How To Switch To a Cash-Based Budget

If you are a business owner, you know that running a business is challenging enough. It becomes more challenging when your personal finances are in chaos. One suggestion to help you stay within your budget limits is to create a cash-based or cash-only budget.

When you are solely dependent on your business’s salary, it is not unusual for your personal finances to fluctuate. Thus, the importance to abide by a budget and stay within the limits of it.

According to a 2016 study, it found that when we pay for items in cash, we tend to give more value. The same study found that consumers who paid purchases with cash had less revolving debt within six months.

Switching to a cash-based budget is recommended by many financial experts. And here is how you can start taking steps to make the changes in your personal finances:

Make a Cash Based Budget

First, your personal finances should be completely separate from your business — including bank accounts, credit cards, etc. At the same time, you should treat yourself as an employee.

You must set a salary for yourself. If you decide the proper amount is $5,000/month, that’s your take home. If a particular month you profited $8,000, you should refrain from withdrawing the extra $3,000.

Instead, the extra cash is set aside and used for months where your profit is less than your required salary. Or be used for reinvestment. You should also build an emergency fund.

Start your cash budget by listing all your expenses, and automate your savings. From there you will know what your bring home every month should be.

Choose Categories for Cash Spending

You will not be able to use cash for everything. Attempting to pay your house mortgage or rent with cash might not be feasible. But other categories such as groceries, eating out, etc., you can easily switch to cash-only. Using your budget, identify the categories that would work best for the switch.

The ultimate goal is to control categories that you are overspending. It could be entertainment, eating out, or clothing. Once you know your deficiencies, you switch it over to cash-only, and it will hopefully curb your spending.

Stop Using Your Card

Stop using your debit card or credit card for the categories on your budget that you are switching to cash-based. Consider leaving your cards at home for a little while. It will help you break out of the bad financial habits.

It is not realistic to be walking around with tons of cash in your pocket. Thus, it is suggested, however, to keep at least one card with you — in the event of an emergency.

Envelope System

When using a cash-based budget, unlike your bank account, it does not create an automatic entry when you make a purchase. You have to find a way to track your expenses.

The most effective way to do this is by using the envelope system. Every time you get paid, you place the amount that you budgeted into the envelope labeled with each budget category. Once the money runs you are done for that category.

Whatever amount of money you take, you should replace it with a receipt. That is the only way to track where the money is going. Conversely, you can keep a ledger for the envelopes, but that is more involving.

Shopping Online When on a Cash-Based Budget

Nowadays, a lot of people are doing their shopping online. Trust me, my entire Christmas shopping this year was solely online (mostly because of the pandemic). It is safe to ask what is the workaround for this situation.

There are a couple of different approaches to online shopping when on a cash-based budget. My preferred way is to use prepaid cards. You simply add the money, and it will work as an envelope.

Plan Ahead

While a cash-based budget is excellent to avoid overspending, it does require you to learn to plan ahead. As I mentioned before, it is not feasible to be carrying several envelopes filled with cash everywhere you go. If you are thinking about swinging by the grocery store after work, you have to take the cash with you.

This method is also fantastic to cut back on impulse purchases. This is mainly because if you run out of money, then you are out of money. One suggestion is to keep $20 with you at all times. It would be for an emergency in case you need it.

Conclusion

Having a cash-based budget is an excellent way to keep you from overspending. In fact, it is also very effective in saving money. The primary idea is to create a budget that fits your needs and follow it closely. Make adjustments regularly. This specific method tends to reduce spending by 10%.

Let’s be honest, who has time to stop at the bank to grab cash every time the paycheck hits the account? A cash-based budget requires a little extra on your part, but rest assure that it works. If you are trying to save some money, switch today.