COULD cold hard cash be the secret to sticking to your budget?
These days 86% of transactions are cashless, but if you are looking to rein in your spending and stick to a budget you may want to head to your nearest ATM.
A new study in the Journal of Economic Behaviour and Organisation has found that paying with cash causes 20% more psychological pain than using cards.
“We find that when people pay using contactless it hurts less, but they spend more,” say the researchers.
“With cash payments, people experience the pain of loss intensely as they need to check the amount, select the right bills and coins, hand these over, receive their change and check whether the amount they have received is correct.”
A survey by Money.co.uk found that 65% of us admitted to being more free with our money when spending contactlessly.
If you are struggling to budget, then Emma Gosling, financial coach and founder of Feel Good Enough, thinks notes and coins hold the key.
“When I was growing up in the 1980s and 90s, my mum looked after the finances and would pay for everything in cash, so she knew how much she had left to spend at any point of the week,” says Gosling.
“Once that money had gone, there was no more. Everything was saved for or budgeted for each week.
A popular cash budgeting method is the Cash Envelope System.
Also known as cash stuffing, videos tagged #cashstuffing have received billions of views on TikTok.
The system is simple you just need cash and envelopes.
Write a category on each envelope: clothes, nights out, the food shop etc.
You then work out how much you want to spend on that category withdraw the money and place it in the envelope.
Then you spend from your envelopes knowing you can’t spend more than is in there.
“Most of our spending habits are on autopilot and we tend to buy what we want and justify the spending later, so I find that clients like this system as it slows them down and makes them more mindful of their spending,” says Gosling.
“It’s also great for people who don’t know where their money goes each month or who feel they want to have more control over their spending.”
As the researchers found in their study standing at a till and counting out the money needed, then checking your change and seeing how the amount left in your envelope has dwindled really drives home to people how much they are spending.
“People tend to stop overspending or splurging because they are forced to be more aware of the choices they are making every time they spend,” says Gosling.
“Seeing the cash go down every time you buy a coffee on the way to work for example.”
You may not get it right the first time.
You could find your overspend as you gave yourself too much money in one category, or you may have the opposite experience and have to return to the ATM or use your debit card to get you to the end of the month.
But make some tweaks and stick with the system to master your budget and reduce your spending.
You can also have envelopes that are designated for saving too, where you pop anything left over at the end of the week.
If you do decide to give cash stuffing a try, be careful about how much money you end up with at home.
Home insurer Admiral warned last year that it has seen a 77% rise in cash theft claims.
Noel Summerfield, head of household insurance at Admiral said: “Allocating different spending pots can be an effective way of budgeting and staying on top of spending. However, having large amount of cash in the house has its risks.
“Most home insurance policies should cover money in the home, up to the amount listed on your policy so it’s important to check how much cash you’re covered for, should the worst happen, and your money is lost or stolen.”
It’s also worth noting that you could be missing out on interest with healthy interest rates offered on savings accounts – and you don’t want to have too much cash sitting around the house.
For example, place your savings in Ulster Bank’s Loyalty Saver and you’ll earn 5.2% interest.
That interest is important in the fight against inflation.
Leave your money at home in an envelope and it will gradually shrink in spending terms as inflation means the things you buy get more expensive but your money isn’t growing enough to keep up.
Still sticking to cashless? Here are some budgeting tips for when you pay with contactless.
“My main budgeting hack that I personally use is giving myself a weekly budget that I transfer out of my main current account and into a separate bank account,” says Olamide Majekodunmi, founder of All Things Money.
“It has been a great deterrent to stop me overspending as I only go out and about with that debit card.”
You could also use a pre-pay debit card in the same way. Transfer a set amount onto it each week and that’s your spending limit.
Ensure you stick to your spending limits by removing other cards from your smartphone and laptops too.
Don’t have card details saved with websites either.
That way you have to stop and think before you can spend as you must find your card and type in the details before you can shop online.
“Another great budgeting hack I always recommend to my clients is a budgeting app,” says Majekodunmi.
“Budgeting apps like Moneyhub enable you to budget your finances effectively by allowing you to view all of your accounts in one place, set spending limits and set savings goals too.”
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.
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