Financial and cash diet: an overspending detox

The trouble with declining cash transactions

A Facebook friend recently posted a picture of his beaming 9-year old daughter in front of a newsagent holding a newspaper in one hand and her change—notes and coins—in her other outstretched palm. The caption quotes the girl: “I feel like I’m doing something so old-fashioned.” 

An equal part commentary on newspaper as it is about cash, it is quite impressive how quickly society has moved from cash-based to a cashless society. UK Finance says debit and credit transactions have risen, and cash transactions only made up 28.5% of all payments in 2018 (down from 60% in 2018). UK Finance predicts cash will only make up just 9% of transactions in Britain by 2028. 

Why does this matter?

While the convenience of credit and contactless payments is unquestionable, many of us find ourselves mindlessly spending invisible money more than we would if handling cold, hard cash money.

Research shows that people spend more with they only use credit cards, sometimes twice as much. Research also shows that we have a more powerful emotional response to paying with cash. Watching that fiver leave our wallet is more meaningful than a contactless tap. Handing over two five pound notes also attunes more value to the spender than handing over a ten pound note. Having to run to the ATM to make a purchase can often start a “is it worth it debate” that the convenience of a card would have cut right through.

In other words, cash may be well on its way to “old-fashioned” status, but at great cost to us. It’s time to bring cash back. 

Enter the cash diet challenge

The cash only diet is a cash-based spending plan for day to day non-essentials. Credit cards, debit cards, and any kind of contactless payments are off limits. 

In theory, by limiting your daily, weekly or monthly spend to a predetermined amount of cash money you will find it easier to say goodbye to impulse purchases, stick to a budget and save. 

Like any food diet, the money diet only works if you stick to the plan. And just like food diets, that’s easier said that done. To help you stick to the financial diet, you need two things to succeed: data and discipline.

Calculate your cash diet

First, calculate your spending to create a budget. Use an open-banking platform like Money Dashboard that syncs up all of your accounts and categorises all past and ongoing spending. This is the best way to stay on top of your money and separate necessary expenses from the non-essential. Also look to how spending varies month to month on categories such as groceries, transport and entertainment. Use this to figure out how much per paycheck should fall into your cash budget.

Be kind to yourself. If you cut your spending too severely, you are likely to fail. Challenge yourself to live off of a reasonable budget and spend less without punishing yourself.

Get the cash ready

Secondly, determine your weekly allowance. Now that you know how much to cash budget, withdraw it from the ATM and separate that into four weekly or two bi-weekly allowances. It helps to leave the house carrying only what you need. This ensures that if you only go to the grocery store with £40 cash, you will walk out with £40 or less in groceries.

If you want to take it even further, you may want to or use the envelope approach, which means putting in budgeted cash in categorically labelled envelopes (“entertainment” “groceries” “clothing”) at the start of the month and limiting yourself to that fixed supply for the labelled purpose. Once set, cash cannot be moved between envelopes, and any remaining at the end of the month goes to savings (ie not a bonus for next month). 

Leave your credit cards and debit cards at home. Disable contactless from your mobile. If you carry them, you will be tempted to use them out of habit, convenience and easy cheating. 

Track your spending

Finally, your cash budget can be adjusted month to month, hopefully for greater savings, but you won’t know how to best do that if you aren’t carefully tracking every penny that leaves your accounts. Don’t discount even the smallest purchases. 

Money Dashboard automatically sees any credit or online transactions. By logging and tracking your cash spending alongside that data you can help ensure you reach the end of the month without cheating. Complete cash and credit tracking also helps identify opportunities to further cut spending and increase savings. 

Don’t disown your credit and debit card just yet

You may find the cash diet plan revolutionary—many do. But think twice before cutting up your card. You still can use larger recurring bills such as loan payments, rent, utilities and phone contracts.

And maintaining the checking account and credit cards for this purpose is good for building and maintaining a healthy credit score. Just make sure you always pay these bills in full each month. 

What about digital exceptions?

Cash is not going to get you very far with Amazon, Uber or Deliveroo or Netflix. The trick is to stay mindful of these expenses and tract and subtract them from your pocket money the way you would a cash transaction.

Try to avoid the “subtract later” mentality. If you spend £20 on credit, pull £20 from your wallet right away, otherwise you may find yourself spending both. 

How long?

Some people choose to stay on the cash diet for years, others only a few months. It depends on your goals and motivations, such as paying down a sizeable debt or saving up for a big purchase. Or you may more simply want to reboot and take control of your spending habits.  

The suggested minimum is 2 months. Many find that the longer they stay on the cash diet, the more they become conscious spenders and able to focus on what they need and less about fleeting wants. 

And with your new financial reserves from the cash diet, you will find it easier to hit emergency fund goals as well as saving and investment targets.

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