Latest Column - When Spending Your Money — Cash is King

Our last lesson explained how easy it is to put aside a portion of your pay cheque into a high-interest savings account.  While you enjoy seeing that money grow, today’s lesson will focus on making your walking around cash last.

Tracking your spending indicates how much money you need to get by on between pay periods. Whatever that amount is, go to your bank’s ATM and take it out in cash. It’s good to use a debit card to figure out where your money was going over a month’s time. Once you’ve done that and seen your spending pattern, it can make a lot of sense to use cash to make your purchases.

There are many reasons to do this. A key one is that you will spend less money using cash to buy things instead of debit. Why? You will control your own spending because you will always know how much money you have left.

If your bank provided your account with overdraft protection, you have the option of going into debt if your account balance goes below zero. You pay fees and interest every time you use this convenience, so my advice would be to avoid overdraft protection altogether and pay with cash. You will end up spending less. Here’s why:

Say you are heading out to a friend’s house and decide to stop off at the convenience store along the way to pick up some munchies. If you know you have roughly $20 left in your bank account to spend, you will try and keep it under that limit. If the cashier rings up $21.39, it’s no problem if you pay with debit and have overdraft protection or pay with a credit card. You end up just borrowing the money you don’t have. If however, you just use the cash in your wallet, you will make sure that you don’t spend over $20. Why? Because no one wants the embarrassment of having the cashier ring in a bunch of items that you don’t have enough money to pay for. So you work your addition skills to the max to make sure you don’t come close to over extending yourself, even with the taxes added. Chances are you over compensate and spend under $18 just to be sure you don’t have a case of the shorts at the checkout counter.

Many studies have confirmed we spend less using cash compared to paying with credit. Seeing the actual dollar bills leave our hands has an impact on our spending habits. You can even take it a step further and only use crisp bills.  Former University of Guelph professor Theodore Noseworthy’s research tells us that given a choice between using a crinkled, dirty-looking bill and a crisp, new one, we’re quicker to spend the old one. Just one other reason to grab your freshly minted cash from your bank’s ATM.

If you’ve had enough with the psychological arguments of why you should use cash, here is a direct one: Debit cards cost money to use them. Many banks have set limits on how many debit transactions you can make each month before being charged a transaction fee. There are student-friendly bank accounts that avoid this. But you can still be charged a fee from the store you’re purchasing from. Some fast food chains have been known to charge a transaction fee when debit cards are used for small purchases under $5.

Having easy access to cash can have its drawbacks, too. If you have taken out $100 to last you until the next pay period, it would be unwise to keep all of it on you in your wallet or purse. To avoid the spending temptation and possible risk of theft, keep a smaller amount on you for your daily needs. Put the rest in an envelope in a secure location where you live. Follow this lesson and you may find that envelope of cash can grow on its own to be added to your savings in the bank or used to make a bigger purchase.

So enjoy spending your cash. You’ve earned it. Next, we will see how you can keep others out of your pockets and spending your money.