Lenny Credit

Studies show that using credit cards leads to higher spending. The reason? Your brain doesn’t experience the loss of funds. The card is swiped, but it’s only a mere motion of the hand. When you hand over cash, you feel the loss. It turns out that by paying more often with cash, you can trick your brain into spending less.

Credit Cards Loosen Wallets

To test this hypothesis, marketing professors Promothesh Chatterjee and Randall Rose conducted an experiment. Their results were published in the Journal of Consumer Research in 2011.

Chatterjee and Rose primed participants to think about either credit cards or cash by mentioning words like “Visa” or “ATM.” Then they were asked participants how much they’d be willing to spend on certain products. Participants consistently rated products as being worth more when primed with words relating to credit cards.

Bidding with Cash vs Bidding with Cards

In a similar experiment, MIT researchers Drazen Prelec and Duncan Simester had college students bid on three prizes: sold-out basketball tickets, regular-season baseball tickets, or a Red Sox banner. The person who bid the highest for each item would have the opportunity to buy it at the cost of the second-highest bid.

Half of the participants were told they’d have to pay in cash. The other half were told they’d have to pay with a credit card. The group that had to pay in cash bid significantly lower.

Carry Cash and Save Like a King

The solution to saving more money may be as easy as carrying more cash. Withdraw your monthly spending budget in cash at the beginning of the month. Put it in an envelope. When you need money for going out or buying groceries, take it out of the envelope.

When the envelope runs out, you’re broke until next month! Watching the stack of money shrink will shrink your spending. It’s psychological warfare on your wallet!