I’m a huge fan of Dan Ariely‘s. Seriously. I find his books on behavioral economics (like Predictably Irrational) fun and fascinating. But one of his theories that I really can’t seem to get behind and incorporate into our lives is the idea that cash is more painful to spend than credit cards.
It seems to be one of Ariely’s favorite theories and he’s even made a slightly ridiculous little video about it. Check it out.
I’m willing to concede that Mr. Ariely, the expert, is probably correct on the average, but here in the PoP household, cash takes on a weird sort of mystical quality with its ability to appear or disappear (though let’s be honest it’s more likely the latter) without anyone being aware.
Let’s Look At An Example
Take a recent review of our mint transactions. (We try to do these weekly to check in and make sure we’re both on the same page.)
It took about 1 minute to review all the charges from the previous week… except for one charge. It was an ATM withdrawal of $60 from Mr PoP’s ATM card from a couple days earlier. Since I like to categorize cash withdrawals to make our personal income statements accurate, I asked…
Mrs PoP: What’s was this $60 in cash you pulled out for?
Mr PoP: I pulled out $60?
Mrs: Um… two days ago? Unless someone stole your card and used it for just $60 at an ATM.
Mrs: Haha… really? No recollection at all? =)
Mr: Wait, I got it! I needed $50 for a deposit for something my dad wants to get when he’s down in FL in a few weeks.
Mrs: Okay, that’s cool. And the other $10?
Mr: (Checks wallet) I have $7 left. No idea where the other $3 went.
… later … Mr PoP sets $7 down next to Mrs. PoP
Mr: You should take this. It’ll disappear otherwise.
I think we categorized the $50 as shopping, and went out for ice cream with the other $7 so called the last $10 eating out. But the classifications aren’t really the point.
Our Cash Memory Is VERY Short
It’s not just Mr. PoP. I’m the same way. I earned a fair amount of money babysitting in high school, but only ever deposited the checks. Those were easy to drop into my bank account and save. The cash on the other hand (and boy there was a LOT of it – at least in terms of what I had in the bank at the time), I have no idea where it went. There were a fair number of Wild Cherry Pepsi’s and bagels from the school cafeteria, and I remember that someone stole a $50 from me. (I had been saving it since I thought it was cool to have.)
Once I started getting paid via direct deposit and using debit and credit cards exclusively, all of the sudden there was a lot less waste in my spending (and not coincidentally fewer lbs around my midsection).
Our Credit Memory Is Long (And Getting Longer By The Day)
In contrast to cash that we can forget where it went in (what feels like) a matter of mere moments, our spending on cards is being tracked and archived in our mint account, which has been active since 2007. That’s almost six years of transaction history; not bad when you consider we’ve only been married for four years.
Yes, there are other benefits to using cards, especially rewards cards when you’re not carrying a balance or paying interest. But the biggest benefit for us is the auto-magic tracking whenever we use cards instead of cash for our spending. The cash back rewards are just a bonus.
Know Thyself, Especially When You’re An Outlier
Reading some of Dan Ariely’s stuff, he makes it sound like we’re complete outliers in this sense. And with companies like Target offering 5% off all the time for a branded debit or credit store card, it’s clear that those companies feel like those that spend with cards (and branded cards in particular) buy a higher volume of merchandise to make the discounts worthwhile.
But from our spending history and patterns, we know that cash has a certain “poof” quality in our hands feeling more like money that’s already been spent (and thus who cares how it’s wasted) in comparison to money that we know is going to flow immediately through to mint and be tracked. So instead of trying to fight it and apply advice of experts like Ariely and Dave Ramsey that preach the “use cash” gospel, we’re just going to go with what works for us.
It does, however, make me wonder…
How much of an outlier are we in the pf community for cash disappearing? What’s your preferred payment method and why?