If you find yourself needing to reel in your spending habits, or change your attitude to money, which payment type is best if you are trying to stick to a budget?
If you give yourself the right tools and a reasonable plan, you can certainly get your spending under control and save for the things that matter most--whether that’s paying off debt, buying a new car or home, or going on that trip of your dreams.
Paying With Cash
- Allows you to see the money leave your wallet
- Sets a strict limit on how much you can spend
- Could be an issue of sanitation or security if carrying large amounts
Find it easy to spend money you don’t have when you see available credit on your credit card account? Say no more. Strictly spending cash is a time-tested method for keeping your spending under control.
The trickiest part of spending cash is that you’ll need to drop by the ATM every so often to replenish your cash stash. You also need to be extra careful about securing your cash, because if you lose it, it can be near impossible to get that money back unless you have an extremely good insurance policy.
With that in mind, only carrying a certain amount of cash and nothing else ensures that you will absolutely never spend more than you have. It’s an excellent way to put an end to impulse buying because you’ll have to plan everything out for the day or week and only carry as much cash as you need for a certain activity.
Many people call this the “envelope” method of accounting, and it’s definitely effective.
Paying With Debit Cards
- Allows easy access to the money you have in your account
- May earn you cashback or rewards, depending on your bank
- Doesn’t allow you to “see” the money leaving your wallet
If you think cash is unsanitary or less than secure, or perhaps just inconvenient, paying with a debit card is very similar. However, many financial experts say that there’s nothing that quite compares to holding cash in your hand.
With a debit card, the plight of “invisible money” often causes people to overspend because they don’t see the instantaneous effect of having less money in their wallet. It won’t be until you log into your bank account to check your balance (which you should be doing often) that you’ll see the real impact of your spending habits.
Of course, there are other ways to help control your debt card spending, and putting daily spending limits on your debt card is one such way to do just that. This can also help protect you against big fraudulent charges, so it’s worth the trouble.
Another thing to remember if you use debit cards is that it’s just as important (if not more so) to plan out what you are able to spend on what and keep those figures in your head at all times. Keeping a paper ledger can help you stay on track even if you don’t have cash in hand to count.
Paying With Credit Cards
- Could be a smart way to stretch your available cash
- Could allow you to earn cashback/rewards if you can pay in full
- Enables you to spend money you don’t have if you use credit cards
- Doesn’t let you “see” the money going out of your account
Many people swear against credit cards, and for good reason. It’s easy for spending to get out of control when you have a credit limit at your fingertips. Whether you end up putting necessary charges on your card or just racking up interest with random purchases, credit cards can wreck anyone’s budget fast.
With that said, they still have a place in your financial wellbeing. Credit cards, when used respectfully, are a great way to build up your credit score, which is essential to your ability to qualify for loans and good interest rates when you do need to finance things (like a house, car, or education).
That in mind, you need to be careful about what you put on your credit cards. The only good time to use credit cards when you’re budgeting is to help stretch your limited cashflow for necessary expenses and/or to rack up rewards in a smart way.
Preferably, you’ll only use a credit card if you can pay it off in full at the end of each month.
Using Touchless Pay
- Gives you easy and instant access to debit or credit cards
- Could enable you to spend money you don’t have if you use credit cards
- Doesn’t let you “see” the money going out of your account
Touchless payment options, like Apple Pay and Google Pay, offer quick access to your money, meaning they have the same downfalls as debit and credit cards--if not more so. Now, you’re not just swiping or inserting and hardly realizing the money leaving your account, you’re instantly tapping your device to purchase whatever you desire.
Touchless payment also gives you access to both debit and credit card accounts, depending on what you add to your device. This means you may be able to use it to control your spending more if you only add a debit card, but if you end up with touchless credit cards, you could find yourself in a tough situation where you spend money and charge purchases more easily than ever before.
Using Buy Now, Pay Later Options
- Enjoy 0% interest on purchases during a given promotional period
- Decide how much and how often you’ll pay down the debt
- Enables you to spend money you don’t have
- Could accrue interest if not paid in full in a given timeframe
The last option to consider when trying to stick to your budget is the chance to buy now and pay later. AfterPay is one popular example of this service, and it’s especially popular around the holidays when people are trying to buy gifts alongside their normal expenses. It's like the modern lay-a-away, except you get the goods now. So in effect it's similar to a credit card or a personal loan except there is generally less paperwork and application to go through.
In certain situations, using a service like AfterPay makes sense as it enables you to spread out a large cost over a longer period, usually 6 or 12 months. Typically, these plans will not accrue any interest so long as the balance is paid off in full within the given period.
So, if you’re making a purchase for $1,200 and you get a 12 month plan, you have a full 12 months to pay off the $1,200. This could enable you to pay off the big purchase by making a monthly payment of $100 or putting a few hundred towards it when possible.
However, if you do not pay it off in full (even $1 left) by the end of the promotional term, you won’t just begin to accumulate interest on the remaining balance but these services also tend to charge you interest in retrospect for the full term of the loan.
That means, if you were approved for a 15% interest rate and you financed $1,200 that you failed to pay in full in a given 12 month period, you would suddenly owe $1,394.16 when the 12 months were up (due to $194.16 of accumulated interest from that year) alongside any interest that continues to accumulate at your 15% rate until you pay the balance in full.
As such, you must read the program terms carefully. And, you have to be mindful of what you finance with such services. In general, you should only be financing things that you can afford to pay off in full. Don’t get caught in the scheme of 0% interest if you don’t have a reasonable plan for paying back the full balance before the promotional period ends.
Of course, if you do need to finance something, AfterPay or a similar service may be the way to go since you do have the opportunity to pay it off before interest gets you. That makes it better than a high interest credit card, which would charge you interest on your purchase from day one.
Making Your Decision
At the end of the day, sticking to your budget is of the utmost importance, but everyone has a slightly different view when it comes to saving, storing, and spending their money.
If you find that swiping a credit card is just all too easy and you’ve ran up balances in the past, it’s probably best to opt for a strictly cash and/or debit card approach so that you can literally stop spending money you just don’t have.
On the other hand, if you’re pretty disciplined about how much you spend and you need to stretch your available cash as far as possible, smartly using buy now, pay later options and credit can be a great strategy, just don’t overdo it.
In general, some best practices to follow include using the lowest interest options you have available if you need to put money on a credit card or payment program and making sure you only finance absolute necessities. So, before you swipe your card for that fun night out, think long-term about just how much it will cost you with interest and stress factored in.
In the meantime, find smart ways to enjoy your new budget, like investing in some great books or starting a side hustle like an affiliate marketing business that can help you learn new things and possibly generate extra income.