Finances FYI Presented by JPMorgan Chase
Paying with credit or debit cards is increasingly more convenient and prevalent than using cash.
According to the Federal Reserve, credit card payments grew 6% by number and 10.5% by value from 2021 to 2022.
For some, credit cards can lead to mindlessly spending more than you have and ending up with unmanageable debt. That, along with price increases, may be why using only cash has been trending on social media. More than 189,000 posts on TikTok have the hashtag #cashstuffing, many with hundreds of thousands of views.
What Is the Cash-Only Method?
If you opt for cash-only or cash-stuffing methods, you will use only cash for most of your spending. You will continue to pay most bills by debit cards or online pay, but you will use cash for groceries, clothing, eating out, and other discretionary spending.
Is the Cash-Only Method Right for Me?
To consider if the cash-only method is right for you, start by determining your goals and budget. Are you trying to pay off your credit card debt, save for a big purchase, or gain better control over your spending? Use your goal to determine how much money you want to allocate towards debt and savings each month. Then, calculate how much you need for bills and other fixed costs like rent or mortgage.
With the leftover amount available, decide what categories you want to track and how much you can spend on each. Typical categories include groceries, gas, gifts, clothing, and entertainment. It’s also helpful to have an emergency fund category to cover unexpected expenses.
With the cash stuffing or envelope system, you will withdraw cash from your bank accounts for these specific spending categories in your budget and use envelopes to divide money by category. Once the money is gone in any given envelope, you can no longer make purchases in that category.
Why Does This Method Work?
Spending primarily with cash can reduce overspending because you are more mindful and connected to where your money goes.
Buying things can give us quick moments of joy or dopamine. On the other hand, the “pain of paying,” a concept coined by Ofer Zellermayer, explains that some spending causes agony — depending on factors such as the perceived value and how they pay. He concluded: “The more painfully a payment is perceived, the less likely consumers are to pay with cash.”
A study from researchers at New York University and the University of Maryland explains that two factors are at play when paying with a card: the separation of time between the purchase and the payment and how credit card payment combines different purchases. You don’t experience the same pain of paying a credit card bill a month later with all your expenses versus cash on the spot for one item.
The Money and Mental Health Policy Institute gains insight into spending related to financial difficulties and mental health problems from a research community of experts by experience. One community member explains, “It’s too easy to tap the card and not remember how much you have spent. I can limit how much money I take with me with cash so impulse spending risks are lessened.”
Paying with cash makes spending more mindful since you are more likely to recognize the potential pain. You are also more connected to each purchase. On top of the research, credit card spending can result in fees and high-interest payments if you incur debt, while cash-only systems mitigate these risks.
Are There Downsides?
One challenge with the cash-only method is that spending is harder to track. With credit or debit cards, you can look at your statements to see where your money has gone. A writer for Yahoo Finance who tried cash only as an experiment reported that “it can be challenging to keep track of your expenses when you use cash. You have to keep receipts and manually record your spending, which can be time-consuming.” Cash stuffing advocates recommend tracking spending on budgeting sheets or in a notebook.
You also miss out on earning points and rewards through credit card perks or building your credit. Also, keeping hundreds of dollars of cash on hand can be risky, increasing the chances of loss or theft. Your cash is not protected the same way your credit cards and bank accounts are.
You can use the cash-only method as a short-term solution to reach a goal or develop better spending habits. Or, if you consistently struggle with overspending and this method works for you, make it a long-term strategy. Either way, it is helpful to understand how your brain seeks rewards and understands consequences so you can keep your spending in check to support your budgeting and financial goals.
Finances FYI is presented by JPMorgan Chase. JPMorgan Chase is making a $30 billion commitment over the next five years to address some of the largest drivers of the racial wealth divide.
