Using Cash to Keep Spending Under Control

If you are struggling to stay within your budget or seem to spend more money than you should, it might be a good idea to go back to using cash for daily purchases.

It is no surprise that most of us are beginning to move away from cash for everyday spending; the convenience of debit and credit cards is very tempting. Some cards actually offer rewards or cash back that makes the use of cash even less appealing.

The problem with this convenience is that you can begin to forget the true value of the money you are spending and end up having trouble staying within your limits.

How Cash is Different

This is where using cash can help. When your everyday transactions are done by swiping a card you don’t physically see the money change hands. I’m sure everyone knows what spending RM2.00 on a cup of coffee feels like but the fact you only see this number in the form of a receipt or on the cash register display doesn’t have the same effect has reaching into your wallet or purse and physically handing the money to someone else.

The problem lies within the way we think about money in each scenario. When you use an electronic form of payment you are only restricted by the amount of money in the bank or the available credit on the card. So throughout the week when you are spending money on groceries, gas, the morning coffee or lunch out with co-workers you don’t realize how much each small purchase is adding up unless you are balancing your checkbook immediately after each purchase.

On the other hand if you were to use cash for these same purchases you would have a clear idea of the consequences of this spending without even thinking about it. If you started the week with RM40 in your wallet and began to use that for all of your purchases you would see this RM40 turn into RM35, RM25, RM10 and so on. You are reminded of how much you have spent and how much money you have left every time you look in your wallet. This alone can make you think twice before making a purchase.



Try it for Yourself

I encourage you to take a week or two and give this a try to see what effect it has on your everyday spending. Before your regular routine on Monday create a budget for how much money you will need throughout the week. If you regularly buy lunch out, count that, or if you stop for coffee on the way to work be sure to include that as well.

Once you have a pretty good idea of how much money you will spend throughout the week you should have that much cash on you at the start of the week. Whether this is $20 or $100, only have the amount of cash that you have budgeted with you and use this cash for all of those everyday expenses.

After one week how did you do? Did you find that you had money left over or did you have to pack a sack lunch on Friday because you spent your last dollar on Thursday? Regardless of the outcome you have a very real sense of where your money is going throughout the week and because of this you can now put together a realistic and meaningful budget. Convenience can be costly but cash can help you regain control of spending.

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Investment Return - Using the Rule of 72

Compound interest is an amazing thing, and the Rule of 72 is a simple way to quickly estimate how long it will take your investment to double. The only piece of information you need for this calculation is the annual rate of return. While most investments don’t have a fixed rate of return over a long period of time, you can use an average estimate to get a pretty good idea.

How to Use the Rule of 72

To estimate how long it takes for your money to double, simply divide 72 by the interest rate. The result is how many years it will take for your money to double at that rate. For example, let’s assume you can earn a 6% rate of return. How long will it take $1,000 to grow into $2,000?
--> 72 / 6 percent = 12 years

In this example, if you invested $1,000 into an account that earned a flat 6% annual rate of return, after 12 years, your investment would be worth around $2,000. To save a little time, here are some interest rates and the corresponding amount of time to double:

1% - 72 years
2% - 36 years
3% - 24 years
4% - 18 years
5% - 14 years
6% - 12 years
7% - 10.3 years
8% - 9.0 years
9% - 8.0 years
10% - 7.2 years
11% - 6.5 years
12% - 6.0 years

Remember, It’s Just an Estimate

Keep in mind that this is just a quick estimate. Depending on changes in the rate of return over time, what you’re invested in, how you invest it, how interest is applied, and possible tax implications, the actual amount of time needed to double your money will vary. Even so, the rule of 72 can be helpful when you quickly want to compare the rate of growth of two investments.

The rule of 72 also works in reverse and can be helpful in understanding the power of inflation. If you consider the average long-term rate of inflation is between 3 and 4 percent, you’ll notice that something worth $100 today will cost $200 in about 20 years. This can help illustrate the power of inflation and the importance of realizing a rate of return over time that can not only overcome inflation, but also taxes.

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