Every diet has its secrets.
The same is true of spending plans. If you’re changing your financial habits to cut back on high-APR credit cards in favor of more crunchy green stuff, a wallet-slimming debit card or other pay-it-now option, here are four steps to ease your transition:
- Go cold turkey or take baby steps
- Before you start, track your spending
- Decide what form of “cash” you should spend
- Have a safety valve
1. Go cold turkey or take baby steps
Depending on your financial situation, you may need to go all cash at once. Such is the case when you enter bankruptcy or attempt a debt-management plan.
If not, ask yourself if you’d do better to change entirely to cash only or gradually increase your use of cash over plastic. “Subtle changes over time become a habit,” says Sheryl Garrett, a Certified Financial Planner and founder of the Garrett Planning Network in Shawnee Mission, Kan.
2. Before you start, track your spending
Divide expenses between bills you must pay — mortgage, phone, electric — from “wants” such as entertainment, cable TV and gifts. Factor in monthly set-asides for sporadic expenses such as quarterly insurance premiums or back-to-school clothes.
“People have no idea where the little money goes, and that’s typically what wrecks a budget,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Md.
Also, don’t forget the emergency fund, which you can use instead of plastic for truly unexpected expenses. Without coming to terms with your spending, your cash-only plan could easily fail.
“You have to budget for all the anomalies that happen,” says Grace Case, a New York state mother of two. “These are the things that push you into using credit cards.”
3. Decide what form of ‘cash’ to spend
Once you map out where your money goes, figure out the right mix of “pay-for-it-now” methods — cash, checks, debit cards or electronic payments — to cover monthly bills and one-time costs.
For example, some all-cash spenders might automate certain regular bills, finding it simplifies life. Or, they might use a debit card while shopping at the mall for the added security.
“You have to know yourself,” says Cunningham.
4. Have a safety valve
Either put enough money in a savings account or keep a credit card close by for use in a crisis. Says Garrett, “Treat it as sacred.”