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

How to Save by Making Credit Card Payments More Real and Tangible: 5 Practical Tips

A higher tangibly of credit card payments will ensure spending less

Making credit card payments more tangible is very important as the tangibility of the payment determines how easy (or hard) it would be to make it.

Credit card payments, which are easier and less tangible then cash payments, will often result in higher spending as they are simply easier to make. Paying cash will reduce expenses since parting with your bills and coins is harder.

However, credit card payments are very convenient and as described in a previous post provide us with a lot of data for later analysis and for budget planning and review as discussed in this previous post about the tradeoff between cash and credit cards.

Making credit card payments more tangible would allow us to benefit from both worlds: spending less and enjoying the convenience of credit card payments and the data they provide.

How do we make credit card payments more tangible?

#1 Take regular peeks at your on line statement

Back when I first started planning and reviewing my family’s budget I was very eager to stick with it and to achieve my goals. I noticed that by taking daily peeks at my credit card statement on line and reviewing my spending for the last couple of days I developed a very keen sensitivity to credit card spending.

The information is readily available on line to each of us and access to our statements is easier then ever.

Watching your statement slowly filling up with lines of expenses can be frustrating, especially if you’re on a very tight budget. Taking regular peeks at your statement online will prevent just that.

#2 Avoid paying on installments

Paying on installments or using credit to finance big purchases distorts your perception of payments and in turn your budgetary status. Furthermore, it makes big expenses, which might be out of your reach in a given budget, suddenly appear possible.

Acting and treating credit card payments as actual cash payments will greatly enhance their tangibility and is bound to lower your expenses.

#3 Lower the number of credit cards to a minimum

Rebates, discounts, promotions and what ever else comes to mind all pale in comparison to the real costs of having more than one credit card. Temptation, combined with readily available credit lines are a financial disaster.

Saving 5% on a dinner somewhere pales in comparison to paying 11.5% yearly interest on an express loan of 5,000$.

Furthermore, more than one credit card means more statement and more complicated budget management. You’ll quickly lose control over your expenses and finances.

#4 Use the data in your statement to budget and plan

Your routine budget planning should include a detailed review of credit card statements. These statements present all the information required in order to plan and review budgets including the obvious sum, purchase itself, dates and also suppliers, interest paid and more.

By depending on your credit card statements for budget planning you’ll create the sought after state of mind where credit cards equals expenses.

#5 Put a little sticker on your card to remind you it’s money

When all else fails a small red light in the right moment just might save the day. Put a little sticker on your card to serve as a red light, a reminder this is actual money.

It could be just a small red circle, a little string of text or whatever you think works best.

I believe that behavior can change believes. Acting as though credit cards are real money will create that necessary state of mind for you and hopefully save you money.

Image by: eliazar

Credit Cards or Cash: A Costly Tradeoff

Where do you stand in the tradeoff between cash and credit cards?

There’s an ongoing debate on the preferred and recommended method of payment for routine, everyday expenses and purchases. Is paying cash better, and more financially sound, than paying with credit cards? Maybe it should be the other way around with credit cards being a more convenient method of payment?

The trade off between cash and credit cards – It doesn’t end with convenience

Many people recommend handling a monthly expense budget on a cash-basis. This recommendation is sound as it essentially contains two important principles:

1. Increasing the tangibility of money – Cash spending is the most tangible form of spending. When we pay cash we see the money literally leaving our wallet and hand and watch it slowly moving away from us and into the seller’s register making harder to spend.

2. Following budget constraints – Cash just runs out. Credit doesn’t. When the cash we allowed for this month is over it’s over (forcing us to carefully reconsider expenses).

However, the problem arises when we try to account and budget for these expenses. Keeping track of the cash that leaves our wallet is hard and requires constant bookkeeping (either by hand or by an electronic wallet of some sort).

Unless we know exactly what we paid cash for we would have a very hard time keeping a monthly budget of our expenses and of their dispersion and behavior (more information on why we need to do that is detailed in this post “How to better analyze your budget”). This information is crucial to correct financial planning.

If we choose to pay with credit cards monthly statements will provide us with every detail we need to know about our purchases and expenses in a specific month. However, we would have an easier time both spending money and exceeding the budget we set ourselves.

Which means of payment is better: Cash or credit card?

I believe the answer, as many others, is not a definitive one. It depends greatly on the sort of person you are. The more disciplined you are the more I’d recommend using credit cards more often in order to have the best data available for budgetary planning and review.

Unfortunately, the less disciplined have a hard time here as well. Obviously using cash as the preferred payment method is recommended. Unfortunately, it carries a price. The data about expenses and purchases would most likely be unavailable as discipline is also required to keep manual track on all that cash.

I personally prefer credit cards as they are more convenient and provide us with the data we need. I believe that with small behavioral adjustments we can actually create a sort of tangibility to credit card payments as well. More on increasing the tangibility of credit card payments later this week.

Image by: Joe Shlabotnik

Common sense advice for credit card use

The use of credit cards is very convenient but without a good level of consumer awareness might become a highway into financial distress.

Credit cards are a very efficient payment method as you can keep track of all your purchases, make use of promotions and of course do without cash and checks and the logistics involved. However, for the unwary, credit cards are also means of encouraging higher consumption which is not always needed.

Educated consuming is always recommended and is strongly advised in the case of credit cards as well.

A couple of do’s and don’ts for a more efficient use of credit cards:

DON’TS

1. Do not pay on installments
Paying on installments often helps buy that desired item today instead of in a couple of months. But paying on installments also has a few major disadvantages. Paying on installments creates an illusion of extra funds which, in turn, can be used to purchase another item, on installments of course. This method of purchase quickly leads to lose of control over expanses and results in a tight budget for the upcoming months as your paycheck is already spent.

2. Do not pay using credit
Interest rates on credit are quite high using credit cards. The accumulating interest is significant.

DO’S

1. Use one credit card
Having more then one credit card is a risk. The use of one credit card and one alone is crucial in order to manage and control your expenses, credit lines and more. Having more then one credit card might result high debt and tight budgets.

2. Try to use your credit card for fixed costs alone. Use cash for variable costs
Using credit cards for expenses such as food, gas, electricity and communications will help you take advantage of the benefits of credit cards with out losing control over expenses. Using cash for variable costs such as a one time purchase would help you better control your budget as you only buy what you can afford.