If simplicity is the ultimate sophistication, the cash system (a.k.a. the envelope system) is a gentleman in a top hat ready to take your coat. You’ve undoubtedly heard of it (if you haven’t, scooch over and make some room for me under that rock), so we can do away with the long, drawn out explanation.
Here it is in three easy steps:
1. Go to bank. At the beginning of each month (or week), withdrawal from the bank the amount of money your spending plan dictates you will need for that month (or week).
2. Fill Envelopes. Label a bunch of envelopes to correspond with the categories in your spending plan. Fill aforementioned envelopes with aforementioned cash.
3. Spend Money. When you need to spend money on something (i.e. gas, groceries, iguana cages), go to that envelope and take out cash. Proceed with spending until cash is gone. When this happens, stop spending. Hint: you’ll know to stop spending when the envelope is empty.
That’s it. This is caveman stuff here, folks, and that’s the beauty of it.
So, who needs to use the cash system? I’m glad you asked. If you find that you’re consistently going over budget in several categories or not hitting your goals (say, finally paying off that Clown College student loan), it’s time to stop the bleeding and switch to a cash system.
In reality, it’s a great tool for everyone and their brother’s mother. Even folks who are financially on track can use the cash system every now to dunk their proverbial fiscal lives in a bucket of ice water. I know CEOs of financial advisement companies (with seven figure bank accounts) who have used the cash system exclusively for years.
Here’s why. The benefits, especially for people who need to right the ship, are as numerous as they are boring.
1. Science. Scientists tell us that spending cold hard cash actually triggers pain receptors in your brain, while sliding a debit or credit card doesn’t. Which must be why people spend 30% less when they use cash in place of plastic. When it comes to fast food, that number jumps to 47%. The average cash sale at McDonalds is $4.50 while the average credit card sale is $7. Buying stuff with that Visa just plain feels good psychologically, meaning our brain is a sadistic jerk that cannot be trusted.
Consider this. Back in 1986, when I was, ahem.. a tender three years of age, a consumer psychologist named Richard Feinberg conducted a series of four experiments that showed that a credit card logo alone was enough to increase spending. In two experiments, he had subjects flip through a binder containing images of consumer products (mail order catalogs) and write down how much they would be willing to pay for each item.
Half of the subjects followed these directives while sitting at a table containing a pile of MasterCard paraphernalia — door signs and replicas of credit cards — ostensibly left over from a prior experiment. The other half sat at a bare table.
Here are the average amounts (1986 dollars) that were offered for each item in one of the studies:
|Product||No MC Logo||MasterCard Logo||Increase|
Inevitably, most of you who are reading this will think something like, “Yeah, maybe that’s true for some people, but not me — I am too smart / sophisticated / disciplined to be affected.”
Be calm. What you are experiencing is superiority bias. David McRainey explains in his book, You Are Not So Smart:
“The last thirty years’ worth of research shows just about all of us think we are more competent than our coworkers, more ethical than our friends, friendlier than the general public, more intelligent than our peers, more attractive than the average person, less prejudiced than people in our region, younger-looking than people the same age, better drivers than most people we know, better children than our siblings, and that we will live longer than the average lifespan. (As you just read that list, maybe you said to yourself, “No, I don’t think I’m better than everyone.” So you think you’re more honest with yourself than the average person? You are not so smart.) No one, it seems, believes he or she is part of the population contributing to the statistics generating averages.”
2. Spend Less. This is a Kevin Cross stone cold lock guarantee: you WILL spend less if you make the switch to cash. In my 20 years of financial counseling, not one person has managed to spend more on the envelope system. For one, when it comes to credit cards, it’s well established in the field of behavioral economics that people who use plastic are unconsciously willing to spend more than those who pay with cash, a phenomenon known as the “credit card premium.” That’s because there’s an emotional pain associated with handing over hard currency that curbs spending, as opposed to mindless purchasing when forking over plastic.
3. No debt. I defy you to rack up consumer debt while only using cash. It cannot be done. If you argue with this, I will personally come to your house and drive you to the mental institution.
4. No Guilt. Detractors say this method will make you feel like an 8th grader on an allowance, but that couldn’t be further from the truth. In reality, it’ll give you a glorious feeling of liberation and will effectively eliminate all the hand wringing associated with not know where your money is going. After all, this is completely guilt free spending. You can spend this cash with the life affirming knowledge that it will not rock your financial foundation one bit.
5. Off the Grid. If you commit a federal offense (and you look like you might), the F.B.I. won’t be able to track you via your credit card purchases. So there’s that.
Have you used the cash system? Have questions about it? Hate Koalas who throw spiders at strangers? Talk about it below.