To us hapless consumers, it seems newspapers are filled with articles about soaring interest rates and huge credit card fees. Nowadays, credit cards are everywhere, and very handy financially. Psychologically, though, they put us at a disadvantage.

Consumer studies show that when we use plastic to purchase, we tend to spend about 25% more than when we use paper currency. That thirty-day lag time between buying and paying back dulls the pain of the expense. As a result, it’s easy even for people with high income to get a little stretched on credit – or a lot.

Having a high-paying vocation or business is a good start to being wealthy, but keeping your wealth is quite another matter. Professionals earning hundreds of thousands of dollars can still be deeply in hock. In fact, if you manage your money badly enough, you can earn almost unlimited amounts and still end up in the poorhouse. Many imprudent celebrities and sport stars have to declare bankruptcy once their multi-million-dollar careers come to an end.

One of the biggest problems we face in managing our private economies is the increasing use of credit – a double-edged sword. In the old days, you paid cash for everything: credit was tough to get, and banks were quite jealous about lending their money. You had to prove your worth before you could get a loan. Today, banks are so eager to throw around easy credit that even our kids get credit cards in the mail.

So far, we’ve been cool with this, since our average earnings are a great deal more than any other generation in history. Because of this, we tend to take on far more financial obligations than our parents or grandparents did. We live in big houses, with big mortgage payments; we drive fancy cars, with fancy payment plans; and we splurge on all the modern necessities like internet, cell phones and cable.

Much of this lifestyle goes on credit, allowing us to get instant consumer gratification with delayed payback. We’ve also become quite adept at juggling credit, transferring our outstanding balances to and fro. If we’re a little short this month, we just pay the credit-card bill from the line of credit – and promise ourselves we’ll catch up next month.

The problem is that this lifestyle can slowly get out of control, and before you know it you’re deeper in debt than you ever thought possible. Suddenly the banks aren’t quite so accommodating any more, and your net worth is significantly reduced.

How to stop the slide before things get to this point? One way to keep a fun lifestyle from becoming a financial burden is to introduce a little simplicity. A good option is to get downright old-fashioned, and rediscover the benefits of cash.

This may sound heretical, or at least eccentric. But just try it. Instead of using plastic for your purchases, with all its seductive promises of “cash back” and “free air miles” – use plain paper money.

If you do, the first thing you’ll notice is that spending becomes much harder. You can physically see your hard-earned dollars deserting your wallet, and you’ll probably develop a protective sort of feeling towards them. The pain of loss isn’t deferred until next month’s statement arrives; it happens immediately, right now. If you’re like most people, you’ll find this a palpable disincentive.

To adopt this strategy, the first step is to decide just how much cash needs to be in your wallet – in other words, how much monthly spending you do. The bad news is there’s some necessary grunt work to be done, in the form of tracking your expenses. The good news is you’ll end up with a much better idea of what your money’s doing while you’re not looking.

The easiest way to track expenses is with a commercial software program, such as Quicken. But if you’re like me and can’t manage to figure out software, there are plenty of low-tech options: all you really need is a simple monthly spreadsheet to record what goes in and out of your bank and credit accounts. (There’s one on my website, www.alanmacdonald.ca, you can download for free.)

You need to be reasonably accurate with these figures, since efficient budgeting doesn’t work with made-up numbers. The most important category is non-discretionary spending: the monthly amounts which don’t change or go away, such as mortgage payments, utilities, car costs, school fees, transfers to savings, etc. This data is on your bank statements and credit-card bills.

Then you’re ready to tackle discretionary spending, which is where the “going to cash” strategy really has its value. Let’s say you have $1,500 a month left after paying the fixed bills. You and your spouse each load $750 into your wallets; and when it’s gone, it’s gone. No more spending until the next monthly top-up – unless the situation is important enough to warrant tapping into the line of credit. That’s a decision which ought not to be taken lightly.

The strategy is simple – and tough. But in these difficult economic times, when so much seems out of control, focusing on what we still can control can be a great confidence-booster. And one thing we can always influence is how, or if, we manage our cash flow. Doing that one thing well can make a huge difference in your financial life.

Alan MacDonald is an Investment Advisor with Richardson Partners Financial Ltd. Alan helps investors with over $500,000 of assets make smart decisions about money. For more information please visit www.alanmacdonald.ca or e-mail Alan at Alan.Macdonald@RichardsonGMP.com

Richardson Partners Financial Limited is a member of CIPF.