Trying to make smart financial moves but can’t figure out the answer to which payment type is best if you are trying to stick to a budget? You’re not the only one! Knowing which payment type to use: namely cash, debit, or credit, is a question lots of people have asked.
Every situation is unique and what works for me won’t necessarily work for you. Because of that, I’m going to break this down into the pros and cons of each payment type. You can decide what sounds like the best fit for you.
This post is all about deciding which payment type is best if you are trying to stick to a budget. There are a lot of different ways to budget, so it’s all about finding what works for you. We’ve helped by gathering the pros and cons of each main payment type.
This post contains affiliate links, which means I’ll receive a commission if you purchase through my link, at no extra cost to you. Full disclosure here.
Which payment type is best if you are trying to stick to a budget?
Why is it important to stick to a budget?
Are budgets really that important? If you’re new to the world of budgeting, it can feel overwhelming and intimidating. However, budgeting is very necessary! Creating a budget (and sticking to it!) allows you to pay off debt more quickly and effectively, create an emergency savings fund, and stay out of this debt.
Tracking
Budgeting is a way for you to track your daily expenses. In today’s world, it can be way too easy to spend money without thinking about it. Because of this, you might accidentally spend more than you have.
When you budget, though, you can keep track of where you spend your money and identify areas where you might be spending too much. The key to spending less is knowing where you spend already. Then you can find ways to reduce spending. In conclusion, budgeting is the best way to keep track of where your money goes.
Saving
Budgeting also makes it easier to save money. Most people would agree, at least in theory, that savings are important. However, it can be really difficult to actually put money away toward savings instead of spending it.
When you budget, you’re creating some accountability that will encourage you to actually set that money aside. Instead of just trying to save money at the end of the month, you can intentionally set some aside. In other words, budgeting helps you prioritize savings.
Rearranging
Finally, budgeting helps you see what your spending priorities are and change them if needed. You may say that travel is a priority but find that you’re actually spending way more money on food than travel. When you budget, you can actually dedicate spare change to a goal that excites you.
Start by tracking your spending in a budget planner, then after a month or so, take time to readjust your budget so that your spending actually lines up with your priorities and goals.
What are the benefits of using cash?
One of the most common suggestions that come up for budgeting is to use cash. Using cash can be a great way to teach you to understand finances. If you don’t have a good sense of your spending habits, it’s a great idea to switch to cash. Let’s dive into some of the benefits.
Easy to Separate with Envelopes
When you budget with cash, you can use the cash envelope system. Just split up the cash into envelopes divided by categories: like groceries, personal spending, pets, entertainment, and personal care. Then, when you’ve spent more than you budgeted, you’ll know because the envelope is empty. It’s much harder to spend more money than you’ve budgeted. In order to go over budget in one category, you’ll actually have to take money away from another category. This decision can help you prioritize more effectively.
You’re More Aware of How Much You Spend
A lot of times we spend money without even thinking about it. When was the last time you agonized over a purchase that was under $10? Those $3 and $5 purchases can add up so quickly, though! However, when you start with $50 in cash, you start to actively watch the money disappear as you spend.
If you’re don’t understand how money seems to disappear so quickly, you should definitely switch to cash. It’s so important to understand that once you spend money, that money is gone. Paying with cash can help you visualize that.
Harder to Buy Online and Impulse Buy
Impulse buying can be a huge struggle for many young adults. We’re surrounded by flashy and convincing ads. As a result, we often spend money on unnecessary purchases. It’s just so hard to resist when our card is right there.
So how does cash help? Well, for one, making online purchases is a little harder to do if you use cash. While you can’t transition cash to a “spent” envelope or buy a gift card with cash, it’s a lot less simple than just hitting “buy now.” The amount of time it takes you to plan your payment may be enough for you to change your mind. If you have to think about your purchase for a day or two, you’ll be less likely to make unneeded purchases.
What are the drawbacks of using cash?
Cash really is a great payment type for sticking to a budget, but it does have its limitations. Here are some of the reasons cash doesn’t work for everyone.
Sometimes Online Purchases are Necessary
Avoiding online purchases is a great way to save money, but sometimes you just need to buy online. There are definitely ways to manage this, though. Most people who use the cash envelope system have a separate envelope for ‘spent cash.’ Whenever you spend money online, take the cash out of the appropriate envelope and put it into the ‘spent cash’ envelope. At the start of the next month, you won’t need to withdraw as much cash to refill the envelopes.
Can Be Harder to Pay Bills
Another reason cash can be difficult is because paying bills in cash is extremely difficult. Things like rent, electricity, and subscriptions are mostly online nowadays. So, you’ll need a way to keep track of all your online bills beyond the cash envelopes. You’ll need to calculate your regular payments first to make sure you know how much leftover you have to put into the cash envelopes.
Less Convenient
Let’s be honest, convenience is important. In order to use the cash envelope system, you’ll need to go to the bank more often to withdraw cash to fill the envelopes or to deposit the savings you’ve collected in cash. There’s a little more planning and math involved as well, so it just doesn’t work for everyone.
What are the benefits of using debit cards?
Debit cards are somewhat of a step between cash and credit cards. A debit card is obviously a card, so you don’t get that visual sense of how much you’re spending. However, you do have an automatic tracking system in place, since all your payments will show up on your monthly statement. Here are some of the benefits of using debit cards as a payment type.
Can’t Spend Money You Don’t Have
Unlike a credit card, a debit card is directly linked to your bank account. In order to spend money on the debit card, you need to have the money in your bank. There’s a lot to be said for not be able to overspend.
Easy to Track
I love that banking apps keep track of your spending. It’s like the bank does the hard work for you. If you are dedicated enough to consistently check your statements and see how you’re spending money, this becomes an automatic budget tracker.
Work Almost Everywhere
While unfortunately you may come across places where cash doesn’t work or not all credit cards are accepted, you can almost always use a debit card. It’s convenient, easy to carry with you, and won’t make you count out coins while standing in line.
What are the drawbacks of using debit cards?
As with using cash to make payments, there are also some drawbacks to debit cards. Each situation is unique, so I want to help you make the decision that will work for you.
Overdraft Expenses
If you don’t check your spending and look at your statements regularly, there is the possibility that you will accidentally spend money that you don’t have in your account. If this happens, you’ll get a costly overdraft fee as a result. Overdraft fees can really add up! If you’re already low on money, having to pay the additional fee can be tough.
Not Great for Large Purchases
Sometimes debit cards just don’t work as well. For example, hotels often prefer getting a credit card, since they may take a large deposit that could affect your spending ability on a debit card. The truth is, there are a lot of benefits to making big payments on a credit card rather than a debit card. We’ll get into that more later, though.
Can Hurt Credit
If you only use a debit card, you may end up hurting your credit score. In order to build up a good credit score, you need to use credit and show that you can pay it back. Debit cards, unfortunately, don’t do that. Plus, if you get an overdraft fee, that can actually have a negative impact on your credit score.
What are the benefits of using credit cards?
Now we’re on to the third and final payment method: credit cards. (I’m not going to talk about things like checks, which are somewhat like cash and debit cards, or phone payments, which typically fall under credit cards.)
Credit cards aren’t for everyone. (If you have credit card debt, you shouldn’t use credit cards!) However, there are some benefits to using credit cards that I didn’t want to include.
Rewards and Points
When used wisely, credit cards can lead to a some pretty great perks and savings. For example, many cards give you sign up bonuses. These can even cancel out the credit card annual charge in some cases. Before getting any credit card, do some research to find out which reward you’ll use. Also do some research to find out how to use cards well.
Good for Your Credit Score
If you keep a credit card for several years and pay it off month to month, it’ll increase your credit score. Your credit score is used for buying a house or even renting an apartment, so keeping a good credit score is important! Just remember to always stay on top of your credit card payments and regularly pay off everything you owe before it gets the chance to build up.
Easy to Track
Credit cards, like debit cards, come with online accounts that track spending for you. I love being able to scroll through my credit card account to see exactly where I’ve spent money that month. It’s so important to check your statements regularly so you know exactly how much you’ve spent.
What are the drawbacks of using credit cards?
There are, of course, also drawbacks to using credit cards. Many people have fallen into deeper debt because of credit cards. Let’s get into some of the common pitfalls with credit cards and how to avoid them.
You Need to Be Actively Tracking
You need to be active about your credit card. Because it’s possible to spend money you don’t have on a credit card, it’s up to you to check. If you’re new to credit cards, you should make a habit to check your spending every week so that you’ll know ahead of time if you’re reaching your budget too soon.
Easier to Overspend
The hard truth is that credit cards are bad for shopaholics. If you aren’t very self-motivated to improve your financial habits, it can be way too easy to overspend using a credit card and get yourself into even bigger debt. A credit card does not mean free money! Track your spending and your income, and don’t spend more money than you have!
Easier to Make Impulse Purchases
Another downfall of credit cards is that they’re so…easy. Credit cards are accepted at most stores and restaurants, and online. With many websites today, you can save your credit card info, and suddenly impulse buys are just one small click away.
The verdict: which payment type is best if you are trying to stick to a budget?
So what is the best payment type if you are trying to stick to a budget? There are major benefits and drawbacks to all of them.
If you have credit card debt and are trying to completely reframe the way you spend money, use cash. Cash is easy to visualize and forces you to really stop spending. It can be divided into categories using an envelope systems so that you can’t overspend without actively taking money away from something else. It helps put finances into perspective!
Once you’ve become a little more comfortable with reigning in your spending, you can move on to a debit card. You still can’t spend any money that you don’t have. However, you can now easily pay online bills or make online purchases without needing to think too hard. Plus, you won’t have to make as many trips to the bank.
Finally, a credit card is an important next step when you feel you’re ready. The points and boost to your credit score can help a lot in the long run. Just remember to always track your spending and stay on top of your payments. Don’t just make the minimum payment; pay the entire amount off each month to make sure you don’t slip into debt.
Final Thoughts
Which payment type is best if you are trying to stick to a budget? That depends what stay of budgeting you’re in. No matter where you are in your financial journey, know that you can stick to your goals. Intentional saving, careful tracking, and accountability can all help you make wise financial decisions.
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