How the ‘Cashless Effect’ Makes it Hard to Budget

The ‘cashless effect’ describes people’s tendency to buy more products and pay more for them when not handing over physical currency. SciTechDaily has explored the decades-old science behind our understanding of it, and the detrimental effect it can have on stretched budgets.

Elizabeth Hirschman—a leading theorist in economics and marketing—first studied the cashless effect in 1979, surveying customers in different branches of a department store chain to see which products they had bought and how they had paid. Her analysis showed people using credit cards or store cards made bigger purchases than those using cash, and individuals with both credits cards and store cards were the most lavish spenders.

Research since—between 1979 and 2015—has supported her conclusion that people who use cards spend more than those using cash, and are additionally less likely to recall their past expenditure and more likely to make unplanned, indulgent and unhealthy purchases.

Various theories have been advanced to explain the cashless effect. In 1986, Richard Feinberg suggested classical conditioning, with his research finding people shown the Mastercard logo alongside products such as clothing and typewriters were more willing to buy them and pay more for them than those shown the products without the logo. SciTechDaily notes later studies on the subject has been mixed, with some replicating Feinberg’s findings while others did not. His conclusion was that the cashless effect stemmed from an association of credit cards with spending, reinforced by the positive feelings linked with spending money to buy things.

A more popular hypothesis is that credit cards enable our buying behaviour by reducing the psychological pain of paying. The ‘pain of payments’ is felt keenly when handing over a cash—a physical manifestation of wealth leaving—whereas card payments render the reduction of personal wealth invisible and thus more comfortable. The pleasure of buying is thus uncoupled from the pain of paying.

So, how can people use this awareness of the cashless effect to help manage their finances? A recent TikTok trend has revived the popular budgeting method of placing cash into envelopes labelled with essentials, such as rent or food shopping, and other optional categories such as treats or savings. Harnessing the physical nature of cash can help make spending visible and mindful, and ensure the basics are covered before non-essential payments are made.