Cash versus Credit
Posted by Gail | Filed under Money Management, Psychology
Have you ever wondered if 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? Do a $200 pair of shoes give you pause to think if you’re spending cash more so than if you’re putting it on 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 ande 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…”
This is one of the big benefits of using the Magic Jars to keep your spending on track. Because you’re dealing in cold, hard cash, you’re more likely to weigh your priorities carefully, especially when you are thinking of buying something that isn’t essential. As the authors say in their study, “The outflow of money is very vivid when individuals use cash making it painful to part with …cash payments are more likely to be used for justifiable necessities and less likely to be used for frivolous luxuries which may accentuate the pain of paying.”
Add the fact that the Magic Jars make is very clear when you’re getting to the end of the money and suddenly Needs become far more important than Wants.
Such a simple idea: being able to see when the money is coming to an end. So why is it that if we know we need to live within our means, and we know that money runs out, we are so willing to waste it?
If everyone has access to free banking (not everyone does, I know), why does anyone pay for banking transactions? If everyone can get from point A to point B in a car that costs just $160 a month, why does anyone plunk down $549 a month in car payments? And if a $40 pair of shoes will do the job, why are we willing to spend $240 on a pair of shoes?
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 cry about how much debt they have. They sigh despondently when’s 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. (Sure, $200 a month may seem like not too much, but that’s $2,400 you could have put in your retirement savings plan, so don’t tell me you don’t have any money!)
Those same people are quite willing to buy a new snappy pair of pants, a lovely set of dessert dishes, or their 37th pair of shoes. Whazzup with that? Why has consumption become the main way we feel better about our lives?
No doubt the deferral of payment has a big part to play in desensitizing us to the pain of payment. 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 track 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’ve spent 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 an equal amount of time be spent in considering and tracking how you spend it?
May 26, 2009 at 7:20 am
Great advice…I like to use a travel visa for all my purchases to earn the points…(TD has a great travel visa)…BUT, I track each and every thing I charge so I know exactly what to expect on the bill…also I keep the limit low so there is no chance of spending more than I can pay off at the end of the month…works well for me…I don’t spend more than I have and I don’t pay any interest…and I earn the points I want for my next trip…win win!!:)
May 26, 2009 at 8:01 am
We used to charge everything on our Canadian Tire Mastercard to get the extra CT money, but by the time the bill came in we had to scramble to find the money to pay the bill. We always paid it every month but sometimes had to use a line of credit! Now for the past 3 months we have been using the jars, we still use the credit card but we now have a jar for it, so as soon as we get home, the money we spent comes out of the appropriate jar. Now when the bill comes in we have all of the cash for it! It has changed our life, in the past two months we have been able to save more than 4 times the amount that we ever thought we could just by paying more attention to what we were spending.
May 26, 2009 at 9:06 am
I just arrived home from 11days in Paris and England.
By budgeting and saving before I went, I was able to bring all my travelling money in cash.
2 items went on my credit card (which had a zero balance when I left) and by using cash the remainder of the trip I was able to ask “do I or anybody else really want a Paddington Bear full of caramels?”, etc.
I returned home with a few very nice souvenirs, a known amount (as opposed to a surprise amount) on my credit card and enough euros and GBPs to pay for my credit card amount.
It was a nice relief to NOT come home with a bunch of tacky tourist crap and not to have a large bill awaiting me.
Cash is the only way to go!!!
May 26, 2009 at 9:24 am
Last month I started doing as nicki does. If I put on credit something from one of my jar categories I have to already have that much IN the jar and when I get home, I transfer that money to my CC jar and pay it off at the end of each week. It’s a few more steps but an interesting way to combine the jar philosophy with using a CC but keeping a zero balance.
May 26, 2009 at 9:27 am
I have been wanting to move to the jars for a while now. We do everything else, and manage to stay on budget, but I am always over in one category and under in another. Not a big deal, except for the fact that I always have a nervousness about the potential that it’s not going to balance in the end. I am about to be laid off for the summer, so we are building our account to be where it needs to be so that it is not noticeable to our budget. So far so good, but I know that next year I can do better (I am a teacher, so it’s not like this is an unplanned lay-off! Just my first year and I didn’t plan well enough for the summer this time around).
My fear with going to the jars is that currently, whenever I have cash I tend to spend it much more freely. It’s like my wallet calls my name, particularly for treats. I seem to think to myself, “oh yeah, I have a $5 in my wallet, I could stop for a coffee…” and inevitably do. If I have to pull out the debit card and access my bank account I seem much less likely to buy anything during the week. This could also be because I have mentally separated my cash spending from my debit spending and it needs to be an all cash method for this shift to take place.
Has anyone else felt this way? I know my husband says the same thing about when he has cash in his wallet. Is the trick to keep them in the jars at home unless a purchase is planned before you leave the house?
I am also trying to figure out how many separate accounts it makes sense to have. Currently we have two savings (one for each, which get auto-debited each month) and one chequing, where everything comes out of. The savings have not been touched yet, but it is undecided what it is actually for. I hear of people having car accounts, EF accounts, major purchase accounts, etc. I bank with PC so I could just add more if it simplified things.
I guess my question to all of you would be: how many bank accounts do you have, and how do you “label” them for your own organization?
Thanks:)
May 26, 2009 at 9:34 am
I agree with Gail that for a $200 pair of shoes I’m much less likely to buy with cash, but I also agree with Marcie that on items less than $10 I’m much MORE likely to buy them if I have cash in the wallet! Especially if the cash is in the form of toonies/loonies.
May 26, 2009 at 9:53 am
This is very much like dieting … when you write down everything you eat, you tend to make good choices or are careful about the choice.
I do use my credit card to collect miles but my trick is that I pay off the credit card before my bill comes in. At the end of every week, I add up the slips and pay the card. I’ve collected my miles and don’t have a huge bill to show for it.
May 26, 2009 at 9:58 am
Hi Marcie -
I have the same problem with cash. Contrary to the study that Gail is writing about here, I personally find cash EASIER to spend cash than to use debit.
I have a free PC financial banking account (I don’t pay for transactions), so instead of magic jars we have separate bank accounts for joint expenses, emergency fund, planned spending and individual “allowance”. Because I have to find a CIBC machine or use debit to access my “allowance”, and because I can see a solid balance number when I do withdraw money, I find I don’t do so very often, and I’m really unlikely to use debit to pay for $1.50 coffee. I never carry cash – when I do it seems like it is instantly gone!
May 26, 2009 at 10:00 am
I’ve been finding using cash makes me question my purchases more, but only if I’m tracking it. When I neglect to track it, it still flitters away so easily, and I forget to question each purchase like I should.
June 1st the tracking notebook is coming out of my desk and into my purse to track ALL my purchases!
May 26, 2009 at 10:22 am
Marcie, I’m the same way…that $2 or $5 just burns a hole in my pocket! This month I switched to using debit only, and tracking everything in Excel…it’s been working much better for me. Of course, I wasn’t writing down where I was spending the cash, so that’s a big part of it too. Now I’m more accountable for where my money goes and I’ve stayed on budget all month.
I have to mention to that my 3 year old likes to impersonate Gail…whenever he sees her on TV he giggles and chants “Stuff! Stuff! Stuff!” Every time she says the “magic” word…cue more giggling!
May 26, 2009 at 11:20 am
I write down everything we spend in a book similar to the one that Gail gives people on TDDUP. I do this twice per month and at the end of the month break everything down to categories. It doesn’t matter if we spend cash or use the CC – money is money. If we don’t have a receipt we write it on a slip of paper and it goes in our receipt box – even if the amount is only a few cents. We don’t have a budget, we do have automatic savings each month for both retirement and planned spending. Most months extra funds are added to savings because rarely do we spend all of what we made.
I have thought about making a formal budget – but my fear is that if I have a certain amount allocated to clothing or other stuff I will feel obligated to spend it (even if I don’t need to). The way we do things I think about every purchase before I make it – do I really need it (most of the time I talk myself out of buying stuff). I know a lot of people who could use a formal budget – but for some reason our way works for us. I guess everybody relates to money differently.
May 26, 2009 at 12:09 pm
I am with Marcie, the tiny cash amounts will get me into trouble every time. But if I know I don’t have the hard cash in my wallet, I don’t bother with the coffee or chocolate bar, and skip the convenience store all together, just paying for the gas at the pump with my card.
I find with the credit card, I know I HAVE to pay it every month so I use it sparingly. I use is strickly for life necessities like gas and groceries. And there is nothing like paying for the whole month’s groceries in one lump sum for making you think harder about buying extras, like cookies! It hurts! BUT because I refuse to pay interest on these consumable items, it really does force me to make more thoughtful choices about what I am willing to put on that card. And to top it off — knowing that the big grocery bill is coming I tend to avoid other shopping all together!
That having been said, I suppose if I really didn’t connect the purchase with my immediate cash (if I let myself believe it was free for 21 days), I might be more loose with the plastic — especially if I thought I deserved the treat or it was a great deal or something.
May 26, 2009 at 12:30 pm
In response to Marcie’s question:
I have four bank accounts. Maybe that’s a lot, I don’t know. I’d be curious to know what sort of bank account set up other people have too:
1) The Personal Savings Account (at a regular bank) – out of which I make all of my day to day transactions and into which I pay myself regularly out of the second account…
2) The Business Account (at the same regular bank) – I’m a sole proprietor and the only reason I got this account was so I could accept cheques in my company name. This is the account that grows and needs to be emptied regularly. (ie. money for longer term savings gets transferred into the third account…)
3) The Longer Term Savings (a virtual/online bank) – this account I opened in an effort to have a place to drop money that was less accessible to me. The bank is not my usual bank (noted above). It is virtual one (so I don’t have as much access to bank machines as I do with the other two accounts), plus I decided not to get cheques or an ATM card for this account. It is a place where money goes in (usually via electronic transfer from one of the other accounts) and doesn’t often come out. Under the auspices of this bank I have a regular savings account as well as a couple of term deposits. Every so often I’ll pull money out of this bank (ie. when a term deposit matures), and drop it into an RRSP at my financial advisor’s office (I guess you could call that the fourth account) where it will not be touched until I retire…
4) RRSPs/Investment Account – this fourth account is for stocks and bonds; more risky and/or long term investments.
I am really at the point where I could close the account at the virtual bank because I’m pretty good with my money and I don’t feel I necessarily need the added separation of that money from my day-to-day account. Also, from a paperwork point of view, I’d really like to have one less statement to keep track of especially as I can do all the same things I do at the virtual bank with my regular bank. Never hurts to experiment though. It’s your money afterall…do what’s right for you. It doesn’t cost you anything to start a new bank account, just don’t apply for a line of credit, credit cards, ATM card or cheques if you want this account to be primarily for incoming and not for outgoing.
May 26, 2009 at 1:21 pm
Gail,
Did you write this post for me today? I cut up my one and only credit card yesterday after a bank representative indicated to me how much better it was to have a credit card at 19% with rewards than to have a credit card with no rewards but at 11%. Honest to Betsy, how did I get convinced to take a rewards card knowing that I am not good at paying off the card in full.
Just one other thing that you have said here before Gail but transferring a balance from a credit card to a secure line of credit might be okay under certain conditions, ie if you know you are not ever going to use the credit card but a financial representative suggests this to you because they know that most people will run up their credit card yet again. For the consumer, it just means bigger debt, for the financial institutions it means more interest.
There was only one disadvantage of cutting up my credit card last night. I went to work till 11:00 p.m. and expected to use my debit card to take out cash to pay for a taxi home. The bank’s website was down and I had to walk 20 minutes home. Walking in the dark after 11:00 p.m. gave me time to think and from here on in I will have a little emergency cash tucked away in my wallet.
May 26, 2009 at 2:02 pm
Good message Gail!
Marcie~I can’t say I’m on the same page with you and others here. Whether I have cash in my wallet or my CC’s I still hear Gail’s voice in my head ‘do you really need that?’ I drink my coffee at home and don’t eat sweets – so am not tempted with them while out. Live in the boonies so no major shopping available.
We have a savings account, chequing account, RRSP’s account, and TFSA’s for each of us. The first two are those we use most.
Wanda~I switched our TD CC from the lower rate to the higher one as it is always paid in full at the end of the month and with the higher rate at the end of the year there is a cash rebate. Besides, we don’t use our cards much and know we won’t get into trouble with it.
Please, do keep some cash tucked away in your wallet – don’t like to hear of you walking so late at night by yourself!
May 26, 2009 at 2:41 pm
Wanda:
The rules of going out, never leave home without ALL the following:
- one bus ticket
- enough change to call for a cab (25-50 cents)
- enough money for a cab ride home
Sometimes combining the bus ticket and the cab ride helps!
May 26, 2009 at 2:48 pm
I rarely use cash. Most of the time when I use cash will be in situations where I can’t use my credit card. I only use my debit when I can’t use my credit card.
In the end it’s all about being aware. I use a computer program that uses the “jar” methodology. I usually have a rough idea of what I have for groceries, clothing, entertainment and random things. I definitely know when things are getting low.
Using cash is a pain. If you’re going to go for grocery shopping and other things you have to make sure you have enough cash on you. I just know what I can spend, and that’s that. Swipe the card (or tap it) and you’re good to go.
It’s also way easier to balance your budget when you have numbers online for your accounts then to go and count up your change.
If you have any sort of discipline I think cash is just a hassle.
If you’ve been in the mindset where you just bought whatever, swiped your card and forgot then I can see how having to use the cash could have a rehabilitating effect.
May 26, 2009 at 3:07 pm
Cash, credit, it doesn’t matter. Wife still wants to buy whatever is on sale. sigh sigh.
May 26, 2009 at 3:24 pm
Geoff – maybe your wife needs to be set up with Gail’s Jar System…
May 26, 2009 at 3:30 pm
Re: bank accounts…
My boyfriend and I have way too many bank accounts, but haven’t figured out how to remedy this yet.
Me:
Bank 1 – Chequing, Savings, TFSA, MasterCard
Bank 2 – RRSPs
Bank 3 – working out the details of a mortgage?
Bank 4 – Chequing
Him:
Bank 4 (again) – Chequing
Bank 5 – LOC, Savings
Us:
Bank 4 (again) – Joint account (for rent, utility bills, and car payments)
May 26, 2009 at 11:15 pm
Geoff– you made me smile.
May 26, 2009 at 11:19 pm
I like using cash, but sometimes i find it hard to keep track of it. most of the time i just make sure we are within our monthly budget (using excel budget calendar). i like using CCs just for the points. last weekend we were able to get our airconditioner paying only 25% of the price because we used our rewards points.
May 28, 2009 at 10:54 am
Catherine and Marie, Thanks for the tips…..I now have a ‘cash stash’ for that all important taxi ride home late at night!!
May 28, 2009 at 1:21 pm
For the discretionary portion of my budget, I’m definitely a cash kinda guy. I budget $100 a month for transport (gas, bus tickets, etc) and $300 for entertainment (which I think is pretty generous, but it’s amazing how easy it is to go through!). I tend to take these out as cash. I find it a good restraint to know that if I buy a nice bottle of wine or go out for dinner (my two most typical indulgences) that it’s going to mean that much less money for similar indulgences later on in the month. Now there have been months where I’ve treated friends to dinner a couple times, bought some nice bottles of wine and maybe a book or two, and run out of money by the 15th… it means a pretty tight and cheerless rest of the month, because I refuse to compromise my goal of being debt-free by May 2011 (and I’m still on track – yay!). It’s a great way to encourage both mindful spending and moderation
May 29, 2009 at 7:03 am
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