When How You Spend Determines How Much You Spend

by Ron Haynes

CashIt’s always nice when a published study confirms what you’ve suspected all along: spending with non-cash forms of legal tender leads to overspending a budget busting! There is new evidence based on a study by The Journal of Experimental Psychology that cash discourages spending while using credit or gift cards actually encourages it. The results build on growing evidence that

The more transparent the payment outflow, the greater the aversion to spending, or higher the “pain of paying.”

Since most people avoid pain, voila! Enter the credit card stage left. No pain, all gain — at least for a few weeks. Even then, it feels so much easier to afford another $25/month than to come up with $1,500. The real pain comes later, when you’ve avoided reality for too long and the credit monster is knocking on the front door.


Cash is viewed by most people as the most transparent form of payment, while credit cards and gift cards obscure the real amount you’re paying because you’re not really paying at that moment. According to the study’s authors (Priya Raghubir, PhD, and Joydeep Srivastava, PhD), study participants tended to think of gift certificates, gift cards, and to a lesser extent credit cards as “play money.”

Personal finance bloggers could have told them that!

Still, it’s good to know that what we’ve suspected all along is actually true. One of the studies found that when participants were given a detailed shopping list they spent more when they had a $50 gift certificate than when they had cash only. In another study, participants were asked to estimate how much they would spend on a Thanksgiving dinner. Those who used credit cards voluntarily spent more but when asked how much they would spend on each individual item, the gap between credit card spending and cash spending closed significantly. Perhaps using credit caused the participants to blow off the total amount until they were confronted with the reality of individual prices.

Another study found that the longer someone held cash equivalents, the more they though of them AS cash. As the gift card spent more time in the recipients wallet, it actually increased in value!

How can we use this information?

1. Avoid using credit cards unless you have a strict, never violated, method of paying off the balance before the due date. Otherwise, the money you spend becomes “play money” and loses its reality. If you’ll go ahead and deduct the amount you charge from your checking account, you’ll always be able to pay the bill in full.

2. Don’t give gift cards unless there is a good amount of time between when it’s received and when it can be used. If it has an expiration date, be sure the recipient knows it.

3. If YOU receive a gift card, know its expiration date and let it marinate in your pocket for a while. Think about how much money is on it. Think about what it’s worth.

When simple brain manipulations can alter spending behavior, the warnings about the deceptive ease of non-cash payments seem to have have real merit — and they DO! Less transparent forms of payment tend to be treated like Monopoly money making them much more easily spent. Study after study continues to lend credence to the idea that non-cash legal tender (gift cards, gift certificates, credit cards, or trade credit) leads to budget busting!

What about you? How do you handle gift cards and gift certificates? Do they burn a hole in your pocket?

[tags]budget, credit cards, credit, debt, money, personal finance, spending[/tags]

photo credit: harry525

About the author

Ron Haynes has written 988 articles on The Wisdom Journal.

The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.