People who use cash spend less because it’s hardwired in us to behave that way. When you use cash, you have an automatic budget because once the cash is gone, your spending stops. But there are deeper reasons in your psyche that using cash will get you to spend less. One is that a single cash purchase “hurts” a lot more than a single credit purchase does. Another is that shelling out cash every time you buy something adds up to more pain during the month than looking at one whopping credit card statement at month’s end.
Cash doesn’t make sense all the time, like with online shopping or paying rent and bills, but below we explain why people who use cash really do spend less.
1. Cash Creates an Automatic Budget
If you spend only cash, you have an automatic budget. If on Monday morning you put $100 in your pocket and that’s the only money you can spend all week, you’ve got a budget. Once the $100 has been spent, you’re out of money and you stop. That hard limit is a concrete reason to spend less on Monday morning. You’ll know at the back of your mind that you’ll need some cash on Friday night.
We spoke about spending cash vs credit with Dr. Erik Angner, philosopher and behavioral economist at George Mason University and author of the book, A Course in Behavioral Economics.
“You can budget even if you have a credit card,” Angner said. “You can tell yourself, I’m only going to spend $100 on food this week, or I’m only going to spend x amount on alcohol or whatever. But it’s a lot harder to do with a card, because you can keep swiping that card. Until you hit zero, the bank will let you swipe it. Whereas if you have $100 in your pocket for incidental expenditures, like things other than rent and bills, then you’re going to come to a stop and then you’re not going to have any more money. It’s easier to do this with money in your pocket than it is to do it in your head. It’s harder to violate your own rules.”
The automatic budget idea does seem to resonate with some consumers.
Brian Welsh of Dover-Foxcroft, Maine says, “When the cash in my pocket is gone I’m out of money. Cards seem like a bottomless well sometimes.”
Sarah Hudson of Columbus, Ohio agrees. “I guess I’ve never thought of it as a way to spend less as much as a way to not over-spend. When using cash or a debit card your balance is real time. Which means you don’t spend $30 on dinner that you don’t have the day before pay day. I see the credit card as the ultimate crutch for immediate gratification.”
Also see: 7 Best iPhone Budget Apps
2. Cash Makes You Feel the Loss More Fully
Loss aversion is the idea that when you lose something, you feel the loss a lot more than when you make a similar gain. As an example, if you find $10 on the sidewalk it might make you happy for a few minutes or a few hours. But if you leave $10 on a park bench, that might make you curse yourself for the rest of the day. Similarly, if you got a 3% raise, that’s great and it would likely make you happy for a while. But if your boss cut your salary by 3% tomorrow afternoon, you’d be absolutely furious. So loss aversion is the idea that it pains you more to lose an amount of money than you get in satisfaction when you gain it.
“What happens when you have cash in your pocket and you’re paying in cash,” says Angner, “is that you’re feeling the loss all the time. You get money maybe at the beginning of the week or month, but then every time you pay, you have to fork over money, and you feel that loss in a way that you might not when you swipe plastic.”
Loss aversion isn’t a new notion at all, but it does help explain why paying cash feels different from swiping a card. You feel the pain of cash more than the pain of credit. When you don’t use cash, you still know in your head that you have a certain amount of dollars in your bank account and that when you charge $7 for a latte, your bank balance will go down by $7. But you might not feel that pain as much as if you have to put seven $1 bills on the counter every time you buy.
David Lovejoy of Farmington, Maine agrees. “After a bad few years with too many credit cards I am now a cash only guy. No plastic means no end of month debts to contend with. Over spending is way too easy with those cards, when money just seems to magically appear.”
3. Cash Makes You Feel the Loss More Often
Apart from an automatic budget and the idea of loss aversion, there’s another psychological phenomenon called “bundling” that makes people who use cash spend less. Bundling has to do with how you feel gains or losses when they happen together.
“Here’s how I like to think about this,” says Angner. “If you’re in a totally dark room and you turn on a light bulb, all of a sudden there’s a huge difference. You can see. That’s wonderful if you’d rather not be in the dark. If you add a second light bulb of the same wattage, you’ll experience a small change in brightness, but the difference is not going to be that large. It’s not going to be as large as going from zero light bulbs to one. Going from one to two makes a much smaller difference than going from zero to one.”
There’s something similar that occurs with money. What happens when you pay in cash is that you experience a loss every time you buy something. If you get a latte every morning, you fork over $5 each time for every day that month. That’s a lot of little losses, and a lot of pain.
“If you’re like me,” says Angner, “you’re always surprised at how much money you spent during the month. It harms you. You feel the loss. But the loss you experience and the pain you experience when you get charged for 28 lattes at the same time isn’t 28 times the loss of one $5 dollar bill. It’s like if you light a light bulb every night, you get a lot of benefit. If you light 28 light bulbs one night a month, that’s good that night, but the total benefit of the lights is going to be a lot lower than that of 28 light bulbs lit 28 different nights.”
When Spending Cash Doesn’t Make Sense
In spite of the tendency to spend less, there are still some very good reasons for not using cash. For example, cash isn’t convenient. People who don’t pay with cash can take advantage of pay at the pumps. They don’t have to make as many trips to the bank or to ATMs. It’s impossible to shop online when you pay in cash, and it’s often easier to get better deals on higher quality products by shopping online. Then there’s security. If you lose your credit card you cancel it and get a new one. If someone uses your card without authorization, the bank will generally reimburse you. Your money is still there. If you have $100 in your pocket and you drop it, it’s gone. You can’t call the bank and get your $100 back. Finally, some people get airline miles or other rewards when they spend on a credit card.
Hugh Mclaughlin is dead set against spending cash. “I use credit to my advantage. There are things that you must buy. Bills that you must pay. Groceries and medications that you need to survive. I say pay everything that you need to pay with a credit card that pays you cash back. Then pay the credit card off every month so you don’t pay the bank a dime of interest.”
Angner responds by saying there is no one-size-fits-all solution: what works for one person might not work for another. If rewards programs work for you, that’s great. But you need to ask yourself if you’re really saving money by getting those rewards, or if they’re just a drop in the bucket after you’ve convinced yourself to spend far more than you would without them.
“Credit card companies wouldn’t be in business unless the fees and charges for the average customer exceeded the benefits they hand out,” says Angner.
Using Cash at Least Some of the Time Saves Money
“I don’t think every person should necessarily use cash for every purchase all the time,” says Angner. “But this is the advice: There are some contexts where you’re more likely to spend than others, and those are contexts where cash is superior. So when you’re shopping for baby supplies for your child, you’re unlikely to go totally overboard. You can spend some time and find the best deal by shopping online. But then if you’re going out drinking with your buddies and there’s a danger that you might get drunk, which happens, maybe cash is better for that occasion. If you have a credit card and you overspend, you can just keep spending, which is bad for your bank account and for your body. But if you put a certain amount of paper money in your pocket and say, I’m going to drink until this is gone, then you might manage to stop yourself.”
Angner says people can use this technique with gambling also.
“When people go to Vegas and they’re inexperienced, they can put a certain amount of money, $10 or $100 or $1,000 in their pocket, leave their credit cards and debit cards behind, and say, I’ll gamble until this is gone and then I’m going to stop. That’s one way for people to make sure they don’t spend more than they thought they would.”
Also see: Man Loses Life Savings on Carnival Game
Drinking and gambling are both extreme examples, but using cash works with other non-need purchases like eating in restaurants or with coffee habits.
“I struggle with this, says Angner. “I’m a huge coffee addict. When I go to my local coffee shop here, I never need a latte. It has never been the case that I need a latte rather than a regular cup of coffee. A regular cup of coffee costs like $1.50 and latte can be $4.50. Those are contexts where maybe it would be better for me to carry cash. Because then I would really feel the difference between the regular coffee and the latte. Whereas when I swipe the card it feels the same every time.”
Save Money By Using Cash at Least for Incidentals
To save money, Angner suggests using your card for regularly scheduled purchases and bulk purchases and things you absolutely need, but using cash for all the incidental expenditures. The little things you spend money on without really thinking over the course of the day.
Andrew Dawson of Portland, Maine uses this approach. “Once I take cash out of the ATM, I consider it spent. I end up using cash for things like deli sandwiches or whatever, and when the cash is gone, I don’t spend as much. I have debit cards, but no credit cards. I built my credit in other ways.”
If you switch to spending cash for incidentals, you might find that you’re spending a lot more money on those things you really don’t need, like lattes or chocolate bars or soft drinks out of a machine.
“You buy a little bottle for $1.50 when you buy it from a machine, which is many times more than you spend if you buy it in bulk at a supermarket,” says Angner. “Using cash for those sorts of expenditures might really help you limit mindless spending on things you don’t need and that are probably harmful to you like excessive soft drink or alcohol consumption.”
If You Can’t Spend Cash, Put the Pain Back in Credit Cards
People who have a hard time going back to cash can use the principles of loss aversion and bundling to put the pain back into credit spending. For example, using a spending tracking app like Mint or You Need a Budget can help you feel the pain of each expense. People who track their spending with an app and check the app a couple times a day will be more likely to feel their purchases than those who wait to look at their credit statement at the end of every month.
To browse a few apps that can help you track expenses, check out our article, 8 Expense Tracking Apps That Help You Cut Spending.
However, Angner cautions that apps like this may be preaching to the choir.
“Any solution that involves taking action with the distant future in mind (like downloading an app and connecting it to your bank, mortgage, and retirement accounts) will work best for people who already think straight, act prudently, and don’t discount the future too much — but they are the people who are most likely to do well no matter what.”