Should I pay for everything in cash to minimize my debt?

Key takeaways:

• Paying for everything in cash may help you stay on budget and minimize your debt
• A cash-only approach may make it difficult to build your credit
• By adopting a hybrid approach where you keep cash on hand for discretionary purchases only, you can stay on budget and build a strong financial future

Saving for a down payment, or any large purchase, requires a more judicious approach to your spending. A new trend in debt management has its participants paying for everything – from large bills to that daily latte – in cash. Here are insights you can use as you determine if you should follow a cash-only budget.

What is cash-only debt management?

This system is fairly simple. Each month, you divide up your budget into smaller mini-budgets. Start with your set-in-stone bills like your housing, car payment or student loans and cell phone bill, then come up with set budgets for other categories like groceries, gas, entertainment, dining out and more. Divvy up the cash into envelopes for each category and stick within each mini-budget without going over.

The pros of cash-only debt management

The main advantage of this system is that you'll never spend more than you have, which is easy to do when paying for everything on a credit card.

Even within a day or two, you may become more aware of frivolous spending habits. Those Starbucks runs or emergency donut expeditions may seem less important when you realize they add up to $15 a week.

Budgeting is never fun, but by staying extra frugal, you may find that you have enough money at the end of the month to buy an unexpected new pair of jeans or tickets to a Minnesota Wild game.

The cons of cash-only debt management

Having good credit is important, whether you're looking to buy a home this year or send your kids to college in 20 years. By paying for everything in cash, you won't be able to build or restore your credit very quickly.

It can also be inconvenient to pay large bills, like your daycare fees or student loans, in cash — and some service providers may be unwilling or unable to accept cash payment at all.

Credit cards can be risky but if they're used properly and paid off immediately, they can be a great way to earn rewards for your spending. On a cash-only budget, you won't rack up those miles or hotel points.

Is a hybrid approach the solution?

There may be a way to stay on budget and understand your spending better without paying for everything in cash.

Consider paying your set-in-stone bills with a credit card, then keep enough in your checking account to automatically pay off your credit card bill each month.

For all the rest of your spending – from groceries and gas to nights out and birthday gifts – set up and stick to those cash budgets.

That way, you can earn rewards and build better credit while ensuring that you don't spend even an extra nickel on anything you don't really need.

Saving up for a down payment?

Whether you're a great saver who's ready to buy a home or are in the process of shoring up enough for a down payment, talking with a mortgage expert can help set you up for a successful home purchase. Call, email or chat today to get in touch with a mortgage loan officer who can recommend the right savings plan or loan for you.