Spend Less by Paying More with Cash

calendar iconOct 5, 2022


Writing for Money.com, finance journalist Julia Glum investigates the psychology behind how cash can support better budgeting, and why bigger bills can further discourage frivolous spending.

Glum spoke to consumer decision-making expert Joydeep Srivastava, a marketing professor at Philadelphia’s Temple University, who explained the theory of ‘mental accounting’ that governs how much humans value money depending on the situation. Glum gives an example of taking $100 of banknotes out of an ATM and earmarking it as money to spend at Starbucks for the month. Its physical nature is a constant reminder that it is a finite resource, and makes a person more likely to avoid overspending at Starbucks than if they pay using a method where the money is not visible.

The ‘pain of paying’ is felt with cash, when people experience negative feelings around handing over a physical thing of which they have a limited supply. This pain is significantly weaker when spending with credit cards or other cashless methods. The associated ‘cashless effect’ describes people’s tendency to then buy more products and pay more for them.

Glum posed the question of whether, having ‘written off’ a portion of money—for example as a coffee allowance—it could then become easier to spend it on other frivolous items that aren’t strictly necessary. Srivastava allows that ‘giving yourself the luxury to spend’ could lead to spending right up to the limit, even if that means buying unneeded things, but has conducted research that suggests this can be avoided by taking out larger bills. While people are quite comfortable to spend $20 and $10 bills, they are more reluctant to break $50 and $100 bills.

Economics and psychology professor George Loewenstein of Pennsylvania’s Carnegie Mellon University suggests cash can be broadly placed in the same category as debit cards, since both lead to an immediate deduction from a person’s savings. Credit cards and digital payments, he says, ‘enable one to go seamlessly into debt without realising what’s happening,’ since the funds accessed lack a well-defined form or limit.

Glum suggests cash can be a quick way of taking control of finances, since its use forces people to track their spending more closely. She also notes there are well-established psychological reasons why using cash can help people spend less frivolously. Her conclusion is that, in the longer term, people should examine the root cause of their overspending, and take steps to address it directly, such as planning their spending more carefully.

We’re always trying to balance the present versus the future. These small nudges—like, for example, the denomination or how we spend—all serve as visual cues to get us to be in the present or think about the future a little more.
"Joydeep Srivastava, Marketing Professor at Philadelphia’s Temple University
Last Updated: Oct 4, 2022