Nickeled and Dimed

The pyschology of spending is an interesting subject.  I’ve talked plenty of times about figuring out where you spend your money, but figuring out why you spend money is even more important.  One key area in the pyschology of spending is whether or not you spend more money when you use credit or debit cards to pay for things.

Nearly all personal finance experts will tell you that you are more likely to spend money when you use plastic instead of cash.  And there are plenty of studies to back it up.  For me, however, it is the exact opposite.  When I pay with cash, I am much more likely to spend money on things I don’t need or had no intention of buying.  And while I am certainly not smarter than the experts,  I think the same is true for many people my age, regardless of what the overall statistics show.

Why I advise paying with plastic over cash

1. I spend less money using plastic.

As I said above, I realize this is the complete opposite of what most finance experts will tell you.  And for you, this may be completely wrong.  But I think for those people who pretty much have their finances in order, it is pychologically easier to not spend as much money when you use a debit or credit card instead of cash.

When I pay with my debit or credit card, I think of it as money coming directly out of my account.  On the few occasions that I have cash with me, I think completely differently.  I think of the cash as already a sunk cost out of my account, and am much more loose with how I spend it.  I am infinitely more likely to spend money on things like fast food, movies, magazines, candy and all other unnecessary expenses when I have cash in my wallet.

For whatever reason, my mind considers my cash gone as soon as I take it out of the ATM machine, which makes me much more likely to spend it.

2. It’s harder to track your spending with cash.

Tracking your spending is incredibly easy when you use plastic to pay for everything.  Simply buy some software like Quicken, or use free internet software like Mint, and every purchase you make with plastic will be tracked with the touch of a button.

When you use cash to pay, you have to track your spending the old fashioned way, with pen and paper.  If I had to physically write down everything I spent money on, there would be no chance of me doing it.

By knowing my money will be tracked and monitored when I use plastic to pay, I am less likely to spend it on things I don’t need.  When I use cash, and I know I won’t track it, I am again more loose with how I spend it.

3. I earn rewards when I pay with plastic.

This reason is admittedly a slippery slope.  The potential to earn free air line miles or cash back could serve the opposite purpose I intend to convey with this article, it could cause you to spend more money.  But only if you aren’t careful.

If you can use them responsibly, though, using your credit cards could earn you some serious cash back or make your future trips much less expensive with free plane tickets.

In my opinion there are many benefits to switching to an all plastic financial system.  And in my experience, you will ultimately begin making less impulse buys when you use plastic.  But in order to get to a place where you can implement an all plastic system, you must first get your finances in order and be responsbile enough to use credit cards. 

I’d be interested in hearing your thoughts on this.  Do you find you spend more money when you use cash or plastic?

Please continue sending any personal finance related questions to centsabilitytowealth@gmail.com