In this month’s newsletter I want to talk about why paying in cash, especially when buying non-essentials, is the way to go when you need to stick to a budget.
The theory of “Pain of Payment” describes the negative emotions people experience when they are actively paying for a good or service. They feel a psychological discomfort associated with parting with their money. The more “painful” the payment feels, the less likely someone is to make a purchase. According to research, paying with cash usually generates greater “pain of payment” compared to using credit cards, since handing over physical money feels more tangible and real.
In comparison, going online to a retail website and hitting the ‘add to bag’ and ‘place order’ buttons is almost too easy – it sometimes doesn’t feel like you’re spending “real” money. Even if you buy something at an actual brick and mortar store, paying with a credit card and being ‘tap happy’ is comparatively quick and effortless. A person isn’t physically aware of parting with their money, and there is less of the pain of payment effect that is typically associated with cash transactions. It’s pretty clear that using cash as much as possible makes you more mindful of spending money, since you can physically see your funds getting depleted. Of course, there will be certain products or services which can be purchased online only for various reasons. For those, the smartest thing to do is use your debit card and track your purchases to get a real sense of how you are using your money. If you are serious about sticking to a budget, paying cash as much as you can, for your discretionary spending – everything that is non-essential – is a great idea to help monitor spending.
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