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Living on Cash to Avoid Debt?

By Ellen Chang

NEW YORK (MainStreet)--Living on cash has several distinct advantages for consumers who are seeking to slash their budgets by spending less and saving more money.

Using only cash or debit cards to pay for your expenses is becoming more popular as consumers are shying away from amassing large amounts of credit card debt and accruing interest.

Creating a budget that eliminates all non-essential expenses and evaluating it weekly helps consumers get started with this option, said Rakesh Gupta, a professor in the Robert B. Willumstad School of Business at Adelphi University in Garden City, N.Y.

Heeding the rule of paying yourself first is also critical, he said.

"This means setting aside a tangible sum, say 10% of each paycheck in savings or investments, before spending it," said Gupta.

Before you stop using credit cards completely, it is a good idea to set aside at least six months of savings and the cost of any potential repairs or emergencies, said Mike Sullivan, chief education officer for Take Charge America, a national non-profit credit financial education and counseling agency based in Phoenix, Ariz.

"The big advantage is you are never going to be in debt," he said. "It's a wonderful thing. A lot of people don't have the discipline and need to try this. It is a good alternative."

Paying for expenses only with cash is becoming a growing trend, but some people were forced into this choice when credit became tight and obtaining debt became difficult.

"We have just gone through an age whose hallmark was instant gratification, and the financial system made it possible through easy credit," Gupta said. "The result was mounting consumer debt to the point that people had negative savings. Then the financial crisis hit and easy credit dried up."

Eliminating or decreasing the use of credit cards can easily enforce a consumer to save more, Gupta said.

"If people begin to live within their means, with the provision for some savings, then over time those savings will accumulate," he said.

Boosting your savings is becoming more popular in this economy, Gupta said. For the first time in many years, consumer debt has declined and the savings rate has increased. According to the NY Federal Reserve, U.S. household debt had declined from $12.68 trillion in 2008 to $11.34 trillion in 2012, he said.