Best way to budget? Cash beats plastic

29 April 2008

When money’s tight, people often find that using cash helps them keep a close eye on their household budget – and in today’s economic climate, budgeting skills are more important than ever. On April 21, new figures from the British Retail Consortium (BRC) revealed that cash is now used for 60% of all transactions, up from 54% one year ago.

Higher mortgage payments, record costs of petrol, rising food costs… with many households finding their budgets stretched to the limit, there is “a widening gap between the amount spent in cash and the amount spent using cards, suggesting customers want to keep tight control of their finances,” as BRC Director General Stephen Robertson put it.

Budgeting: cash is simple; simple is good
When every penny counts, a simple oversight can easily push this month’s (and next month’s) budget into the red, so it’s not surprising that so many households are keeping such a close eye on their budgets.

“Hard-up customers are increasingly reluctant to spend money they haven`t actually got in their hands,” said Mr Robertson. This is the key point: although plastic’s convenient, old-fashioned cash can make budgeting easier. With cash, checking what’s left of the household budget is just a matter of looking in the wallet / purse.

And there’s a world of difference between different kinds of plastic. With debit cards, people risk spending more of their household budget than they realise. But credit cards bring additional risks: unless they can pay off the balance quickly, it’s easy to get caught in a ‘debt spiral’. High interest rates can easily push credit card debt far beyond the initial amount borrowed, so repayments take a small but significant chunk out of the monthly budget for years to come.

Spending in the shops: biggest decline since 2005
So many households have decided the best way to control their budget is to spend real notes and coins, rather than figures on paper. But in itself, that’s not necessarily enough. Also published in April, the BRC-KMPG Retail Sales Monitor March 2008 reveals a drop in spending: UK retail sales fell by 1.6% on a like-for-like basis*.

“This is the first year-on-year fall in like-for-like sales for two years and the worst result for nearly three years,” said Mr Robertson. “Here is the strongest evidence yet that customers are making serious economies and are increasingly concerned about the future.”

Nobody enjoys ‘tightening their belt’, but it’s good to see people are coping with these expensive times by cutting back on household spending, rather than borrowing more. After all, there’s no point in someone just watching their budget unless they can adjust their spending habits when the situation calls for it.

• ‘on a like-for-like basis’ – percentage change in the value of sales compared with the same period one year ago.

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Gregory Pennington are founder members of DEMSA (Debt Managers Standards Association).

DEMSA are the first trade body within the finance industry to successfully secure approval for its code of practice under the OFT Consumer Codes Approval Scheme (CCAS).