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Apr. 7 2010 - 2:18 pm | 437 views | 0 recommendations | 3 comments

Don’t Leave Home Without It?

WASHINGTON - MARCH 26:  Jefferson Best loosens...

Image by Getty Images via Daylife

Credit cards have a relatively well-documented effect of making us looser with our money. When “spending” “money” is just swiping a piece of plastic, insulating us from the psychic pain of parting with crisp dollar bills, it’s easier for us to go hog wild and swipe until the strip wears off. So, a writer for Mint.com decided to go cash-only for a month.

What’s she found so far? Well, she’s actually spending more:

I’m one week into my cash-only month and so far I’m spending like crazy. Let’s see. $490 in one week? Not good. (I usually spend $300. What happened to those studies showing that people spend less when they shun credit cards?)

The problem is, I have not been able to shake the emotional security of credit cards – you always have enough money with credit – and that has lead me to carry around a ton of cash. Which. I. Spend. Immediately. I’m paranoid about running out of cash, which, ironically, is leading me to spend more and…run out of cash. Doh!

Here’s what I’ve learned so far.

* I’m much more generous with a wad of bills in my pocket. I’ve bought friends beer, paid cover charges for others, indulged in fancy coffee drinks and bought myself homemade beef jerky. Cash turns me into a big spender.

* I have no idea where half my money is going. I’m not in the habit of asking for receipts – my credit card tracks every purchase for me – and cashiers rarely offer a receipt on little purchases.

* Getting past my paranoia of running out of cash is probably my biggest impediment to spending less. I need to carry less cash, so I spend less.

Of course, any one person’s experience — especially one hyper-aware of the result she should be getting — is hardly representative of the general principle. But this does show the pitfalls of trying to use one piece of behavioral economics in isolation to improve your habits. It’s astute, I think, that she’s identified what seems like the (a?) major impediment to making her cash-only plan work.

I’d say I’ve found a similar effect in my own spending — I try to do as close to zero transactions as possible in actual cash. I like everything on my credit cards, earning frequent flier miles and tracked to the penny by, yes, Mint.com. I have an iPhone app in my pocket that tells me every cent I’ve spent this month and exactly where I am on various sub-budgets I have for everything from restaurants to my mobile wireless plan to movies and DVDs. Instant-feedback budgeting has cut my spending tremendously; reducing invisible and untrackable cash spending was the first big step in that process.

So, does this mean the “cash makes you spend less” idea is bogus? No, I don’t think so. Look at taxi cab tips, look at this study of NBA tickets (PDF), look at millions of Americans spending themselves into oblivion with plastic. The effect is very real… there are just other effects.

I don’t practice what I preach on using cash (and, well, I don’t really preach it either, see: this post). But if I didn’t pay my credit cards off in full every month, eliminating them from my life would be my first order of business. Every person’s financial situation and mind works differently. For some people, doing many more of their transactions in cash (or check — you have to have some way to pay bills) would be a huge improvement. If you shop a lot recreationally, for instance, this could slow you down. For some people, just using a debit card could be the answer. For me and other people who like a lot of control and data and feedback — and I swear this whole post isn’t a viral add for Mint.com — a solution like credit cards plus something like… Mint.com is a good answer.

The key, as in so many things, is a high degree of self knowledge, a willingness to experiment and track results, and the information to understand what biases might be driving your behavior.

I look forward to seeing if carrying less cash solves our writer’s problem… or if it just opens up new ones.

How do you restrict your spending? Any tricks?


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  1. collapse expand

    Actually, I found keeping my receipts and “balancing my checkbook” in a spreadsheet and comparing it to what I spent online on my bank account has actually reduced my spending. Every time I spent something, it gives me a visual reminder of what’s left in my checking account, which keeps me from overspending. Also, the work of having to enter in numbers in a spreadsheet may have a lot to do with that as well! This helped give a lot of feedback about where I was spending money as well… I cut down on money spent on eating out by bringing lunch to work all the time.

    What I do probably might not work for others, though. It really just relies on a lot of self-awareness and experimentation… just like in the related problem of trying to lose weight. What works for one person may not work for another!

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    I'm a freelance writer and blogger based in Brooklyn, NY. My background is mostly in politics. I've worked on the editorial boards of the New York Sun and New York Post. In 2006, I wrote a book, "The Elephant in the Room: Evangelicals, Libertarians, and the Battle to Control the Republican Party" (Wiley). I've also done my share of freelancing, for places like the Atlantic Monthly, The New York Times, Reason, and RealClearPolitics.

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