Tracking your spending is the 1st key to savings, writes Greg Cawsey
In our last lesson we showed you how to easily put aside a portion of your paycheque into a high interest savings account. While you enjoy seeing that money grow, we can now focus on making your walking around cash last.
Tracking your spending indicated how much money you need to get by on between pay periods. Whatever that amount is, go to your bank’s ATM and take it out in cash. I told you to use a debit card before — so that you could track where your money was going over a month’s time. We’ve done that — so now we can start using cash to make our purchases.
There are many reasons to do this — but a key one is that you will spend less money using cash to buy things instead of debit. Why? You will control your own spending because you will always know how much money you have left.
If your bank has provided your account with overdraft protection, you have the option of going into debt if your account balance goes below zero. You pay fees and interest every time you use this dangerous convenience, so my advice would be to avoid overdraft protection altogether and pay with cash. You will end up spending less. Here’s why.
Say you are heading out to a friend’s house and decide to stop off at the convenience store along the way to pick up some munchies. If you know you have roughly $20 left in your bank account to spend, you will try and keep it under that limit.
If the cashier rings up $21.39, it’s no problem if you pay with debit and have overdraft protection or pay with a credit card. You end up just borrowing the money you don’t have. If, however, you just use the cash in your wallet, you will make sure that you don’t spend over $20.
Why? Because no one wants the embarrassment of having the cashier ring in a bunch of items that you don’t have enough money to pay for. So you work your addition skills to the max to make sure you don’t come close to over extending yourself, even with the taxes added. Chances are you over compensate and spend under $18 just to be sure you don’t have a case of the shorts at the checkout counter.
Many studies have confirmed we spend less using cash compared to paying with credit. Seeing the actual dollar bills leave our hands has an impact on our spending habits. You can even take it a step further and only use crisp bills.
Former University of Guelph professor Theodore Noseworthy’s research tells us that given a choice between using a crinkled, dirty-looking bill and a crisp, new one, we’re quicker to spend the old one. Just one other reason to grab your freshly minted cash from your bank’s ATM.
If you have had enough with the psychological arguments of why you should use cash — here is a direct one. Debit cards cost money to use them. Many banks have set limits on how many debit transactions you can make each month before being charged a transaction fee. There are student friendly bank accounts that avoid this, but there are retailers who charge a fee unless you make a minimum purchase.
Having easy access to cash can have its drawbacks too. If you have taken out $100 to last you till the next pay period, it would be unwise to keep all of it on you in your wallet or purse. To avoid the spending temptation and possible risk of theft, keep a smaller amount on you for your daily needs. Put the rest in an envelope in a secure location where you live.
Follow this lesson and you may find that envelope of cash can grow on its own to be added to your savings in the bank or used to make a bigger purchase.
So enjoy spending your cash — you’ve earned it. Next we will see how you can keep others out of your pockets and spending your money.
A Lesson in Finance appears every month. Gregory Cawsey is the director of business and financial literacy education at John F. Ross CVI’s Ross School of Business. He can be contacted at gregcawsey.com.
Want more lessons? Check out lessonsinfinance.ca
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