Fiscal Fitness '09: Cash Is the Cure for Over-Spending

Today's tip is part of our Fiscal Fitness '09 series. Every weekday this month, you'll get help getting fiscally fit as we work toward our goal of saving $2,000 to invest in three stocks!

Here's a no-brainer way to curb the urge to splurge: Leave the credit cards at home. Seriously, toss them behind a major appliance or bury them in kitty litter and -- this is the key part -- go on a cash-only diet.

Why cash? Because using actual currency (not "play money," or non-cash types of tender like credit cards) significantly curbs spending -- and not just because we're short on change at the checkout counter. Just look at the revenues that these credit card companies enjoy, much of which comes from credit card transactions:

Source: Yahoo! Finance.

Forking over the Benjamins (or lesser presidents) induces a gut reaction that's absent when we whip out the plastic. But don't take my word for it. Let the science speak for itself.

Research reveals the pain of parting with cash
A recent study conducted by two business school professors from NYU and the University of Maryland, College Park, found conclusively that when our mode of spending is cold, hard cash, we're much more careful about parting with it -- and we actually spend less.

Specifically:

• People were willing to pay more at restaurants when using a credit card.
• When asked to estimate the amount of each item in a Thanksgiving dinner, rather than ballparking the total cost only, the cash-credit spending gap closed.
• People spent more when they shopped with a $50 gift certificate vs. $50 in cash.
• When participants had to buy candy with $1 cash or a $1 gift certificate, they more readily spent the gift certificate than the cash. But when asked to keep the gift certificate in their wallet for one hour, consumers were less likely to spend it.

The conclusion is pretty clear: People are willing to spend more if they can pay using a piece of plastic or other non-cash currency. And in all instances, people were much more conscientious when cash was involved.

What's it worth to pick paper over plastic?
So how do we put a dollar amount on how much you can save by leaving the credit cards at home? Think about it: How much easier is it to buy all those magazines and candy that stores like CVS (NYSE:CVS) and Kroger (NYSE:KR) conveniently (and strategically) place right by the checkout when you don't have to worry about running out of greenbacks?

A 2003 survey of supermarket receipts found that credit-card shoppers rang up 30% bigger bills and carted out twice as much in nonessentials as cash buyers did. Based on government statistics, that adds up to $153 a month for the average household, simply by putting the plastic away and practicing a little cash-consciousness.

Hit the ATM after work
You've got nothing to lose by trying the cash-only diet for the rest of this month. (Just be vigilant about your surroundings, and don't carry more cash than you need for the day.) Try it out for a couple of days and let other Fiscal Fitness participants on the dedicated discussion board know whether it changes the way you spend.

More ways to save ...

• Stick to your budget with envelopes! You got a breakdown of your big spending categories for yesterday's Fiscal Fitness tip by signing up for the free budgeting tool at Mint.com. Divide what you spent last month on food by four to come up with a weekly budget. Now slash that by one-third, and put that amount of cash in an envelope labeled "Food." Every time you reach for your wallet, you'll see exactly what you have to spend in very tangible terms. If the money runs out before the week is over, get creative with leftovers and an excursion to the recesses of your pantry. Do this same exercise with any spending category that gave you pause, and start racking up the savings -- in cash.
• Get more cash flowing in: Now that the in-laws are gone, you can retrieve all the junk you stashed in the garage, up in the attic, and under the bed. Only this time, assess it for what it really is -- stuff you don't want, but which someone else might be willing to pay you to get. There are plenty of forums for unloading your cast-offs. One of my favorites is the free listing site craigslist.com. But many use eBay (NASDAQ:EBAY), Amazon.com's marketplace, a garage sale, or Freecycle (though with the latter, as the name implies, you won't get cash, but you will get rid of your late great-uncle's creepy taxidermy collection).

Read the latest from Fiscal Fitness '09: 1 Month, 2 Grand, 3 Stocks to get our other money-saving tips. We're warming up your budget by cutting back on everyday expenses.