Cash

The move into the digital realm has provided infinitely more places to spend money. It is also much easier to over-spend. The run-down of a cash balance is emotional more akin to a dwindling video game score than the emotional concept of going broke.

If someone runs out of digital cash, it is a straightforward manner to apply for credit cards and credit lines online. There are even shopping carts that provide instant links to sign up for credit so that a low cash balance won’t stop an over-sized purchase.

The greatest benefit of spending physical cash is the physical presence. As the number of bills dwindles, people become more conscious of its value and its scarcity. This causes us to limit what we buy and what we spend. Restaurants installed credit card machines because people spent on average 30% more than when they paid with cash. When someone must physically handle and count out the money, it is emotionally harder to spend it.

Cancelling the credit card and putting away the debit card and returning to cash for regular purchases limits spending because the emotional impact of each purchase puts a damper on overspending. This is why financial counselors recommend teaching teens and young adults about financial planning using cash.

Credit cards, like student loans, are too easily run up on impulse buys and painful to repay over time. Teaching self-control and impulse control is a far greater financial lesson than how to review a credit card statement for errors or check one’s credit score.

Another benefit of switching to cash to pay for transactions is the hard stop it can put on spending. If more cash is need, a trip to an ATM is required. If there isn’t enough cash in the account to pull from the ATM, the cash provides a strict limit on what can be bought. As long as someone does not fall back to old habits and sign up for a credit card when they run out of cash, they cannot spend more money than they have.

It also prevents the credit risk of bounced checks and exceeding credit limits. This is why many financial counselors suggest putting the budgeted amount for a category in a cash envelope each month and then spending from that one envelope. The switch to cash enforces a strict limit on the budgeted amount that one cannot go over.