I have been saving money and paying off debt for the past 10+ years.
Now I have no debt except mortgages (one for an investment property, one for our home). Both mortgages have $100,000+ in equity each. And I have enough cash in the bank to allow me to retire from a traditional career at age 37 and pursue my own business ideas and passion projects.
Let me tell you, mastering spending control was a crucial part of this journey.
So, how do you know what the best payment type is to help you stick to your budget? When it comes to the cash or credit debate (and everything in between), it’s good to take a step back. What exactly are each of these choices to begin with? And why do they even matter- or do they even matter?
Let’s dig in, so you can find your answer.
What's In This Post
#1 – Money mindset – what is money anyway?
I think of money as a convenient tool invented by people to trade stuff. Our U.S. money is not backed by a gold standard. Even if it were, why are metals from the Earth that particularly meaningful anyway? In today’s world, money is increasingly just numbers stored in data systems. I think the last time I touched cash was over 2 months ago. Rare. And living through a pandemic, well, even more payments have gone “touchless” than ever before.
So where does that leave us with controlling our spending and sticking to a budget?
Cash is king
There’s cold hard cash, that is increasingly annoying to use. More and more of life is handled virtually and no one wants to handle COVID money anyway. But data tend to support that people spend less when using cash. Actually the very fact that cash is increasingly annoying to use makes spending it self limiting. If ordering groceries through Instacart, signing up for auto-charged subscription services, and impulse purchasing stuff with one-day shipping on Amazon Prime isn’t an option, well, you prevent excess spending. Hard to argue with that.
But cash stinks
But at the same time, if you’re raising kids, holding down jobs, and running a household, among other things, who’s got time for ATM runs, stuffing cash budget envelopes, and running errands for every little thing at a brick and mortar store with cash? Capitalizing on modern conveniences like automatically delivered toilet paper and toothpaste can ultimately help enable higher earnings because you can dedicate your time and energy to what matters while building a career, more so than maintaining the minutia of life.
The real issue
So for these reasons, I don’t draw a line in the sand for cash spending versus credit or debit card spending.
The deeper issue is getting real with your relationship to money. And aligning your spending choices with your highest core values and goals. This internal transformation is something that you can rely on for a lifetime of spending control. But if you rely on your payment method to be your main mode of spending control, you risk slipping into uncontrolled habits. This usually involves reaching for the credit card with no internal controls to regulate the swiping, leading to debt (no!).
So when you’re trying to find what payments type helps you stick to a budget, start by understanding what it means to spend money.
Every dollar is a trade off
A simple way to think of your spending is to think of every single dollar spent as a tradeoff. Each $1.00 subtracted from your bank account database, or each George Washington green paper bill handed off, is a choice to acquire something over and above something else. Like, you’re buying a Coke at the drive-through instead of using $1.00 to {fill in the blank}.
If you’re struggling to come up with rent, but had $20 of those dollar Cokes this month, you’re choosing the soda runs over having $20 more towards your rent, for example.
The {fill in the blank} can be a lot “bigger picture” though. It is the most crucial part of spending control – goals, dreams, aspirations for something better. If you have no financial goals, then who cares what you do with your money!
But if you’re griping that you hate your job, hate your commute, hate your apartment, well, what are you going to do about it? Do you want to have more saved for your kids, rely on others less, give more to charity, have more time freedom, have less work stress? Anything goes. And all of these involve financial goals.
So now every $1.00 Coke at the drive-through is a tradeoff between another dollar towards your most important dreams or just another soda. Easy choice, right?
There’s no such thing as perfect spending
When you understand spending as trade-offs between all your wants, needs, and future goals, you get real about prioritizing. The amount of unnecessary spending you squash is generally proportional to the strength of desire you have for other needs, wants, and goals. What payment type to use to help you stick to a budget becomes secondary, just a helpful tool to accomplish your aims.
But remember that perfect is the enemy of good. Be kind to yourself. Sometimes an icy soda from the drive-through is a delightful indulgence. Savor it! Other times it was just a pull, a habit, and kicking it to protect your larger priorities feels way better than indulging.
Making good choices with money is a lifelong pursuit.
Always remember it’s only money.
Be kind to yourself, for the long term pursuit outweighs any single choice or moment.
Stop saying you’re bad with money.
Don’t give up.
And while we should all constantly strive to use our money well, no one spends perfectly (me included!). Keeping trying is more important than always doing it perfectly.
#2 – Design the right budget
Before stressing over the right payment type to help you stick to a budget, build the right budget for you. There are many budgeting methods out there. Each is a different way to allocate your income. But like anything, there are different strokes for different folks.
Category budgets
Traditional budgets are based on categories of what you are purchasing. More high level budgets focus on the proportion of your income you allocate to your fixed expenses, like housing and transportation, as well as various spending categories. With this type, you portion out income per month or per week to use towards groceries, gas, entertainment, clothing, and so on.
Budgeting by time, not categories
I use a monthly spending cap, a portion of what I call the Magic Monthly Number. To do this, I allocate 2/3 of that spending cap to calculate a weekly “burn rate” for day-to-day spending (groceries, gas, clothing, services, etc.). In effect, it’s giving an approximate weekly allowance to spend on all your needs and wants. You keep track of your spending rate, not your purchase categories. The remaining 1/3 of the spending cap helps buffer some more expensive, but less frequent purchases. There’s always something like that cropping up any given month (i.e. a trip to the vet, back to school shopping, etc.). To get your Burn Rate Budget going today, grab the free Quick Start Guide below!
Hybrid
But there’s no reason you couldn’t budget a certain amount of your spending cap towards a particular category you want to keep a better handle on. And then monitor a general spending rate (i.e. burn rate) to keep tabs on the rest. Maybe you need a specific spending limit for clothing because you know you tend to overspend. Set that aside. Then decide if the rest you can apply the “burn rate” concept.
The point is to think about your lifestyle, your spending habits & weaknesses, and your own psychology. Build a budget specifically designed to help you succeed with being in control of spending and to save money. For me, the main purpose of a budget is to regulate spending behavior. Other expenses not impacted by your day to day behavior, like your fixed expenses, can be approached with a different strategy altogether.
#3 – Which payment type can help you stick to a budget?
With a mindfully curated spending plan (aka, budget) in place, identify the payment method to help you stick to your chosen budget. There are pros and cons to each. But like a budget, try what fits your family best. Then make changes if something isn’t working.
Credit cards
Personally, I have always used credit cards. I like to monitor my burn rate, keeping tabs on total spending as the month goes by, irrespective of what I spend on. Checking the credit card balance in the app, or as a morning routine at work when you sit down to check email, is an easy way to do this.
And whenever I want to dig into a deeper analysis (maybe figure out where I went awry some month) or examine an entire year of spending, the online tools credit cards offer make this analysis easy. I find tracking my amount spent across the weeks in a billing cycle to be feasible and so I stick to it. Tracking every receipt and purchase I make is not feasible for me. I know this about myself.
Also, as a busy working parent of young children, I enjoy the conveniences of credit cards. I avoid stores like the plague- quite a literal situation in the era of a pandemic. Instead I do nearly all of my shopping/errands online. Zappos when someone needs shoes. Amazon for all the household cleaning, toiletry, and paper products. And more Amazon for all the random “needed” things. Plus, a few occasional services like Grove, Thrive, and Instacart. Regular in-store purchasing (i.e. weekly groceries at Aldi) my husband handles. He enjoys errands just for getting out of the house, whereas I’d rather outsource (to him). However, it’s very easy for your card number to end up seemingly everywhere and you can wrack up a lot of subscription services or unintentional purchases with a credit card when you do a lot online. So that’s a caveat.
If you, unlike me, go to stores a lot for general “shopping” and regular errands, perhaps credit cards with a non-specific spending cap are trickier. Maybe you tend to fill the cart up a bit too much (hello, Target & Homegoods). And when the total rings up, you think “yikes” but just swipe. If you were sticking to cash, maybe that would make you take half the stuff off your tab at the checkout. For me, it’s sticking to that “umm, no, let’s take half that stuff back off the tab” no matter what the payment method is. No shame in being in control of your own money!
In short, I’m a fan of the conveniences, fraud protection, and free rewards of credit cards when paid in full every month and used with a spending cap. But, you must know thyself. If you’re not fully committed to a spending limit, credit cards may not be your friend. Or atleast not yet.
Get the budget down first.
If you’re wary of credit cards, you could request a very low spending limit. This way you can’t go on a spending binge so easily. If your credit is very low and you’re working on credit repair, you can open a secured card. A secured credit card is one where your spending limit is equivalent to the amount of cash you put down, typically starting at $500. So, you’ve basically laid down the money in advance to secure your purchases. But you can get the hang of responsible credit card use while building your credit back up. When you do this right, you get your cash down back.
Debit cards
Debit cards are a direct line to your bank account. In this way, perhaps they feel like they help limit spending because you’re spending “your” money. But be aware that many banks will still let you overdraft. Then you’re hit with fees and a negative balance. Not good.
When a thief has a direct line to your bank account, this is also not good. Yes, the bank tends to cover you but if money is spent directly from your account on the same day your mortgage is scheduled to withdraw, this could be a problem. For these fraud risk reasons alone, I tend to not be a fan of using a debit card as your main mode of spending.
But if you feel your debit card gives you the convenience you need like a credit card, but you won’t be at risk of a credit spending frenzy, I get it.
I’d recommend, again, focusing first on the budget that fits best. Get that down, and then ultimately use a credit card instead of your debit card when you’re ready, simply to keep your money safer.
Prepaid cards
If you struggle to control yourself spending, it may be best to use money separated out by week or month on a reloadable prepaid debit card. You’re essentially giving yourself an allowance in line with the budget you design. But you also have the convenience of a card as well.
The downside is just having to manage moving money onto the card in line with your budget. And many have fees associated with using them. But thoughtfully done, using a prepaid card to implement your budget could be a savvy move, especially when you’re getting started and want max control.
Cash
There is just no arguing that when your life is a cash only existence, you will spend less money. So if your goal is to slice spending drastically, this may be the way to go. Perhaps you could choose to do so just temporarily to get a strong handle on budget spending and saving money fast.
By using cash, you automatically eliminate lots of autocharged services flying under the radar, like music or TV streaming services you signed up for during a promo. You won’t be impulse purchasing stuff online late at night. You won’t be wasting money on sudden Chinese food cravings with your DoorDash app. Basically, cash protects you from all the easy spending of the internet/app era where all you need is a 16-digit number.
And many people claim that when you’re counting out dollar bills at the checkout, people tend to be more tight with their money, unlike swiping. I think it’s important to be equally conscious of your dollars, with any method of spending. But if you’re just not there yet, perhaps cash only is your answer.
Hybrid
Early in this post I stated I don’t draw a line in the sand of cash versus credit card spending. (I do draw a line on credit spending- do not spend money you don’t have! That is a given). Part of the reason I don’t draw a hard line is that people and people’s lives are all very different. And the answer to any problem is rarely only one answer anyhow.
Perhaps the best payment type to help you stick to a budget is a combination of the above options. For instance, I could use my credit card where I get 6% cash back for groceries. We always use a list for groceries and shop at Aldi, a pretty no-frills store. So there isn’t much risk of overspending on unnecessary anything. We could opt to use the same card for gas, another area where overspending isn’t really the norm.
Then, with those essentials out of the way, maybe you have $200 cash that your spouse uses as daily spending money for the month. You have another $200 you load monthly onto a prepaid debit card, for your whatever spending. And any family spending that come up and fits within the remaining limit of your budget is done using the debit card as needed. In this scenario, you really will only keep an eye on the groceries & gas card, which will probably be pretty consistent without much effort. And so you’re really just tracking other general essential spending from your checking account. That’s a manageable combination.
The point, just like with crafting a budget, is to create a payment type set-up that supports the budget you have designed and works with your family’s tendencies. Maybe your spouse can have four credit cards in their wallet and not spend a dime. Maybe you’re not quite the same. Think about what works best to help you be successful as a family and talk it over. It may take some figuring out, and trial and error. But the right answer is simply the one that helps you get results the easiest! The one that helps you stick to your budget and is feasible for good spending control long term.
Key takeaways
The first step in determining which payment type can help you stick to a budget, is to design a budget that is a good fit for you for the long run. You may allocate your spending money by time (like my “burn rate” budget) or categories, or a hybrid of both.
After thoughtfully setting up your budget, then consider what payment type or combination of payment types best support this spending plan. Keep evaluating how it is going. Keep tweaking.
Always remember, different payment types will work better for different people. Just as different budget methods will work better for different people.
Just remain open to learning, adapting, and refining your methods as you grow in your financial journey. The solution to which payment type can help you stick to a budget is likely not a single answer. And the best answer may evolve as your season of life evolves and your financial practice grows.
You Might Also Like: