Leave your ATM card at home

By Liz Pulliam Weston

In a world where people use plastic to buy lattes, Stacy Jo McDermott feels like a bit of an oddball. But after running up $35,000 in credit card debt, the San Francisco Bay-area resident decided her relationship with money had to change.

McDermott tried different ways to monitor and control her spending as she paid down her debt. The method that she hit on several months ago seems to work best: using cash.

Every two weeks, after her paycheck is direct-deposited into her bank account, McDermott slips $125 into a checkbook register to pay for food.

"About 70% of that goes for groceries," she said, "and about 30% for eating out."

Another $60 goes into her wallet to pay for gas. A final $30 stash is tucked into a zippered pocket in the wallet for what she calls "treat money"-- little splurges like a movie or a magazine.

McDermott, a saleswoman, still carries an American Express card for business travel and a debit card for emergencies, like the new battery her car recently needed. Her monthly bills are paid with checks. Otherwise, though, she pays with the green stuff.

"When I use cash, I stop and think," McDermott said. "Do I really need this?"

It's still plastic

Plastic surpassed cash years ago as consumers' payment method of choice. People now use debit, credit or prepaid cards in 56% of their in-store transactions, according to the American Bankers Association, with cash comprising 33% of the transactions and checks 11%.

Indeed, plastic forms of payment have plenty of advantages for money management:

• They're convenient. You can buy what you need when you need it, as long as you're not already over your credit limit or overdrawn at the bank.
• They're easier to track. With debit and credit cards, you know exactly what you've spent where. You can check your transactions and balances online and track them with personal-finance software like Quicken or Money. Dollars in your wallet, by contrast, tend to disappear without a trace unless you're diligent about writing down your purchases or retaining receipts.
• They offer some protection. Credit cards, and debit cards with MasterCard or Visa logos, promise "zero liability" for consumers if the cards are lost or stolen. Credit cards also serve as a middleman in transactions, so that if you have a dispute with a merchant, you don't have to pay the charge until your beef has been investigated.
• They give you rewards. Many credit cards and even some debit cards offer reward points, frequent-flier miles, cash back or other fringe benefits. The more you use them, the more rewards you pile up.

The envelope system

Debit cards, in particular, have soared in popularity in recent years, with their use for in-store transactions climbing 45% between 1999 and 2005. Since debit-card transactions come directly out of your checking account, you don't have to worry about facing a big, unexpected bill and possible finance charges at the end of the month, as you could with a credit card.

Still, it's possible to overspend with a debit card, just in a different way. You might buy too much at the grocery store, for example, and discover too late that you don't have enough left for rent. Couples may find themselves in constant conflict because they've essentially spent the same dollars twice.

The desire to earmark money for different purposes without worrying about overspending is what led Carolyn Pittman of San Dimas, Calif., to set up her cash-based envelope system nearly two decades ago, when her now-grown sons were still in elementary school.

Pittman keeps seven envelopes on hand, labeled:

• Home, for small home repairs.
• Entertainment, which includes weekly dinners out with her husband, Richard.
• Gas. The envelope is kept in her car.
• Trips, for weekend getaways.
• Barber, for haircuts.
• Clothing.
• Food.

You can't spend what you don't have

"If I have the cash put aside, it's harder to overspend," Pittman said. With plastic, "you're tempted to buy everything you see."

The Pittmans know something about money management -- Caroline was an accountant before becoming a full-time mother, and Richard works for a credit-counseling organization, ByDesign, as vice president of fund development.

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