How to Pay Off Debt on a Cash-Only Budget

It’s funny; getting into debt is pretty easy and it happens with little thought. A few months of mindless trips to the mall and getting over the initial discomfort of only making minimum payments on your credit card balances can quickly turn into years of the same. Before you know it, you’re so deep in debt that even with a commitment to living on a cash-only budget, you may feel like you’re trapped in quicksand with no foreseeable way out.

Paying off that debt, on the other hand, is quite different. It often takes intentional thought about how to make smart money decisions. It involves learning new lifestyle and spending habits, including living on a budget. It may also regularly feel like you are pushing a boulder up a mountain.

Many a debt journey has included at least one stop at a cash-only budget. While this is not the only way to pay off debt successfully, it is a popular one that many people try and it absolutely can help you pay off debt.

The reality is that once you get into debt, you have only two real choices: pay your debt off, or fall behind and sink further into the hole financially.

Learning how to pay off debt on a cash-only budget may sound like a big commitment, but it starts with a relatively simple step; you have to stop spending more than you earn and commit to killing the debt. You can even pay more than the minimum on your debt each month to speed things along.

However, the one obstacle that can stand in your way when you’re on a debt repayment journey is lifestyle inflation and the desire to pay for more expenses that you truly can’t afford with the help of credit cards and loans.

That’s where having a cash-only budget can step in and help kill your debt. If you’re new to the concept of living on a cash-only budget, or wondering how to pay off debt on a cash-only budget, all the basics are covered for you here,

What’s a Cash-Only Budget?


A cash-only budget is just like it sounds. It’s when you only pay for expenses with cash so there’s no using credit cards for rewards points, which is a bummer, but there’s also no having to worry about accidentally overdrafting with your debit card.

Some people even take the cash they need out of the bank each month so they can pay for everything in cash which sounds pretty old school, but it’s a great way to get your finances in order, especially when you are getting used to the concept.

Having a cash-only budget can give you more control over your finances and be a great way to help you get out of debt (here are 25 other ways to pay off debt if you are curious or looking for some fresh ideas). Numerous studies have shown that you will naturally spend less with cash than you would with a credit card, but here are some specific tips that will help you pay off debt on a cash-only budget.

Step 1 – Create a Budget that helps you spend Less Than You Earn


Whether you like it or not, your first step with paying off debt should be to get on a budget. If you don’t know how to budget, here’s a great guide on how to make a budget. A budget will tell your money exactly where to go so you’ll know how much you have to put toward debt payments.

However, you don’t just want to list out your expenses and call it a day. You want to compare all of your expenses to your income side by side and make sure your income exceeds your expenses.

If it’s the other way around, you’ll wind up with a deficit, which will force you to accumulate more and more debt each month. You want to break the paycheck-to-paycheck cycle so you’ll need to make sure you have a decent-sized buffer between your income and expenses to cover savings contributions and debt payments.

Make a list of all your minimum debt payments and decide which debt (if any) you’d like to pay extra on each month and how much that extra payment would be.

If you don’t have a large enough buffer, find ways to save more money each month, or earn more money.

Step 2 – Balance Your Budget With Envelopes


Once you have a budget in place that will allow you to make payments on your debt each month, consider using the cash envelope system to manage everything.

Instead of keeping the money in your checking account or spending on a credit card with intentions to pay the bill off at the end of the month, place money for your fixed and variable expenses into separate envelopes based on the budget category.

While you may not be able to pay cash for every category, you can definitely start by using the cash envelope system for groceries, dining out, gas, clothing, entertainment, etc.

Sometimes, it’s convenient to pay your bills online, which is why you might choose to leave some money in the bank and there’s no problem with that. Another area that makes sense to handle electronically is your emergency fund.

If you don’t already know, you’ll want to understand what an emergency fund is and why you need one, because it will help you handle unexpected needs like car repairs or doctor or dentist bills without having to put them on a credit card or do something financially harmful like take out a payday loan.

While you could have an envelope category for your emergency fund savings, online banks like Ally or Barclays Savings pay you over 1% interest, which will help you grow your emergency fund to $500 and then $1,000 and more, quickly. Both of these banks make it very easy to access your money and move it when you need to, so there’s no downside over an envelope with cash.

Consider using the cash envelope system for budget categories that you tend to overspend in. For example, if you spend too much money on groceries, dining out or concerts, that extra spending could be contributing to your debt or keeping you in debt.

Once you reign in some of those out-of-control expenses by resorting to using a cash-only budget, you can ensure you’ll have enough money to pay on your debt each month.

Step 3 – Make Your Debt Payments at the Beginning of the Month


The earlier you make debt payments during the month, the better because you don’t want to wind up spending the money on something else if it sits around too long.

You can create an envelope for all your debt payments or keep the money in your checking account. Try to set all your debt payment due dates for the beginning of the month or right when you get paid so you can get the minimum and extra debt payments out of the way early on.

That way, if you run out of money in your envelopes, you won’t have to worry about being tempted to use debt repayment money to fill in gaps with your budget.

Step 4 – Stop Spending Once the Envelope Is Empty


This should go without saying, but the cash envelope system only works when you stop spending once the envelopes are empty.

When the money is gone from your envelope for a certain category, you’ll know you can no longer spend money on those expenses, which will reduce the temptation to spend money you don’t have.

You may also find yourself sticking to your budget better when you adopt this mindset.

When you’re in the grocery store and see snacks in the check-out line, you can look into your grocery envelope and see how much money you have left rather than purchase the extra items on impulse knowing that you’re using a credit or debit card to make the purchase.

If your envelopes get empty earlier than expected, you’ll have to get creative and find other ways to make ends meet without overspending.

A cash-only budget has many benefits - especially when paying off debt. Here's how to use a cash budget to pay off debt, in 5 simple steps.

Step 5 – Funnel Any Extra Money Into Your Debt Repayment Goal


If you happen to have any extra money left in your envelopes at the end of the month, be sure to use it to make an extra debt payment even if it’s just $5.

Every extra payment, regardless of the amount, will help you get one step closer to becoming debt free. Also, if you come across or earn any extra money, using a cash budget will make it much easier for you to put that unexpected income toward debt as well.

When you make extra money or receive a cash gift, it’s so easy to just spend that extra money mindlessly or even add it to a budget category like dining out or entertainment.

If you’re using a cash-only budget, it means you’ve already outlined a clear budget and separated your spending categories into envelopes making it easier to manage. Therefore, anything extra can go straight toward debt and not to your envelopes.

Transitioning to a cash-only budget may be challenging to do at first especially if you’re used to overspending each month. It helps to have a goal in mind, especially for Step Five.

For example, if you know you want to pay off $60,000 of debt in three years, you’ll be more motivated to stick to the envelope method and put any unexpected extra money toward debt since you won’t necessarily need it.

If you’re struggling with killing debt, I’d highly recommend it to help you get back on track with your financial goals.


What has been your experience with using a cash-only budget? What are some other budgeting tricks you’ve used to pay off debt? What do you believe is the most overlooked way to pay off debt?

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