Consumers who have bank accounts have gotten used to paying for everything with a debit or credit card. People might carry some cash, but they rarely spend it.
But there's some research which suggests that paying for things with cash makes you think about the purchase more because the transaction is more real. You don't see the money going out of your bank account and into the cash register with a card. You do when you hand over cash in exchange for whatever you're buying.
Writing in the Journal of Consumer Research, researchers in Canada and the U.S. suggest paying with greenbacks might even make you appreciate your purchase more.
“While the convenience of going cashless is undeniable, it comes with an inadvertent downside – we tend to value purchases less when using a card than when we pay via the more ‘painful’ methods of cash or check,” the authors write.
No pain, no gain
The researchers pulled together a number of studies on the topic to measure the difference between a cash or plastic purchase. In one, consumers purchased identical mugs for $2. Half paid with cash. The second group used plastic.
Then both groups were told they had to sell the mugs, but they should ask the highest price they thought they could get. Those who bought their mug with cash asked for an average of $3 more than those who used a debit or credit card.
Another study measured the emotional connection to charities people had after making a donation, either with cash or with a voucher for the same amount. People who made the cash donation felt the stronger connection.
“The form of payment clearly influences the subsequent value of the purchase to the consumer, even when the objective monetary cost remains constant. Using cash or check seems to increase the psychological ‘pain’ or sacrifice of the act and creates more affinity with the product or brand,” the authors conclude.
So how does paying with cash help you save money? Maybe by making you think more about every purchase. If you have a finite amount of cash in your wallet, you can actually see the total shrink with each purchase. It's harder to do when you are running up a credit card bill or automatically debiting the money from your checking account.
Cash envelope budget
Many personal finance experts recommend using the “cash envelope system” of budgeting to keep spending under control. Personal finance writer Dave Ramsey explains how it works in his publication on budgeting.
“Let’s say you have budgeted $500 a month for groceries,” Ramsey writes. “When you receive your paycheck, write yourself a check for $250, cash it, and put the cash in an envelope. On that envelope, write “groceries.” No money—and we mean NO MONEY—comes out of that envelope except to pay for food at the store.”
Have another envelope for gasoline purchases and another for discretionary purchases. It's surprising how effective that can be to increasing a household's monthly cashflow.
And here's another tip to make your cash go farther: when you pay with cash, try to pay with the exact amount. If the total is $4.37 and you have 37 cents in your pocket, dig it out. Otherwise, you end up with even more coins that never get spent and accumulate in a jar somewhere.