Having a cash-only rule while consolidating debts seem like a good idea. In fact, a lot of articles will advise you to use cash to avoid adding more balance to your debts. But what exactly is the effect of using cash completely?
According to statistics, a lot of people are still using cash. In fact, 55% admitted that they do not like the idea of abandoning cash completely. Admittedly, the younger generations all prefer to use digital payments. However, the older ones are still holding on to their cash. They have started to use mobile and digital payments but they refuse to completely surrender their use of cash.
While the use of credit and debit cards, mobile payments, and digital wallets prove to be convenient and secure, cash still holds a tight hold on consumers. It is especially useful for a lot of debt-ridden consumers. As mentioned, people are usually advised to go back to using cash when they are already struggling to pay off their multiple debts. While it seems like a logical move, it may be smarter to find out the real advantages and disadvantages of having a cash-only rule.
Pros and cons of a cash-only rule while consolidating debts
Consolidating debts is an effective way to solve your credit issues. But to maximize the positive benefits of debt consolidation, you have to pay as much as you can every month. The higher the monthly payments, the faster you can get out of debt. The shorter the repayment, the more money you can save in the long run.
But how can you ensure that you can maximize your payments? Most people believe that it all boils down to how you control the way you spend your money. It is this idea that prompts consumers to come up with the cash-only rule.
The truth is, using cash has its advantages and disadvantages. It might be a good idea to get to know this before you completely turn all your payments over to cash.
Advantages of using cash only
Using cash has a lot of advantages especially for people with a lot of debts. One of the most important involves budgeting. When you are in the midst of any debt relief program, you need to make sure that you are following the right budgeting tips that will help maximize your limited finances. To be specific, you need to implement strict budgeting rules because it will allow you to reserve the funds for your debt payments.
Cash also makes it easier to avoid overspending. After all, when you do not have cash, you are forced to stop spending. Your credit cards give you more freedom to spend. It is dangerous because some people think it is an extension of their wallet. They fail to remember that every time they use their cards, they are using the money of their creditors. And to pay it back, you have to do it with interest – which is another benefit of using cash. There is no additional fees or interest to be paid.
The cash-only rule will also make you aware of how much you can really spend. Not only that, it will make you more resourceful. As soon as you realize how much you can afford, you will find ways to get what you need without spending so much. This is a helpful habit that will benefit you even after you have paid off your debts. It makes you cautious about spending.
Disadvantages of using cash only
One of the primary disadvantages of the cash-only rule is its inability to help with your credit score. While the debt consolidation program that you are currently using can repair your damaged credit score, using credit continually will also do the same. If you use cash, there will be nothing new in your credit history.
Another disadvantage is the danger that comes with carrying so much cash. When that money is stolen from you, there is no way to recover it. With credit cards, you get to have more security. If you become a victim of fraud, there is a chance to recover what you lost.
Finally, you do not get to enjoy the rewards and loyalty programs associated with your credit cards. These can also help you save money – as long as you are using the card for your usual purchases.
Now that you know the advantages and disadvantages of a cash-only rule, do you think it is worth implementing it in your life while you are paying off debt?
Tips to implement the cash-only rule during debt relief
In case you decide that the cash-only rule will work in your favor, that is okay. As long as you can commit to it, this should help you bring your finances back on track.
Here are tips that will help you implement this rule effectively.
You do not have to convert everything to cash immediately. Choose categories that you can pay for in cash. Ideally, these should be the areas in your budget where you overspend the most. According to reports, people usually spend cash on small purchases that are $10 or less. Your groceries and daily expenses might be better off using cash. Eating out is another area where we usually overspend. You should use cash whenever you dine out too.
Set a budget for these categories
Once you have identified the cash-only categories, you need to allocate a budget for it. Be realistic with the budget so you will not end up falling short. This might tempt you to use your credit cards. Track what you spend so you can be sure that your needs are being met even as you try to get used to using cash only.
While debit cards are practically like cash, refrain from using these. You want to get used to handling cash more. Besides, when you use cash, it is more painful to spend it.
Bring only what you need
When you start using cash, make sure you only bring what you need. This will keep you from overspending. If your budget for the day is only $50, bring only that amount. Add an extra $10 or $20 for emergencies. The amount should ideally be something that you can use to get home. Make sure to keep it in a hidden compartment in your wallet or purse. Usually, we do not want to have an empty wallet. So it is more likely that you will spend less than $50 just so you have money left. This is one of the strategies that you can use to lower your monthly expenses.
Schedule when you will withdraw money
If you are implementing this cash-only rule, make sure you have a schedule to withdraw the money. Do it in a secure location and preferably with someone you know. And do this just before you go home. That way, you do not have to carry around all that money. You can immediately bring it home and keep it secure.
Plan your every expense
Once you have your funds, you need to plan how to use it. You can use the envelop strategy so you can stick to the budget that you have set for yourself. If the money in the envelope runs out, you need to stop spending.
To help limit your spending, you might want to make a list before you go out to spend. At least, this is applicable to your grocery errands. It will probably be easier if you do all your errands in one day. That way, you only have to prepare your list once. And if you make a list, make sure that you will follow it strictly. If there is something that you want to spend on that is not on the list, delay it. Go home and think about that expense. Unless it was a clear oversight on your part, you have to trust your initial judgment in not including it in the list.
If you implement it correctly, the cash-only rule can help you develop the right financial management skills and habits. It can also help control your spending so you can put more money towards your monthly debt payments. Hopefully, it can help you get out of debt a lot faster.