is a wide range of ways to go about this, but the key to every approach includes both discipline and organization. One of the more popular cash diet approaches includes the Envelope Budget. 

Envelope Budget
Envelope budgeting is exactly how it sounds: Using envelopes to organize your spending money into various “buckets.” These expenses include food, transportation costs like gas, home goods such as cleaning supplies and paper towels, and toiletries like shampoo. Instead of determining how much you spend on each based on receipts, you set a budget based on what’s left of your paycheque after your monthly fixed bills, like the hydro and rent. You then put the allotted money for each expense into its own envelope. Either label the envelope or use coloured envelopes for each type. For example, a yellow envelope might be household goods while a green envelope might be for groceries. You’ll also put money aside into an envelope for non-necessary expenses like eating out, entertainment, or your coveted double-double.

The nice thing about this system is that you can take specific envelopes with you that you will need that day and leave the other envelopes at home - helping you stay disciplined and not spending money that you have earmarked for something else. And, of course, when the money runs out - you’re out. There’s no swiping the credit card to cover the cost once the envelope is empty. 

How to Make it Work for You
Only you know how to make the envelope budgeting system work for you. But there are a few things you can do to ensure you’re approaching this in a way that will ensure success.

  • Be flexible. There will be some months where you don’t have to spend as much on household goods so you can move that extra cash to another envelope. The same will be true about spending more some months, so, in general, be willing to make concessions here and there.
  • Keep your receipts. Whenever you take cash out of an envelope, put the receipt you used that cash for in it. This will help you keep track of what you’re spending money on in each “bucket.” For example, you may have not had enough money to buy all your groceries for the week and not know why. Looking at your receipts will tell you that you may be spending too much on pop.
  • Set priorities. If you can’t trust that you will be able to stay disciplined, make all your necessary purchases earlier in the week. Prioritize the needs over the wants by focusing on those first - and only after can you consider splurging.

Why The Cash Diet Works

Research has shown that those who use cash to make purchases spend less. Here’s why:

  • It’s more painful to spend cash. When you buy something with cash, you are physically watching your wallet deplete. That can set off some anxiety, making you second guess the value of your purchase. With credit cards or debit cards, you don’t feel that immediate pain, which makes it easier to and more enjoyable to buy something, until the bill comes due, of course. 
  • It’s more difficult to be unhealthy. Not only do people who use credit cards spend more, but what they spend money on tends to be unhealthier. Those frosted doughnuts looked good on the shelf, but will they be nearly as enjoyable when you’ve gone way over budget to have them? If you get to the clerk and you don’t have enough cash to cover your grocery bill, you’re more likely to get rid of the sugar than to get rid of the milk.
  • It’s more about value with cash. When you buy something with a credit card, there’s a disconnect between what you are buying and what it took to afford it. If you spend cash, though, you know exactly how many hours it took to earn it, and you end up valuing what you bought a lot more. That’s because cash is simply a physical form of your hard work. Instead of seeing dollars, you’re seeing your hard-earned labour - which makes it that much more meaningful. You’ll ask yourself if you would work two hours just to have that impulse purchase, and more often than not, the answer is no.

Potential Setbacks
By far the biggest potential problem with the cash diet is the safety of your money. When you have your credit or debit card stolen, in most cases, you aren’t responsible for the loss of any funds. Not so with cash. Once it’s gone, it’s gone - even if it’s taken from you rather than spent. The solution to that would be to carry as little as possible, only having on you what you need for the day.

The second drawback to the cash diet is emergency situations. What if you blow a tire and need a tow? You probably won’t have enough cash on you to pay for it. This is where having an emergency fund is beneficial.

Digital Envelope Savings

The Envelope Budget can easily apply to savings, both physically and digitally. What that means is, you are using both paper envelopes and your digital bank account to build savings. So, how do you organize something like that? Have a savings account for long-term savings and a cash envelope for smaller emergencies.

For example, included in your envelope budget is a savings envelope. Upon getting paid, you automatically put a small amount in that envelope. Any leftover cash from your spending envelopes also goes into your savings envelope. Then you use your digital savings account “envelopes” for more long-term savings goals, such as one account for vacation savings, one account for car maintenance savings, and one account for medical expense savings. When that tire blows and you need a tow, all you need to do is use your mobile to transfer money from your car maintenance savings into your chequing account.

As with any diet, it can take time to adjust to a Cash Diet. In fact, most experts suggest you stick to it for at least six months to really get into the habit of being more disciplined with your money. Once you have a better handle on your spending, you can slowly switch back to the convenience of debit cards, albeit with a new understanding and appreciation for each loonie. And, of course, until you can get your savings account built up, we’re here at 310-LOAN with an online payday loan to help you get through to your next paycheque! For more money management tips, check out our blog now.

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