Thursday, May 8, 2008

The Problem of Accounting and Budgeting For Cash Expenses

Where did all that cash go ?

I’ve recently written two posts on payment methods or credit cards vs. cash. I argued that while cash payments help us avoid overspending credit card payments provide us with valuable and timely information for budget planning and review (Credit Cards or Cash: A Costly Tradeoff).

I also provided my tips and insights on how we can make credit card payments more tangible and real to help save us money (How to Save by Making Credit Card Payments More Real and Tangible: 5 Practical Tips).

There is, however, one remaining question which I’ve yet to find a successful solution to. How do we account, and budget in turn, for routine cash expenses?

We can’t avoid paying cash as part of our daily routines. The problem arises at the end of the month when I take a look at all my cash withdrawals and start scratching my head trying to remember where I spent all that money. These cash withdrawals, when summed up on a monthly basis can really amount to significant sums of money.

Aside from having spent those sums of money in the first place there’s the problem of accounting and budgeting for it. How will I be able to answer these questions?
1. How do I figure out my budget busters?
2. How much did I actually spend on eating out this month?
3. How will I know what my actual budget looks like?

The deviation in your budget’s numbers depends greatly on the percent of cash expenses out of your total expenses each month. The bigger the percent of cash spending the less the budget represents what is actually going on.

Our options for accounting and budgeting for cash expenses

What are our options and what are the possible solutions? I’ve narrowed the list down to the following:

#1 Lower your cash expenses

Naturally, the first solution would be to lower cash expenses and pay more with credit cards. A word of caution – paying with credit cards requires a much higher sense of awareness to spending and the realization credit cards are money as well (as I’ve discussed in detail here).

#2 Limit cash expenses to routine, specific expenses

Since cash payments are unavoidable narrowing and focusing them might work better. Most of my cash expenses pay for eating out and usually to buy small trinkets. This way, at the end of the month, I usually take all my cash expenses and assign them to “eating out” budget.

The extra cash spending makes eating out a bit bigger then in reality and helps me pressure myself into saving more on this particular budget item.

#3 Treat cash like it’s another expense

I’ve read about this method somewhere. The author recommended adding another budget item called, very conveniently, “cash expenses”.

There is a basic logic to this method. Adding cash expenses as a budget item makes into an expense which should be minimized. Since assigning cash expenses is often done in accurately we might as well plan and budget for it as just another expense.

#4 Keep tabs – My least favorite

I don’t know how but some people are able to keep tabs on cash expenses. If you’re able to do that, either with a pen and paper or an electronic wallet, you’ve got it made. Forget about credit cards and use cash only. You’ll both save and be able to track your expenses. I think it’s impossible to get it right, though.

Image by: marirs


Canadian said...

I do #4. I keep my receipts and when I get home I write the amounts in the proper category. It's not much trouble -- I don't often have more than 1-2 receipts per day.

If they don't give me my receipt, I ask for it. If I'm spending in a way that doesn't normally have receipts (for example, a garage sale or farmer's farmer) I just keep track mentally until I get home.

Dorian Wales said...

@Canadian - I admire your diligence. Do you find spending cash harder than paying with credit cards?

KellyB said...

I use debit card for anything I can and track the receipts, but for when cash is needed I use the following method. I don't find it difficult to keep track of cash expenditures, but you do have to be diligent. I take out cash $100 at a time and note it in my checkbook. Every time I spend cash (or once a day or so), I write down what category I spent it in (entertainment, Dining Out, Household Items, Grocery, spending allowance, etc.)I make these category notes right within the checkbook entry notes/description space, and those noted numbers need to add up to $100 when I'm done - just like a mini checkbook itself. As long as you do it daily, its not too hard to remember where the money got spent. If $100 is too much, do $40 or whatever you can track easily. Then when I enter these numbers into my budget/spending plan, I know how much has gone to each category. This was a huge step for me when I first started trying to figure where my money went - most of my unexplained expenditures were "ATM", but where did it go? Tracking this way helped me see exactly where it went (in my case, mostly dining out and other frivolous purchases), and I was able to cut back by keeping track and knowing what my weaknesses were. Try it and Good luck!

Dorian Wales said...

@Kellyb - After reading your comment I remembered a trip a friend of mine and I went on to Italy. In order to avoid calculating what each of us should pay during the day we'd just pay in turns and every night we'd list all the expenses and pay each other back. It wasn't much trouble and we had a lot more cash expenses. It's a cost/benefit decision I guess. I'll give it another go for the next couple of weeks and see how it works. Thanks. Dorian