A popular debt reduction strategy that is often repeated by the finance celebrities involves putting away the plastic and starting to pay for EVERYTHING with Cash.  This thought is parroted by everyone from Dave Ramsey to Suze Orman, and is based on research suggesting that the handing over of actual dollars has more of an emotional effect than swiping a card.  Studies by MIT and the Journal of Experimental Psychology support this idea, but in fairness; they all focus on the “Credit vs. Cash” side of the equation.  In these discussions, they seem to avoid mentioning debit cards altogether.

Stop Using Cash

If you are trying to get rid of debt, ANYTHING should be preferable to using credit cards.  Cut those bad boys up, or at least freeze them in a block of ice.  It is my belief that the debt experts are missing the fact that using exclusively cash is also a strategy that can be fraught with problems.  It all comes down to accountability.  When you use cash, you leave behind no crumbs to explain where that Money actually went.  Budgeting is all about painting a clear picture of your money flowing in and out, and the use of cash can make this very difficult to track.

In fact, I deliberately try to AVOID using cash whenever possible, for this very reason.  I don’t know why, but whenever cash enters my wallet these days, I seem to burn through it super quickly.  I try not to take the attitude that cash is ‘free money,’ but perhaps something in my subconscious interprets it that way.  I apologize ahead of time to the vending machine owners and panhandlers of the world, but I prefer that cash pocket in my wallet to be completely empty.  If someone pays me for something in cash, I will take it straight to the bank and deposit it, because I know that otherwise it will soon vanish into the wind.

A Debit Strategy

The better solution that this cash-only nonsense is of course to become best friends with your debit card.  Using a debit card is just like using cash, because money comes straight from your checking account, and you can’t spend what you don’t have.  Virtually every bank offers electronic banking at this point.  This means that just by using your dedit card, you will automatically get a record of every purchase that you have made.  You can even likely sync your accounts up through an online product like Mint, that will automatically drop the purchases into the appropriate category.

Of course the real reason why the all debit strategy, is the automatic accountability that comes with it.  If you stop by McDonald’s on the way into work, there is no hiding it from your budget.  The record of your purchase is there, carved into digital stone.  To many, this level of financial micromanagement may sound like a bad dream.  For those folks, I wouldn’t suggest abandoning the idea, just build a little bit of “fun money” into your budget to spend on whatever tickles your fancy, no questions asked.

An Envelope System

Ramsey and Orman will tell you that the best part of going cash-only is how well it slots into an “envelope system.”  This is where you place the budgeted amount of money for each category into separate envelopes at the start of the month.  This effectively keeps the piles of money separate,  and forces you to stick to your limits.  For each category, once the money is gone, it’s gone.  I understand the concept here, but an unfortunate side effect is that you have no tracking of where the money goes within a given category. You will certainly notice if your grocery envelope is empty on the 20th of the month, but how can you make sure that you plan better the following month without a trail of bread crumbs to follow to understand how you spent that money?

The truth is, you can accomplish the same sort of envelope system using a combination of savings and checking accounts.  I documented how we use multiple savings accounts in this fashion in a recent article here at See Debt Run.  To make this work, you simply need to put the budgeted amount of money for a given category into separate savings accounts, and then transfer money over to your checking account when needed.

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Back when we were up against a massive debt mountain, going debit-only was a big part of our strategy for getting debt-free.  In full disclosure, I am a big time numbers guy and a technology nut, and having electronic records of everything really does work the best for me.  I understand that this may not be the case for others and a cash-only plan may be a better solution.  The important thing is that you decide to try something to find your better financial future.

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Photo From Ryan Loos