Here's What Happens When You Pay for Everything in Cash

Cash-only budgets are popular among consumers who are trying to spend less. Instead of using credit cards and even debit cards, you pay for everything in cash. One of the most popular ways to do this is the envelope method, where you divide your cash into envelopes labeled for specific expenses.

While switching to a cash-only lifestyle is said to help with managing your finances, it also has some big disadvantages. If you've been thinking about giving it a try, here's what you can expect when paying for everything in cash.

You may spend less

The main argument for only using cash is that it could help you spend less money. Multiple studies have found that people are willing to spend more when paying with credit cards than with cash. That includes research by MIT, the American Psychological Association, and Dun & Bradstreet.

It's not guaranteed, and you can certainly stick to a budget while using credit cards. But the research shows that people find it easier to spend money with a credit card than to actually part with cold, hard cash. When we pay for purchases with cash, we're more aware of what we're spending.

You miss out on the opportunity to earn rewards

One of the benefits of paying by credit card is that you can earn rewards. There are plenty of rewards credit cards that earn 1% to 2% back, or sometimes more, on eligible purchases. And while rewards cards may seem complex, most of them are easy to use. If you want to keep it simple, any of the top cash back cards are good options. These let you apply your cash back as a statement credit on your credit card bill.

When you pay with cash, you don't get anything back. Over time, that adds up. Let's say that you spend $25,000 per year on purchases you could make with a credit card. If you use a card that earns 2% back, that will earn you $500 in cash back per year. That's $500 you won't get by paying with cash.

You need to carry more cash around

Something that doesn't always get brought up about cash-only budgets is how inconvenient they are. You need to keep enough cash on hand to cover all your bills. That likely means doing either of the following:

• Keep enough cash at home for the next month's expenses. This is how the envelope method works. You take the money you need from your envelopes as you need it.
• Make frequent visits to the ATM. If you do this, you'll need to watch out for ATM fees or stick to ATMs in your bank's network.

Paying with a credit or debit card is much easier, because you only need enough cash for emergencies. There's also far less risk involved. You can't get your cash back if your wallet is lost or stolen, but you can get a replacement credit card and be no worse off.

You aren't able to dispute transactions

An underrated benefit of credit and debit cards is the option to dispute transactions. If you're not satisfied with a purchase, and you can't work things out with the merchant, you can dispute it with your card issuer. Your card's payment network (Visa, Mastercard, American Express, or Discover) will then get information from you and the merchant to investigate. If it determines that you're in the right, you get a refund.

This is a helpful option to have if there are issues with a purchase you made. Sometimes just the threat of a dispute makes merchants more willing to work with you.

If you paid with cash, your options are much more limited. The merchant would need to agree to refund you, because it's not an electronic payment that can be reversed. Your only other option would be to go the legal route.

Because of the benefits they offer, credit cards are generally the best way to pay for purchases. If you often find yourself overspending, you may want to switch to cash. But in the long run, it's better to figure out how to spend responsibly while paying with credit cards.