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Published: Jul 21, 2022 7 min read
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This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.

There is a certain type of sign — usually handmade, Sharpie-on-cardboard — that strikes fear into my heart the second I spot it behind a bar: “CASH ONLY.”

As a general rule, I don’t carry much cash. Not only is it a hassle to obtain, but it’s also germy and largely unnecessary, especially when options like Cash App and tap-to-pay are available. On top of that, paying with cash kind of sucks — I can feel myself losing money in a way I can mostly ignore when I’m simply swiping a card. It’s like a wake-up call, hard evidence that I’m splurging on something I probably shouldn’t be.

But after a recent happy hour, and an eye-opening look at the bank statement that followed, I realized that $15 cocktails can make a dent in my budget even more stealthily if I don't hit up the ATM before ordering them. Now I'm wondering whether going cash-only might be a way to trick myself into spending less.

Will I spend less money if I force myself to use cash?

I called Joydeep Srivastava, a marketing professor at Temple University who studies consumer decision-making, to find out what’s actually going on in my brain when I use cash. He told me it has to do with something experts call mental accounting, a theory that humans value money differently depending on the scenario.

Because of this, Srivastava says that using cash can indeed be an effective way to fool myself into budgeting. If I get $100 out of the ATM, thinking, “OK, this is my Starbucks money for the month,” I’m likely to limit myself to spending $100 on Starbucks for the month because I’ve mentally earmarked it, and the physical presence of that cash in my wallet is a constant reminder of how finite it is.

Unfortunately, the opposite can also happen. Because I’ve already told myself I’m devoting the $100 cash to frivolous purchases like my daily caffeine fix, it may feel easier to justify spending it all on items I don’t need.

A big concept in behavioral economists is the pain of paying, or the negative feelings we associate with parting with our hard-earned cash. Usually, Srivastava says, that pain is higher when I pay with cash than with credit cards or other electronic methods.

But when I've already mentally written off the money, the pain of paying is less.

“You say to yourself, ‘I have $100. I can spend it on anything I like’ … which you would probably not have [otherwise],” he adds. “Given that you’ve allowed yourself the luxury to spend, it could very well be that you’re spending up to the limit — even for stuff you probably don’t need.”

Interestingly enough, one way to curb this temptation is to take out larger bills. Srivastava has done research that shows people are reluctant to break $50s or $100s, whereas $10s and $20s are nbd.

“It’s this tussle between your long-term self, which wants to save, and your short-term self, which wants to indulge," he says.

That's where the denomination of the money comes in: It helps one "self" edge out the other.

On that note, George Loewenstein, an economics and psychology professor at Carnegie Mellon University, tells me he actually puts cash in the same category as debit cards because they “lead to an immediate deduction from one’s savings/cash stockpile.” Credit cards and digital payments, meanwhile, “enable one to go seamlessly into debt without realizing that it’s happening” because the funds are so amorphous.

While using cash can be a good short-term move because it’ll force me to track my spending more closely, though, behavioral financial advisor Dawn Dahlby says it’s not a fix for deeper issues.

“I don’t want to tell anybody to stop spending and just get cash out,” she adds. “Think through your spending. Prioritize your spending, and have a plan.”

Rather than waste my time schlepping to the ATM, Dahlby says I should find an app like Mint that will track my expenditures — and can ping me if I’m going overboard.

Loewenstein recommends a similar approach. In an email interview, he explained that he thinks it’s more powerful for someone to focus on taking steps that can save them money almost painlessly, like raising their insurance deductible, instead of cutting out things that might be cheaper but feel like more of a sacrifice.

“Trying to cut down on spending by cutting out small things is like trying to save money by turning up (or down, depending on the season) the thermostat — it causes a lot of small pains that may not be worth it,” Loewenstein says.

The bottom line

If I actually feel like my spending is out of control, I should tackle the root cause. But there are legit psychological reasons that suggest using cash more often could lead me to spend less on silly stuff.

“We’re always trying to balance the present versus the future,” Srivastava says. “These small little 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 bit more.”

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