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
“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.”
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.”
Also see: Take Control of Your Money: 4 Steps to a Master Budget
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.
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.”
Also see: How Your Daily Starbucks Coffee Can Cost You $145,000
When Spending Cash Doesn’t Make Sense
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
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.
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.”
“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
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.”