 Feeling the pressure of living on a budget? A petty cash fund can help relieve the pressure and re-train your mind in sound financial principles.
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It might seem beyond obvious to say that you need to have money to live without credit cards. But in reality, most people do not have much money available on a moment's notice to cover unexpected expenses, impulse purchases, forgotten birthdays, and other expenses. That's precisely why most of us carry credit cards (or at least, it is the reason most of us signed up for our first credit card). So where do you turn when you forget someone's birthday, when you get invited to go out to dinner unexpectedly, when you have an opportunity to buy something now for less than you would have to pay if you waited until you need it? Most of us turn to our credit cards to handle these expenses. But if we want to live without credit cards, we need another solution: The petty cash fund.
"Everyone" knows you should have some money set aside for emergencies. I've mentioned it several times in this blog. Every financial book I've read, every financial seminar, every bit of counsel I've had makes it clear that it is important to have an emergency savings account. There may not be a clear consensus of how much you should have in your account, but there is little question that it is a necessity. But I know as well as anyone just how difficult it can be to establish such an emergency fund. And I know as well as anyone just how tempting it can be to dip into that money for things that really don't qualify as emergencies. What's even worse, however, is that even if you are able to establish an emergency savings account and keep yourself from using it except for actual emergencies, it's still not enough. You also need to have some money available that you can use whenever you need, for whatever you need, without guilt or remorse. Many businesses have a "Petty Cash" fund—a certain amount of money that can be used as needed without the need to budget for it in advance or keep detailed records of what it was used for and why. I believe that individuals should follow the same practice and will have to create their own petty cash fund before they can do away with credit cards completely.
Like your emergency savings account, the amount you should have on hand in your petty cash fund will vary depending on your financial situation. In general, I think you should have no less than $50, and more reasonably you should have around $250 to $500 if at all possible. Rather than deciding on how much money to put into the account, I think you should first look at your budget and identify how much you can afford to contribute to this fund on a monthly basis. If you're following my plan, you can look at how much you've set aside for your "BBB" budget item. Then, you should set aside whatever amount of money you'd be able to repay within about 6 months. The idea is to keep your petty cash fund large enough that it can be useful to cover life's unexpected (but not emergency) expenses whenever they occur, but small enough that you can fully fund (or re-fund) it in a relatively short period of time. If you don't have enough money to cover unexpected expenses, your petty cash fund doesn't do you any good. And if it takes you more than a few months to re-fund whatever you've taken out of the account, you won't get the sense of freedom from the petty cash fund that you should feel.
One of the primary reasons so many people find it difficult, if not impossible, to live on a strict budget is because they feel too restricted. In general, it's a good idea to know exactly where your money needs to go every month. But if you're facing a financial situation that is going to take years to recover, it's not reasonable to assume that you can go through life year after year without ever once spending money on something outside your official budget. A petty cash fund can go a long way towards providing a "pressure release valve" in your finances, allowing you to feel like there's at least a small part of your finances that can be used at need, on a whim, and without guilt or remorse. And, more importantly, a petty cash fund will help re-train your thinking about money so you can get into (or back into) the habit of setting aside money today for the things you might need or want tomorrow.
