Cash, Debit, or Credit? Which Budget is Best for You?

Last week I met with a client to start a personal financial plan; she asked me if she should live on a cash budget.  As we explored the advantages and disadvantages of living on a cash budget I started to think about my own spending habits. I wondered if a cash budget is a good option for people to control their personal spending habits.

There are several advantages to living on a cash budget which include controlling spending, as well as learning the value of our purchases. If we take out a fixed amount of cash every week and we live off that amount for the entire week it definitely controls our personal spending.  When people say that they live on a cash budget it means their personal miscellaneous spending is controlled by a fix amount of cash that they withdraw per week or per pay check.  Miscellaneous personal spending includes shopping for any personal items that are not related to our household such as hygiene and aesthetics at the pharmacy, eating out in restaurants, as well as snacks at coffee shops.

Women probably spend most of their miscellaneous personal budget on eating out in restaurants as well as on makeup and other beauty items at the pharmacy, am I right ladies?  My boyfriend Nick spends most of his miscellaneous personal spending budget on sporting events, alcohol, and various men’s lifestyle, music, and sports magazines.  Male DINKS do you agree?  I think that we can all agree that personal beauty items and sports magazines etc. are expenses that we can all live without.

The amount of money that everyone should calculate into their miscellaneous personal spending budget is different for each person. Some financial professionals say that it should equal 5% of each pay check and others say that 10% of our pay check is the amount that we should budget for personal spending.  I feel that the amount of personal spending should be less than the amount that we save per pay check. However, some people feel that we should save an amount equal to the amount that we spend, but I feel that is definitely overspending.

Regardless of the amount of our budget that we allocate to personal miscellaneous spending, living on a fixed budget makes us appreciate the items that we buy with our money.  If we only have $100 per week to spend on personal items we will be very picky about which items we buy. For those of us who like “stuff” we may look for the best deal and buy several items.  Some others may buy one quality item with our $100.  Living on a fixed budget definitely makes us appreciate and learn about the value of our money.

Only recently have I started living off of cash for my personal spending each week. My daily spending on food and snacks was out of control, and it caused me to gain 5 lbs.  I quickly decided to live on a $40 per week cash budget to limit my daily spending output as well as my daily intake of excessive calories.  I hope to eventually cut this weekly budget down to $30.  Although living on a cash budget is effective in controlling our personal spending, the problem with living on a cash budget is that we cannot keep track of our daily spending.  If I use my debit or credit card for all purchases I can track my spending to see exactly where my money goes.  Sometimes I spend my $40 by Thursday and I ask myself…where is all my money?

I would personally rather have no money at all than owe money, therefore I will always use my debit card over my credit card for daily spending on personal items.  It makes more financial sense not to earn potential interest on the money in my checking account than it is to pay 19.9% on my credit card.

Photo by BRH Images

Kristina Tahnyak

Tahnya is a Certified Financial Planner and former Investment Advisor turned marketing and communications professional She holds a degree from Concordia University, is debt free and currently works in the field of digital marketing.