Cash versus credit

How you pay for something affects how much you’re willing to spend.



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Is it harder to part with cash than to slide your credit card through the machine? Would a $200 pair of shoes give you pause to think if you paid for them in cash more so than if charged your credit card? You betcha!

A study in The Journal of Experimental Psychology says that shopping with cash discourages spending while using credit or gift cards actually encourages it. Fittingly called “Monopoly Money,” the authors of the study—Priya Raghubir from New York University and Joydeep Srivastava from the University of Maryland—say, “…using a less transparent form of payment such as a credit card or a gift card lowers the vividness with which one feels that one is parting with real money, thereby encouraging spending….”

If you did not have access to credit of any kind—no credit cards, no line of credit, no over-draft protection, no loans—would you be as willing to drop gobs of your hard-earned money on things like expensive shoes and fancy cars? Or is it the fact that you can defer feeling the pain of payment that lets you convince yourself that you need that shiny truck with the whopping monthly payment?

I’ve worked with a lot of people who whine about how much debt they have. They sigh despondently when they consider that they may never shake free of the burden. They cringe when they think about how much interest they’re paying every year. Those same people are quite willing to swipe their cards to buy a new snappy pair of sunglasses or a lovely meal in a restaurant.

No doubt the deferral of payment has a big part to play in desensitizing us to the pain of spending money we haven’t yet earned. If we can have dinner out with friends tonight, and not have to deal with the idea of paying the bill until two weeks Tuesday, it’s easy to swipe the card. And that’s why, if you’re going to use credit in any form, you need to be tracking your spending as you spend. It’s the only way to keep you in the moment and create a sense of real cost when you use credit.

All you need is a notebook and pen. Put your balance at the top of the first page and then make a note of every cent you spend manually so you always know exactly how much money is in your account. Whether you use a debit card or a credit card, deduct the amount you’re spending from your balance so you’re feeling the “pain” of having spent the money and you’re not tempted to spend the same money twice.

Yes, keeping track of what you’re spending takes a little getting used to. But it’s well worth it to keep your accounts in balance and your impulses in check. Just think about how much time you spend earning your income. Shouldn’t at least a small amount of time be spent tracking how you spend it?

7 comments on “Cash versus credit

  1. Its true ,borrowing for that new car instead of writing a cheque for that 3 year old one,or pulling out the card at a restaurant or that 20.00 bottle of Vintages wine .
    The reason that alot of people sabotage their financial independence.


  2. Another tactic, when you get home total your credit card receipts and move the money from your chequing to either the credit card or savings (so you have it on hand to pay off when the bill arrives)

    There's something about seeing your bank balance drop $250 that makes you more careful or sends you back to the returns counter.


    • Your right ,I wait for my statement,my 23 year old son pays his visa online weekly and watches his bank balance decline.


  3. I wonder if any studies have proven this to be true of younger generations. I'm 21 and have had a debit card since I got my first paper route at 9. When I have cash I seem to blow right through it… it doesn't seem like "real" money to me because it's not reflected on my online statement which I check most days and which I feel is the reflection how much I have. Cash is extra on top of that.
    Interesting that a number on a screen seems much more real to me than paper in my hand …


  4. Cash maybe king and best but without credit (and in the last decades, the profligate use thereof) how would the economy operate if people didn't spend their money? Isn't that why credit has ben popularized since the Great Depression?


    • The biggest benefit gained has been by the canadian banks.


  5. If you have a good grip on your spending habits, credit cards can be a useful tool. Like Katherine, I check my online banking frequently and watching my checking account drop when I pay off my credit card each month is enough of a reality check to keep me from spending wildly. However, when I make a purchase, unless it's a very small number (a couple of coins) or somewhere where cash and debit are the only payment options (such as most places in Chinatown), I always swipe my credit card. It's because putting my regular spending on my credit card will get me cash back; cash won't. At the end of 2011, I earned over $150 in cash back from purchases made on my credit card. I should be getting about the same in a couple of weeks when my 2012 cash back rolls in. It's not a huge number for a full year, but it's good motivation to make my credit card work for me. Anyone who's okay counting money as a number on the screen as opposed to bills in their wallet can do the same and as Ali says, it definitely seems to be a rising trend with the younger generation.


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