Budgeting can feel like a psychological game just as much as a financial one. There are a lot of theories out there about which payment type can help you stick to a budget. Some people have the impulse to spend more freely with a credit card in their hand, while others prefer cards and have a harder time keeping track of cash.
Ultimately, the best payment type to help you stick to a budget depends on you and your preferences, but there are pros and cons to every method!
Which Payment Type Can Help You Stick to a Budget?
Let’s break down all the information to figure out which payment type can help you stick to a budget, and tips for using each successfully.
Is cash king when it comes to budgeting? In my opinion—it can be a yes and no.
One perk of cash budgeting is that it gives you defined (and physical) limits to your spending. Many people love budgeting with the envelope system, which works like this:
1. Divide your spending into categories (e.g. bills, gas, groceries, clothing, fun money).
2. Determine a budget for each category. Some expenses will be fixed each month, and some you’ll have to choose your own numbers that feel realistic.
3. At the beginning of each month, withdraw your budgeted amounts in cash. (Remember to budget for savings too, but leave this in the bank where it can earn interest!)
4. Put your money into labeled envelopes from each category.
5. Throughout the month, spend from each envelope—take the grocery envelope grocery shopping and so on. If you run out of an envelope, no more spending for that category! If you have extra at the month’s end, you can roll it over or put it in savings.
That’s the main way to budget with cash, so let’s look at its pros and cons.
- Cash gives you defined limits to your spending in every category.
- It may feel psychologically harder for you to part with physical cash than to swipe a card, so you might spend less.
- It’s impossible to spend more money than you have and get into debt.
- Lots of accidents can happen with cash. It can be misplaced, stolen, or destroyed in an accident.
- It can be inconvenient to remember all your envelopes and bring them when you need them.
- You don’t get any special benefits or rewards for using cash.
- You’ll have to track everything manually, since you won’t have spending analysis tools.
Personally, I only keep a tiny amount of cash at any given time, in case I run into a place that’s cash-only or offers discounts for cash.
Next up, many people consider debit cards to be a happy medium between cash and credit cards. They provide the same limitations as cash, since you can only spend what’s in your account. However, there isn’t such a clear distinction between spending categories, since you’re using one card for everything and you’ll have to check your accounts if you want to total up your spending for the month.
- It’s more secure than cash, since your money is in a bank account.
- You can set your card to reject overdrafts so you can’t spend more than you have in that checking account.
- They often have great built-in budgeting tools that can show you charts and trends about your habits.
- You need another method to track spending categories and know once you’ve hit your budget limits.
- Most debit cards don’t have extra rewards and don’t help you build credit.
Credit cards are one of my favorite financial tools, but they can also be dangerous if you aren’t careful. Not everyone is a good candidate for credit cards. However, if you’re confident that you’re capable of having a credit card and keeping a tight rein on your spending, they do offer plenty of benefits.
For one, they’re one of the most secure payment methods, because there is an extra layer of protection between your card and your bank account. If someone hacks your debit card, they can empty your checking account. If someone hacks your credit card, they haven’t touched any of your actual money, and you can easily open a fraud case with your credit card company.
The other big reason I love credit cards is that they can actually save you money. There are cards like the Chase Freedom that earn you 5% cash back on rotating categories (e.g. it could be groceries one quarter and gas the next). You can also get travel credit cards that reward you with miles and points you can choose to use for flights and hotels. Some come with even more perks like free travel insurance for trips you book.
For me, credit cards make budgeting easier for the simple reason that at the end of the day, they put more money in my pocket. I know my budget, don’t use credit cards any differently than I’d use a debit card or cash, and pay cards off in full each month. Earning cash back for every purchase means I’m saving an extra 2-5% on purchases I’d make anyway. Or, if I’m using a travel card, that’s a flight I can get for free instead of paying for it.
- One of the most secure forms of payment.
- Offer great rewards like cash back, points and miles, purchase protection, insurance, etc.
- Responsible use can help you build a better credit score.
- Like debit cards, many credit cards have robust financial analysis tools you can use to understand your spending trends.
- Like with debit cards, you need to manually keep track to know when you’ve hit your limit for a budget category.
- Credit cards do allow you to over-spend, so if you have historically struggled in this area, the temptation isn’t worth it.
In the end, the best payment type to stick to a budget is the one that will help you. Weigh the pros and cons of each and think about your own personality and how you handle money. You can also use a combination of methods—for instance, pay your bills with a credit card, and use the cash envelope method for your “fun” spending.
What payment methods work best for your budgeting habits? Let me know in the comments.
Kate is a writer and editor who runs her content and editorial businesses remotely while globetrotting as a digital nomad. So far, her laptop has accompanied her to New Zealand, Asia, and around the U.S. (mostly thanks to credit card points). Years of research and ghostwriting on personal finance led her to the FI community and co-founding DollarSanity. In addition to traveling and outdoor adventure, Kate is passionate about financial literacy, compound interest, and pristine grammar.