A cash-based system helped me pay off $500,000 worth of debt

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A cash-based system helped me pay off $500,000 worth of debt


I love using my credit cards for as many purchases as I can and redeeming the rewards for travel. However, I'm not blind to the fact that sometimes I might spend a little more than I need to in the name of "earning" points and miles.

Because of my own love affair with credit cards, I was particularly intrigued by Christine Odle's story. She's a financial coach who advocates and lives a swipe-free lifestyle.

It's been known for years that using credit cards can have a powerful psychological effect when it comes to how - and how much - you spend.

A 2001 MIT study found that consumers using credit cards were more likely to spend more on a product using a credit card than if they used cash. This was called the "credit card premium." In 2008, the American Psychological Association found that cash discourages spending, while credit can encourage it.

Odle paid off $500,000 worth of debt and consistently saved money, in part because she switched from credit cards to cash. While this approach may not work for everyone, as different approaches to managing credit and debt depend on many factors and there may be other benefits to using credit cards besides points and miles, here's how Christine Odle did it.

Christine's story in her words

My husband, John, and I live in Norwood, Colorado, a town of about 500. We run an electrical contracting business and manage rental properties. I also work with companies and individuals as a financial coach.

Getting into over $500,000 of debt

John had a paid-off house when we got married in 1997, but I wanted to make the home my own. We took out a $250,000 mortgage for a remodel, but that was just the start.

Over the next few years, we went into more debt to buy two new vehicles. We also decided to buy property in the mountains as an investment, and I had promised my neighbor I'd buy her property if she ever decided to move - and she did.

On top of that, we had student loans to pay off and a few credit cards with balances. We wrongly thought that keeping a balance would help us build credit.

I was a professional bookkeeper at the time, but neither of us really knew what was going on with our personal finances. We had a good income and were always able to make our monthly payments. Our credit was good, and there weren't any pressing day-to-day problems, but we felt scared and knew something was wrong.

Tallying up the numbers and making a plan

In August 2001, John saw Dave Ramsey speak on TV. Ramsey is an author, radio host and motivational speaker that strongly advocates living debt free. John told me to look up his website, and once I learned a little more about Ramsey I signed up for one of his seminars in Phoenix.

The event inspired me to take action. When I got home, I tallied up all our debts and figured out that we owed over $500,000. That's when it sunk in -- we weren't doing that well financially.

At the seminar, I heard that the average American household spends $40,000 a year [editor's note - in 2014, the latest Bureau of Labor Statistics data available, the average household expenditure was $53,495].

So, we gave ourselves a combined $40,000 spending budget for the year and built up an emergency fund, paid down debts, saved for long-term goals and then paid off our homes.

Living the plan

Between diligently making payments and being very intentional with our spending, we were able to pay off all our debts by April 2009. An essential component of our plan was switching to a card-free system. I've found that using cash forces me to realize how much I'm spending so I'm less prone to wasting money.

I'll never forget the first time we made our monthly shopping run after switching to cash. It's a 65-mile trip to the major stores, so once a month we make a big grocery and supply run. Usually, we'd spend about $1,500.

After we finished at the last store, I had $300 in cash left. At first, I thought we must have forgotten something. We double-checked our entire list, but we had everything we needed. I think knowing we had a limited amount of money helped us avoid impulse purchases.

We've gotten the monthly shopping bill down to about $800 now. That's about $700 less than we used to spend -- over $8,000 a year in savings.

Since becoming debt-free, we've stuck to cash for our personal and business expenses. Each business has a debit card, but like with my personal expenses, it only gets used to deposit and withdraw cash.

We do have one credit card with a $15,000 credit limit that we use online, but I always make early payments so that I never owe the credit card company money [in interest on a balance]. I'll write a check for how much I plan to spend, and send it to the credit card company a few days before making my purchase.

Anyone can try it.

As a financial coach, I've worked with hundreds of people to help them get out -- and stay out -- of debt. One family I worked with had a great income, but they were spending about $10,000 a month, and a lot of that went to paying their credit card bills.

They were reluctant to stop using credit cards, so I helped them set up an alternative system that allows them to continue using credit cards while sticking to a budget. It's a simple envelope system with fake money. You break down your budget into several categories -- groceries, bills, entertainment, etc. -- and put your budgeted amount of play money into each envelope.

Take the envelopes with you when you're shopping, and remove the proper amount of play money whenever you make a purchase. If the envelope is empty, you can't make any more purchases from that category for the month.

It may sound a little silly, but it works because the system forced the family to be mindful of their spending. Having the physical experience of taking money out of an envelope, even if it's fake, can also help you visualize how your spending affects your overall budget. This alternative approach also allows you to take advantage of the benefits that credit cards provide.

At the end of the first month, the family had spent $4,000 less than usual. Now, their budget is down from $10,000 a month to about $4,000 a month.

Give it a shot.

If your debt load has grown too large to handle or you're worried about your spending habits, you may want to try something new.

Switching straight to cash worked for Odle, but you could also start with the play money envelope method paired with credit cards for a month to see how it affects your thinking.

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

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