In his latest book, “The Case Against Cash,” Harvard economics professor Kenneth Rogoff pitches the controversial idea that there is too much paper currency sloshing around the U.S. and the world, especially in large $100 denominations. Why bother with paper money worth more than $10 or so in an advanced technological society like America?
Count me among the intrigued skeptics, admiring the argument but not quite persuaded. Still, it reminded me of an area in personal finance where cash is king, at least temporarily: Budgeting. Specifically, cash is an invaluable tool for anyone trying to change their spending habits and boost their personal savings.
Creating a budget is necessary when we realize we’re working hard yet at the end of the month credit card debt is up, savings is down and we’re not sure where the money went. Budgeting is a tool, not a goal. There’s no need to monitor your spending data over the years unless you enjoy it. For most of us, with a relatively small investment in time and effort, a budget becomes good financial habits.
If you feel the need to budget, online services are easy to use, such as Mint.com. Your financial institutions might offer online programs to customers. Monitoring your money with a notebook and pen works well, too.
Whether your method is high-tech or low-tech, the budgeting process is simple. You track how much income is coming into the household and how much you are spending on a weekly and monthly basis. Once you have learned where the money is going, the next step is making some tough decisions about where to cut and redirect spending while using the freed up cash to pay down debt and boost savings. It’s at this point that joining the cash economy helps. You pay certain bills from home, of course. But what you spend during the week at work, on food, at the gas station and similar expenses is paid for with cash.
Put the debit card away and don’t use your credit card (for now). Instead, use cash — actual bills — to meet many of your weekly expenses. Withdraw from your bank or credit union a set sum of cash every week. That’s it. That’s the amount of money you have to spend during the week. For some reason, it seems harder to spend cash than to whip out the plastic. Maybe it’s because you feel the bills leave your hand, a moment that reinforces you’re spending money.
When it comes to budgeting the case for tapping into the power of cash is strong.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio