Money can be a magical thing, and in today’s world the consumer is more empowered than ever before. You can swipe, tap, touch, and even just look at your phone to pay with ApplePay. There are so many ways to pay that now you don’t even need to carry a wallet or purse. This new age of financial freedom is truly wonderful, but being financially savvy might mean to spend cash as much as possible.
With these new payment options people are liberated from their wallets and having to lug around cash all day, but it also further separates the consumer from that feeling of physically parting with their money. It is much easier to purchase something online for $50 than it is to hand over $50 in cash to someone.
Over the last decade, scientists have studied the spending habits of individuals using cash for purchases and individuals using cards or other forms of payments. They found that, on average, consumer spending increased by over 40% when people used cards or other digital forms of payment instead of cash. That’s an astonishing rate, but it gets even worse when you throw in credit to the mix.
Not only are you far more likely to spend over budget by using a card or electronic forms of payment, but you’re 83% more likely to spend more when it’s on credit. That’s truly terrifying. Drazen Prelec, an associate professor at MIT agrees. In his research about the psychology of spending, Drelec stated that “credit cards are insidious because they disconnect the pleasure of buying from the pain of paying”.
Credit cards and electronic forms of payment are not actually evil. You can use credit to make major life purchases like a car or home that wouldn’t make sense paying for in cash (imagine the looks of curiosity as you approach a dealership with a Bond-villain-style briefcase full of cash). Additionally, credit can also be used to get rewards like airline flights and gasoline.
Digital payment systems, debit cards, and credit cards can all be wonderful tools to enable the consumer to be more financially free, but we all need to understand their power and try to only use them when necessary. Try spending in cash as much as you can and also limit your use of credit.
If you don’t have the money right now to buy that $400 sound bar for the living room, then maybe you don’t really need it. Having physical cash in hand will make it harder to part with your money, and that’s a good thing. One of the simplest tricks is to know how much you want to spend over the weekend and just take it out in cash.
Reconnecting with the feeling of physically handing over money can be a great deterrent in the ongoing fight to not blow your budget.