Should You Live On a Cash Budget?

by Team Dinks on April 14, 2010 · 13 comments

wallet - you have no money
When I was the manager of a small business, I was always shocked to learn when a new hire didn’t have a bank account. He or she would opt out of getting an electronic direct deposit in favor of a paper check that they’d cash every payday. I guess it surprised me because bank and credit accounts lay the foundation for my entire money management system and make my life so much easier.

You might argue that a cash budget has benefits because there’s no chance you can spend more than you have. Or that spending cash gives you a psychological advantage because it’s more painful to peel off a Benjamin than to swipe a debit or credit card for a purchase. Yeah, that’s true. But on the other hand, you can’t buy online or make a reservation for something like a concert, hotel room, or a rental car with cash. Trying to keep the right amount of cash in your wallet at all times is terribly inconvenient and could be dangerous if you were caught short of funds at the wrong time.

Let’s take a look at four reasons to use bank and credit accounts, instead of cash, and how to find the best ones:

1. You need to track every penny of your money.

Spending with a debit or credit card allows you to automatically track your expenses. It’s simple to import transactions from your bank and credit card accounts into a financial program at the click of a button. Quicken is one of the best-known brands in accounting software. But there’s also free software like GnuCash and Outright to keep you organized. is a fantastic online application that automatically aggregates your financial data in one place for easy budgeting and reporting. On the other hand, purchases made with cash can’t be easily tracked. You have to manually enter them into your software or paper register which means they’re easily forgotten.

2. You need to earn interest on your idle money.

Money that you set aside for emergencies, short-term savings goals, and everyday bills and spending, should be working for you in a high-yield FDIC-insured bank account. Funds up to $25,000 in my checking account at Bank of the Sierra earn over 4% APY. To get that currently-awesome rate, the bank requires that I do the following each billing cycle:

  • Make a minimum of 12 debit card purchases
  • Have at least one direct deposit or automatic payment
  • Pay at least one bill using online banking
  • Receive an account e-statement

Am I happy to comply with those requirements in exchange for earning over 4% with absolutely no fees? You betcha! You can find more high-interest checking accounts at

3. You can use credit card rewards to your advantage.

I really enjoy getting 5% cash back when I buy everyday items like groceries and gas with my American Express Blue Cash card. I buy everything I can on it (except for the 12 debit card purchases that I mentioned above) and deduct each charge from my checking account balance each week. Then I pay down the card balance in full twice a month—so I actually use it like a debit card. The cash reward is credited to my account every 12 months.

4. You need to pay bills on time.

Without a checking account, it would take me so much longer to pay my bills. I remember the old days of writing paper checks, addressing envelopes, and stamping them. Whew! I’m so thankful for online bill pay; now it literally takes me all of a few seconds. Paying bills with cash or a money order seems downright archaic.

To me, living on cash has too many limitations and too few advantages. However, if you’re still convinced that using a cash budget is the only way you can tame your spending—don’t change a thing.

Laura Adams is the author of Money Girl’s 10 Steps to a Debt Free Life. It’s available as an audiobook at or as a short e-book in the Amazon Kindle Store, the Sony Reader Store, and the Fictionwise E-bookstore. Learn how easy it is to get out of debt and stay out of debt for good. Take control of your finances today and create a more secure future.

(Photo by Jeff Keen)

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{ 12 comments… read them below or add one }

1 Keith Morris April 14, 2010 at 12:15 pm

This reminds me of a program in San Francisco called Bank on San Francisco. It turns out that there are a ton of people who lose hundreds of dollars a year by taking their payroll checks to check cashing companies. The program helps those people open up bank accounts in order to save money.

2 Laura Adams April 14, 2010 at 4:27 pm

To Keith: Thanks for that reference–it's a very worthy mission!

3 Tahnya Kristina April 14, 2010 at 7:52 pm

I am about the cash budget. If I don't have the money…I don't spend it. I have a credit card that I use once a week for items only under $50 and then I pay it off…just to keep my credit score good :-)

4 J. Money April 14, 2010 at 7:56 pm

Oh yeah, I am a credit card beast! I put as much as I can on that plastic and then pay it off in full every month. Easy to track, easy to budget, and easy to get free money back ;)

5 Kevin@OutOfYourRut April 14, 2010 at 8:08 pm

All good points, but it would be better to have plastic–for true emergencies–but to pretend that it doesn't exist otherwise! That'll offer the best of both worlds.

On the credit card rewards point, I think that will generally work against you since the potential to entice you to spend more, to get more rewards, is real enough to make it worth it to the credit card companies. They probably have internal reports showing the positive (from their standpoint) affect of rewards programs on sales and fees–not that any of us will ever see them!

6 Tahnya Kristina April 14, 2010 at 8:55 pm

Credit Card Rewards Points are a marketing tool that Banks use to encourage you to max out your credit cards so they can charge you 21% interest. Don't fall for it! Also don't think for a second that you are actually getting something for free. You pay for it, trust me!

7 J. Money April 14, 2010 at 9:32 pm

What if your interest rate is only 6%, and you pay it off in full every month anyways? ;)

I get what you're saying though – generally speaking, credit cards aren't trying to cozy up to us for nothing. They want our money and sadly they get it from a lot of people. Def. about sticking to what works for you when it comes to this stuff.

8 Laura Adams April 15, 2010 at 6:11 am

Yes, if you don't pay a credit card off in full and on time each month–you're asking for trouble. But if you pretend that it's a debit card (like I do), you never pay a penny in interest or fees and get to rack up the rewards. The credit card company makes their money from merchant fees–never from me!

9 kitty April 17, 2010 at 12:47 pm

I am with Laura here. There is this one great invention called "automatic payment of the full balance". I don't see any difference (other than those advantageous to me) between having a credit card with automatic payment of full balance vs having a debit card. I get all of the rewards, take advantage of full grace period, but money are still taken from my checking although at the end of the month.

Alternatively, there is very little difference between credit card with balances and debit cards with credit lines.

It's really about personal responsibility and common sense.

I use credit cards for everything. The only exceptions are where the expenses are too small to bother or I can get a better deal for paying cash. Or if a local business asks to be mindful of their expenses and only use cards for bigger purchases.

10 J. Money April 18, 2010 at 11:32 am

Yeah, the local business exception is usually one that comes up in topics like this for sure. I always try and do my best to not charge $.99 when at 'em ;) Which is yet another reason to at least have $20 of cash on you at any given moment.

11 slackerjo April 18, 2010 at 1:28 pm

The best part of the cash only method? It's 2 days until pay day and wow, you still have $40 left. Oooh the buzz!

12 kitty April 18, 2010 at 4:11 pm

The best part of the cash only method? It's 2 days until pay day and wow, you still have $40 left. Oooh the buzz!

Why is having money left before pay day is a part of cash only method? I have $2000 left every month (after max 401K contribution and payment of full credit card balance… OK I earn low six digits and have a paid off home, but seriously I've always had money left at the end of the month even with credit card. It's about thinking only about cost when you decide to buy and not worry until method of payment until you are at the cash register.

@J. Money – I usually use $20 as a line between using cash or credit card at small businesses I really like and want to support. Like a French pastry shop nearby….

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