Why people tend to spend less with cash than when they use credit

What debt is in most situations is denial. You have already spent the money, you just aren’t emotionally admitting it. – Dave Ramsey

I was listening to The Dave Ramsey Show this week when Dave made this statement. I had never really thought of debt in terms of denial before.

I believe this is why people tend to spend more when they use credit as opposed to when they use cash.

Cash is painful

Carnegie Mellon University did a study a few years ago that showed that when people make a purchase using cash, the pain sensors in the brain are activated. Interestingly, when those same people made purchases with a credit card, the pain sensors were not triggered.

It simply does not feel the same when you use credit. You don’t feel the purchase. When you hand over that $20 bill at the check out line, there is a very tangible reminder that you now have less money to spend than you did before. When you swipe a card, there is only a vague sense that there will be a bill coming someday, but you don’t really feel like you have spent money.

Fast food chains figured this out a few years ago. Why do you suppose they started taking credit cards? As a service to their customers? Hardly! Sales go up when their customers buy with credit. McDonald’s found that when they started accepting credit card purchases, their average sale went from $4.75 to $7.00. You see, when I swipe a card and they ask me to super size, it is easy to say “Sure, why not.” When I pay cash, and I know my wallet will be a little lighter when I walk out the door, I’m looking at the dollar menu!

Need to feel the purchase

The problem really is, as Dave says, when we buy with credit, we don’t feel the purchase. There is a real sense that we are living in denial. We have spent money just as surely as if we had pulled that $20 out of our wallet. But we don’t feel like we did, so much of the built-in common sense that would govern our purchases just disappears.

We don’t “feel” the purchase until the credit card statement comes several weeks later and we suddenly are hit with the realization that we have dug ourselves a hole. Sadly, all too often by that point we may not even remember what it was we bought.

But I pay my card off each month

I have often heard people make the argument that for them it’s ok to use credit cards because they pay them off in full each month so they never pay interest and they get the benefit of the rewards.spend less with cash

Well, in the first place, have you seen most bank’s headquarters lately? Banks are much better at playing the game than their customers.  You really aren’t going to beat them at their own game.

You might be the mouse that figured out a way to get the cheese out of the mouse trap without springing the trap. You might succeed for some time at this. Eventually, there will come a day when you won’t be quick enough and the trap will be sprung. The banks know this. They count on it. And they are very good at playing the game.

You really do spend less with cash

I have found this to be true even with using a debit card. It is why I am sold on using envelopes for common purchases like groceries. While your debit purchases are limited by what is in your account, it is still easy to spend more than you intended. There is a real psychological effect to looking into that envelope and knowing that there is only $25 left and it’s a week until pay-day. Handing the  cashier 10 Andrew Jacksons feels very different than swiping a card.

The denial of debt

When we buy stuff with credit we simply don’t feel it the same way as we do when we spend cash. In a very real sense debt allows us to live in denial. Credit allows so many to lead a lifestyle that is really beyond their means and while that may be pleasurable for a while, in the end it almost always leads to misery when the bills start to come due.

Spending cash may mean saying no to our wants from time to time. But the pain of handing those Andrew Jacksons over to a cashier saves us from the greater pain that comes from being deeply in debt.

This week’s challenge:

Try using cash and keeping the plastic at home for one month. At the end of the month, consider carefully if you spent as much with cash as you would have with credit.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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