Cash versus credit - MoneySense

Cash versus credit

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


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?