Create Better Spending Habits with Cash
Jul 17, 2024
The authors of research published in the Journal of Retailing say their findings ‘offer a simple solution for anyone looking to save money: carry more cash.’
The study—titled ‘Less cash, more splash? A meta-analysis on the cashless effect’—set out to explore whether the well-known phenomenon of people spending larger amounts and more frivolously continues to hold true as cashless payments have become more widespread and familiar. It drew from both academic and industry sources, combing the results of more than four decades of research spanning 71 research papers, 17 countries and over 11,000 participants.
Analysis showed ‘cashless payments were indeed associated with higher levels of consumer spending compared to cash transactions’, confirming the so-called ‘cashless effect’ persists in the current day and ‘the payment methods we use do indeed influence our spending behaviour.’
It doesn't matter whether you use a credit card, debit card or a buy-now-pay-later service—you are likely to spend more money using cashless methods than when you pay with cash.
The leading theory to account for the cashless effect is the ‘pain of paying’—a phrase coined in 1996 in a PhD thesis by Ofer Zellermayer—that describes people’s emotions when paying. With cash, notes and coins must be physically counted out and handed over, and the latest study’s authors observe: ‘Humans seek to avoid losses, and paying by cash sees us physically lose a tangible object.’ Nothing is handed over when paying cashlessly, thus the pain is greatly reduced… or at least delayed.
Picture this: You're at a theme park, excited for a fun day. You use your smartwatch to pay for snacks, souvenirs and rides. It's all so convenient that you don't realize how much you're spending until you check your account later and see that you have completely blown your budget!
The authors conclude that, in a challenging economic landscape in which ‘spending control has become front-of-mind for many people’, returning to cash ‘whenever possible’ is a valuable budgeting tool.
The increased friction felt when using cash could help people better control their money, even just by providing a moment to pause and consider whether a transaction is necessary. This could help individuals make more mindful decisions, saving money while they can in an increasingly cashless world.