One of the first lessons we learn about money is that it is used to buy things. We quickly learn that money is a means to get what you want. While part of that is true, many people did not get the lesson that money can be used to build wealth.

By the time you realize that there is another purpose for money, you have already experienced the ‘buy whatever I want” philosophy. If that is not your story, it was definitely mine.

Top Money Mistakes I Made In My 20s

Spending money is a part of everyday life. Since every person must participate, it is a wonder why we do not learn how to spend money the right way in school.

How you spend money can make or break your wealth-building journey. Even if you increase your income and spend it all, your net worth still won’t grow.

“It’s not how much money you make, but how much you keep.”

To have the money to invest, you need to increase the gap between what you earn and your expenses. You must live below your means regardless of your income level. This means you cannot spend everything that you make.

This article will provide one tip that can reduce your spending so that you can build wealth faster. This tip has helped me control my spending, especially when paying off debt. It also helped me transition from paycheck to paycheck to investor.

That tip is to use cash.

It may sound rudimentary and easily dismissible, but it works. Often, people look for the latest trend to transform their money, but most times you have to get back to the basics.

The Benefits of Using Cash

With technology advancing at a rapid pace, electronic payments have become the preferred way to buy goods and services. Having cash is a rare sighting.  Even businesses have signs that state that there are limited coins to provide for change. Where are all the coins? (But I digress.)

But with the increased use of electronic payments, consumer debt increased as well. Online shopping has become the new way to shop. It’s easy, it’s convenient and it can be dangerous to your wealth.  Because online shopping can be quick and easy, it is causing many Americans to spend more than they make and pile on credit card debt. With cash, you don’t have this concern.  While you may lose the convenience of online shopping temporarily, using cash is worth the effort to get your spending under control.

Fixed Amount (Once It’s Gone, It’s Gone)

When you use cash, you are certain of how much you can spend. There is no risk of exceeding your budget or increasing your debt because once it’s gone, it’s gone. Too often people have used credit as a fail-safe to purchase more when you do not have money. If the balance is not paid within the month, this steals from your ability to build wealth in the future.

Forces You to Plan Ahead

Success is the residue of planning. – Benjamin Franklin

You have a better chance of controlling your spending by planning. It is impossible to prepare for every detail that life may throw at you. But there are a lot of routine decisions that you can make in advance to save you time and money. For example, when you have a grocery list and commit to using cash, you will follow the plan.

Reinforces Thoughtful Spending

Just because you are using cash, does not mean that you cannot buy the things that you want. But when you use cash, you can see the exchange of dollars for what you bought. When compared to what you have left, it makes you think hard about if this item is worth the money. Often, when you make credit card purchases, it is easy to buy it even if you are not sure you really like it.

This happened to me recently when I went to buy a couple of sweaters. I picked up several sweaters and tried them on. I liked a couple of them but wasn’t completely sold on one. Since I was using cash, I realized that I didn’t want to spend any of my money on a sweater that I didn’t really like. It made my decision easy. I purchased only what I liked and with the money that I had.

Remaining Money in Your Account Can Be Dedicated to Investments or Debt Repayment

When you identify what you will spend and commit to that, the rest can be used to further your goals.

No More Debt

The first step to getting out of debt is to stop digging further into debt.

Using cash forces you to only spend what you have available. This is a huge benefit because you have little to no chance of increasing your debt unless you borrow cash from someone else. As mentioned before, cash is fixed and does not allow you to overspend. This is why practicing using cash only for a time will have dramatic effects on your money.

The problem most people have is overusing credit cards. The buy now, pay later, is digging them further into the whole. Cash requires you to buy now and pay now. This will significantly curb your spending habit.

Cash requires you to buy now and pay now.

Objections

I know what you are thinking. Who wants to use cash anymore? Nobody carries cash. Since you are already thinking about it, let’s address some of your objections.

Cash Is Inconvenient

I must admit, using cash as my primary payment took some getting used to.  I recently practiced this same strategy and I found myself fumbling to count the right amount of money at the register.  I received some hard stares from the customers behind me because I may have probably taken too long at the self-check out trying to get my money together.

Paying at the gas station was a bit old school as well, but I did it. I experienced the awkwardness of “Can I put $20 on pump #2?”, but not really sure if $20 was going to fill up my tank.

Yes, it was inconvenient at first, but I spent less. But I also realized that when I paid for the items, the transaction was done. I did not have to go back and remember to pay a bill 30 days later. I paid for it at that moment. Buy now, pay now.

Losing Cash Back on The Credit Cards

Receiving cashback is a nice feature. It’s like a built-in discount, on every purchase. But you should ask yourself at what cost am I receiving this discount. The credit card companies understand that the more you use the card, the higher the balance. And with a higher balance, the greater chance you will pay interest.

This means that all your cashback is irrelevant to the interest that you pay anyway. Note that your interest rate is greater than any cashback offer.

Again, I am not saying that you should never use credit cards. But if you are carrying a balance and paying high-interest payments, it’s time to give the credit cards a break. Stick with cash until your spending habit is under control.

Carrying Cash Can Be Dangerous

Carrying a large amount of cash can be a security risk, but you do not need to carry all your cash with you all the time. If you know where you plan to go that day, carry enough money for that activity. For example, if you are going grocery shopping and getting gas, carry that amount. There is no need to carry around everything that you own in your purse.

Action Plan

Now that you know the pros and cons of carrying cash and you are ready to give it a try, lets’ discuss the next steps.

Determine How Much You Can Spend By Category

For the cash strategy to be effective, you must create a spending plan.  Understanding how much you plan to spend by category will determine how much cash you need.  The balance can be used to pay your rent and bills electronically and further your wealth goals.

Be clear on what obligations you need to cover this month so that you decide the right amount. Decide how much is for personal spending, groceries, gas, etc.

 

5 Simple Ways To Create a Budget That Works For You

Use Cash Envelopes to Categorize Spending

Once you withdraw the cash, use envelopes or a wallet to separate the purpose of your money by category. Do not commingle the funds.  If you need to transfer from one category to another, make sure to adjust your spending plan accordingly.  Note if this transfer was a one-time change or you need to adjust your spending category in the future.

 

Keep The Receipts and Track How You Spend the Cash

After every transaction, keep a receipt.  Having a record of what you spend is good not only if you plan to get a refund, but it will help you analyze your spending habits.  Better understanding your spending habits can provide valuable insight into changing your behavior. 

Conclusion

If you are trying to establish better spending habits, try using cash for a while. It will take some adjusting, but you will see a dramatic change in your spending.  Every strategy will have advantages and disadvantages. The question is are you willing to sacrifice now to develop the habits you need to achieve your goals. More importantly, you will have more money to further your wealth-building journey.  That’s getting your Finances On Point.