Can a 'cash diet' save your financial health?

In a lot of ways, financial health is just like physical health—we’re only one bad decision or unexpected accident away from serious problems. And recovering from those problems? Well, that can be a long journey fraught with twists, turns, and plenty of hurdles along the way. So, what’s the best way to kickstart the climb out from the financial hardship hole, whether it’s just a few overdue bills or tens of thousands in credit card debt?

At first glance, it might seem logical to go on a so-called “cash diet” and simply cut off your outbound cash flow. You can’t lose money if you don’t spend it, right?

Well, not exactly. Experts warn that cutting spending “cold turkey” isn’t always sustainable and carries a high risk of backfiring. Much like a regular diet, cash diets depend on moderation and self-restraint. They follow the premise of setting a daily or weekly allowance; but rather than counting the calories you take in, cash diets count the dollars you spend. This approach can be helpful as a short-term solution to poor spending habits, but anyone looking to find the surest path to financial freedom should know there’s no such thing as a one-size-fits-all financial plan (just as there’s no one-size-fits-all diet).

So, is going on a cash diet the right approach for you? To find out, consider the following:

The good and bad of cash diets

The philosophy behind the cash diet is simple: Spend less, save more. Bolstering savings is a hallmark of financial responsibility, but it’s also one that most people have great difficulty achieving. According to a 2019 survey, 69% of Americans have less than $1,000 in their bank accounts and 45% have no savings at all. But is simply cutting your costs the answer to achieving financial freedom?

It’s a bit more complex than that, according to experts. Erin Lowry, author of the bestselling book Broke Millennial, said in an interview with Quartz that going on a cash diet is much like going on a juice cleanse: the goal is to reboot and regain control—but you can’t always be on a juice cleanse. Instead, she suggests “aligning yourself with what you actually enjoy and value,” while cutting out the extraneous expenses that tend to add up in the process.

Diets that people use to lose weight are widely known to fail when they are too restrictive. The same holds true for cash diets. Being too financially austere can result in binge behavior downstream—think shopping sprees, impulse spending, and retail therapy. People binge after a diet—financial or food—because they depleted the willpower reserves they needed to manage a big behavior change, says Pauline Yan, a portfolio manager and finance blog writer. In an interview with CNBC, Yan explained that she finds “the yo-yo-ing back and forth to be worse” for her overall budget.

If you’re looking to put an end to the financial decisions that have been hurting you, a cash diet can help you spur the turnaround in the short term. But if you want to address the root habits that lead to your money woes, your best bet is to set specific goals, put a plan in place, and maintain a consistent budget.

Sensible tips for financial health

While there are tons of strategies you can use to get a grip on your finances, most start with the same key idea: Decrease mindless spending and increase mindless saving. After all, before you pay others, why not pay yourself?

There are many ways to follow this approach and prioritize saving so that you don’t have to rely on self-control to make it happen. One of the best strategies is to automate the process and take yourself out of the equation entirely. Here are a few of the easiest ways to make this happen:

• Increase contributions to your 401(k) or retirement account.

• Arrange for a portion of your paycheck to be automatically deposited into a savings account.

• Set up periodic automatic transfers from your checking to your savings account.

Tracking your spending is another common approach to boosting savings. The simple act of writing down each purchase or tracking it with an app helps you practice temperance before indulging in an expense that might not be worth it. When your spending history is laid out, you can quickly identify mindless buying patterns (ie, excessive Amazon purchases and takeout food orders) and change your behavior to better align with your goals. When your awareness of exactly how you spend increases, buying becomes a thoughtful activity, rather than a loosely controlled habit.

With subscription services to everything from Spotify to Apple TV+ to Planet Fitness, being an unconscious spender is easier than ever today. Pruning your subscription services can help you increase savings from month to month. “[S]ubscription-based businesses are everywhere, and they’re probably betting that most of us will forget to turn off these services when we don’t need them anymore. Unsubscribing to something is a quick little win,” said Tara Siegel Bernard, a personal finance reporter, in an interview with The New York Times.

For those monthly bills that can’t be cut—such as utilities, internet, insurance, and phone bills—negotiation is a powerful tool. Calling your service providers and looking for opportunities to cut costs can sometimes provide surprising results. If you do make a new deal, just be sure there aren’t any embedded premiums or interest charges.

Finally, research supports use of cash instead of credit and debit cards to help curb spending. In a study that examined the relationship between payment method and spending behavior, results showed that people were willing to pay more for identical products when using debit cards than when using cash. The study, published in the Electronic Commerce Research and Applications journal, suggests that one of the reasons for this difference is the representation of money. Cash spending forces the buyer to direct their attention to their holdings after a purchase. Card transactions, on the other hand, provide a less conscious and more depersonalized spending experience.

Saving made simple

Cash diets are just one of many approaches to help you work toward a more secure financial future. The short-term benefits are clear: A cash diet can help you reset, achieve equilibrium, and move forward more confidently. But the drawbacks can’t be ignored: Cash diets simply are not effective in the long-term and, if mismanaged, can lead to binge spending behavior that can inflict lasting damage.

Keep in mind that physical and financial health have a lot in common. You succeed by employing behavioral techniques and daily regimens that benefit you and your long-term goals. While getting a grip on your finances is a task that never truly ends, keep these strategies in mind and implement them daily to strengthen your fiscal habits and see your financial security flourish.