After indulging in eggnog, cookies and, of course, gift-giving — it’s probably time for a diet or two. Many Americans will vow to shed those extra pounds or increase debt repayments (or both) come 2016. Those looking to get beach-body ready can try Weight Watchers, juicing and SoulCycle classes — but anyone interested in ditching debt needs a different kind of diet. They need The Cash Diet.
Paying a tab with a credit card (or debit card) incentivizes people to spend more. Not only have countless studies proven people spend more with plastic, but the mere fact a store owner is willing to pay a 2 percent interchange fee to a credit card company proves the convenience for a customer means more money spent.
Switching to a cash-only diet — actual cash not a debit card — is one way for people to jump-start their financial lives and actually have a shot at keeping a New Year’s resolution.
How The Cash Diet Works
The first step of a cash diet involves everyone’s least favorite money chore: budgeting.
A cash diet won’t be successful without a frame of reference. A dieter must know how much money he or she can afford to spend each week; otherwise overdraft fees and switching back to credit cards will happen quickly.
The simplest way to start a cash diet is to create a list of monthly expenses such as: rent and mortgage, utilities, cellphone bill and existing debt payments. Don’t forget about retirement and emergency fund contributions, too.
Next, subtract monthly set costs (including savings) from income. The remainder is the money used to live during the month. It’s effective to divide this number by four and determine how much cash you can spend per week.
The Plan: Think Before Buying
Cash dieting is designed to encourage participants to really evaluate a purchase before heading to the counter. It puts small habits into perspective — which isn’t to say all indulgences need to be eliminated — but debt slayers may begin to forgo little luxuries in the interest of getting out of the red.
It’s also a way to force people to budget without actively tracking each penny spent. There’s a set amount of money to spend, and once it’s out of the wallet, the week is all home-cooked meals and Netflix. Someone who wants to see “Star Wars” this weekend might decide to nix three lattes to make sure there’s enough money leftover for a ticket.
Cash diet dissenters claim cash makes them spend more than plastic. The more likely scenario is that having cash on hand takes time to get used to. After a week or two spending all allowed money by Wednesday and having to forgo happy hours, a latte pick-me-up or a date night, people will re-evaluate spending decisions.
The Exception to the Cash-Only Rule
In the case of the cash diet, that exception would be large purchases. It isn’t wise for anyone to walk around with thousands, or really even hundreds, of dollars. Should someone need to make a large purchase — let’s say a new washing machine or the deductible for a surgery — then use a credit card. Plus, there may be some element of purchase protection with a credit card. Also, any online purchases should be made with a credit card, not a debit card. Debit cards are just not worth using unless you’re making transactions at a bank ATM.
Cash dieters can compensate for using the credit card by paying off the charge ASAP instead of waiting for the bill to cycle. That way, it’s reflected in a checking account.
The Downsides of a Cash Diet
Unlike a misplaced or stolen credit or debit card — cash isn’t easily replaced. Losing a wallet with a week’s worth of spending money is a painful experience.
Doing a cash diet for too long may also harm a credit score. Cash dieters who exclusively build a credit score using a credit card and don’t have student loans, mortgages or auto loans may suddenly show 0 percent credit utilization for months, which could negatively impact a credit score. This can be avoided with a small bill on a credit card like $7.99 per month for Netflix that’s automated to get paid off.
The Results
Even the most financially fit people could stand to reset their money behaviors every so often with a cash diet. It never hurts to try a new style of budgeting, especially one that forces people to see exactly where and how much they spend per week. And not to mention, having cash on hand is extremely convenient, especially when it comes to splitting the check with someone.
At the end of the diet, you may have saved enough cash to shed your debt or meet new savings goals — and you’ll feel great too.
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How a Cash Diet Can Kick-Start Your Money Resolutions originally appeared on usnews.com
