I stood in the middle of the grocery store aisle, staring at the produce. Grabbing the tattered envelope from my pocketbook, I counted out a five dollar bill and then added 78¢ in change. Punching numbers into the calculator perched on top of the cart, I verified that I could afford both the 10-pound bag of potatoes and the 2-pound bag of grapes.
Not only is this scenario true, it’s not all that uncommon if you have adopted the habit of using a cash envelope budgeting system.
Whenever I am trying to cut overall expenses, including spending less on groceries, I have discovered one sure fire way to make it happen: handing over cold hard cash. This financial strategy is called Envelope Budgeting.
On the first of the month I head to the bank and take out the total for my monthly food budget in ten dollar bills. This, then goes into an envelope labeled, “food”. Throughout the month, every time I purchase food, I pay only out of this envelope.
A budgeting envelope then allows me to track every penny I spend throughout the month. In this way, I keep an incredibly close eye on my food budget, spend only what I have, and carefully consider every purchase.
Why Envelope Budgeting Works
I turns out, I am not the only one who has discovered this proven key for making headway on financial goals. This whole idea of sticking cash in an envelope on “Day 1” and then using that money for every purchase within that budget category, is rapidly increasing in popularity.
Here are four good reasons why making purchases with cash, rather than sliding a credit card, will save you money.
My husband, Larry, and I explain these four reasons in detail in the above YouTube video.
You enjoy purchases more
A 2016 study by experts at the Journal of Consumer Research, showed that those who paid cash for a simple mug, later found more inherent value in it than did those who had paid for it with a credit card. The exercise was repeated with subjects giving money to charitable causes. Participants more carefully considered the recipient of their monetary gift when the donation was cash.
Although this study was limited in scope, it does demonstrate the value which was place on cash as a medium of exchange.
Psychologically, the phenomenon is known as coupling. There is a direct correlation in our brain, linking the time of purchase and the item.
For instance, tonight we sent our boys to pick up sandwiches at our favorite Italian restaurant. My husband gave them 3 ten dollar bills to pay the tab. Since we weren’t using credit, we needed to figure the amount of the bill in advance and be prepared to pay. Because of this, our brains linked the experience of going out to eat with the act of surrendering cash from our “fun money fund”.
We enjoy the product and value it more highly when cash is paid. Alternately, when credit is used, the brain does not respond in the same fashion. Not only am I not actually paying for my item until thirty days after my credit card bill arrives in the mail , I don’t even remember how much it cost in the first place and I don’t value it nearly as much as I would have had I paid cash for it in the first place.
You consider each purchase carefully
As demonstrated in my initial example, because I was able to check my cash envelope, verifying the contents, I was able to instantly compare the amount I had left in my wallet to the worth of the items on my shopping list.
When you deliberately put limits on your spending (and you know that you are absolutely not going to add any additional money to the pot), then your brain goes into “starvation” mode and intuitively begins to strategize and prioritize each and every purchase.
As a result, the practical purpose and necessity of every item becomes important.
You spend less money
How many times have you gone to the store, swiped your credit card, and left, not having any earthly idea of the actual cost?
I stand guilty as charged.
We have all done it more than once. The truth is, unless you are handing over cold hard cash, your mind doesn’t really record the cost.
In fact, statistically, spending solely cash can save you a substantial amount of money. When you pay with a credit card, emotionally there is less pain than paying with physical money. The subjects in a 2001 study by Forbes, actually indicated that they were willing to pay 100% more for an experience when paying with credit.
This same concept applies to absolutely everything – from tickets to the theater to that ten pound bag of potatoes on the supermarket shelf. A weekend getaway that was supposed to cost $200, could come with a much higher price tag solely because when we are sliding plastic the numbers don’t reach our brain. By the time the bill arrives in the mail, it’s way too late to change our minds.
When you can physically see exactly what you have available, you spend less. Spending cash hurts more than using a plastic card. Our brain knows the difference.
You save more money
Let me ask you a question. How many times have you stared at your Amazon shopping cart and tried to find just one more item to put in it so you can reach that magic threshold and score free shipping? We all have! It’s a great way for them to make more money!
Minimum orders are used in all sorts of establishments, not just large on-line businesses. In a similar fashion, we often wind up spending more just so we can use our credit card, get free shipping, or gain an additional 10 percent off of our order. In all of these scenarios, we are begin enticed to spend more money (sometimes on things we neither truly want or need.)
In addition to these factors, some businesses tack on a convenience fee for those who slide plastic. Due to fees imposed by the large credit companies, some small, family-owned establishments display signs indicating a minimum purchase for sliding plastic.
Finally, if you are paying for larger purchases, it always pays to ask if they have a cash price. Furniture or appliance stores are generally happy to take 10% off if you offer up actual dollars. Even if you are making a smaller purchase, family-owned stores will give loyal customers a discount for purchasing a case lot and paying cash.