Budgeting Tip: How You Pay Affects What You Pay
Did you know you could save money simply by paying with cash instead of credit cards? How well does this budgeting tip work? Studies show that when consumers pay with plastic they spend 12-18% more — that’s an additional $15 for every $100 you spend!
Non-cash payments weaken the connection between the decision to purchase something and the actual money you spend. Paying with a credit card makes spending money less tangible and puts distance between the time of the transaction and the payment of the bill. The experience of paying for something that costs $1 and something that costs $1000 feels the same when you pay with the credit card, but you certainly feel the difference when you pay with cash. Researchers who study the psychology of money call this “payment decoupling”. The more transparent the payment method is to a direct outflow of money, the greater our aversion to spending.
Counting out and handing over your hard earned cash forces you to do a quick cost-benefit analysis — is this item really worth what I am paying? Automating payments for your bills is great, but when it comes to large purchases and discretionary spending, cash is king. Using cash for all your discretionary spending, nicknamed ‘cash-diet’, gives you an informal budget, encourages you to research and plan ahead for big purchases, and ensures that you aren’t spending more than you have.
Imagine you went to a bar with $20 in your pocket. It doesn’t matter if you’re tempted for a fourth drink after your third; once you’re out of cash, you’re done for the night.
While credit cards make it easier to spend more, they also charge fees and interest on the items you charge — a double-hit to your wallet. But cash is fee- and interest-free, and some retailers will even give a discount to customers who pay in cash. It may be less convenient, but that convenience comes at a cost.
Of course, there are times when paying in cash is not possible or you need to be able to buy now and pay later. In those cases, taking out a personal loan offers you the budget benefits of cash with the additional capital of credit cards. Learn more about when you should use credit cards versus personal loans here.
Next time you grab for your credit card remember that cash:
- Reduces impulse purchases
- Acts as an informal budget
- Encourages financial planning
- May discount the price