Is an All-Cash Diet Right for You?

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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 Benefits

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 where your money's going. Using cash can encourage you to only buy what you really need and avoid impulse purchases. This is especially helpful if you tend to go on shopping sprees and overspend when you're stressed, upset, or anxious.

2. Reduces Some Fraud and Charging Errors

Using cash also reduces the chance of accidental overcharging, or worse, fraud by retail and restaurant staff. Stores and restaurants do occasionally unintentionally double charge your card, and wait staff have been known to steal credit card data. It is usually not until we get home or are balancing our checkbooks later that we realize the error or fraud, and by then it can be difficult to correct. Alternatively, using cash ensures that you're never in that situation.

3. Streamlines Store Returns

When you're making a return with a card, you usually need to have the exact card that you paid with. On the other hand, if you paid with cash, you can quickly get the refund in cash.

4. Reduces Overdraft Fees

If you're prone to accidentally overspending on your debit card and then having to deal with overdraft fees, an all-cash diet may help you. You can still overdraw your account by taking too much money out at the ATM, but you're less likely to do that by mistake, especially if you only take out a certain amount every week. Over time, you can save quite a bit on what would have otherwise been wasted on overdraft fees.

When to Use Credit Cards

Even if you decide to stick to an all-cash diet indefinitely, there are some times to make exceptions and use credit cards. This is a particularly true if you're trying to improve your credit score, since using credit cards responsibly is an easy way to build credit. But you don't have to charge a lot to get the credit score benefit (in fact, it's better if you keep your credit utilization low), so you could still use cash for out-of-pocket expenses and charge one or two monthly expenses, such as your Internet and electricity bills, to your credit card. Just make sure you pay those charges off in full and on time every month.

In fact, even if your credit score is good, you may want to keep at least one credit card open and active to help maintain your score, especially if you don't have a mortgage or other loans you're paying. It's also good to have a credit card on hand for online purchases (credit cards are safer than debit for web shopping), car rentals, and for emergencies. To keep the account open you'll need to continue using it occasionally. Again, a good way to do this is by charging a monthly expense to your credit card and paying it off in full.

If you're racking up travel rewards, frequent flyer miles, or cash back on a particular credit card, then you may still want to use that card for certain purchases. For example, if you earn extra points for travel expenses, then you may want to continue using your card for these types of purchases. You can also use a rewards credit card for large purchases. Not only is it safer than carrying around large amounts of cash, you'll also earn a big bunch of points for that expensive purchase.

Some credit cards also offer additional benefits, such as free travel insurance and rental car insurance. If you need these services, then it's better to use a credit card that offers them for free than to pay extra for them with cash.

Give It a Try

You don't have to devote your life to the all-cash diet right away. Consider just trying it for two to three months to see how much you can save.

If you find that you're running out of cash midweek or are still regularly reaching for your credit cards, you may want to re-evaluate your spending habits altogether. Even if you find that the all-cash diet is not right for you, it can help you get a better handle on how much you're spending and how to improve your budget.

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