Monday, July 06, 2009

Pay Cash, Spend Less (Month 1)

As I noted at the start of last month, our household went to cash- or debit-card-only spending for the month of June, 2009.

Until June, our household's spending was done almost entirely by cash-back credit cards; auto-debited utilities and such notwithstanding. (Check my "How We Manage Our Money" post for a few more details.)

Why use plastic? (All balances paid in full, of course!) Well, it's insanely convenient. It makes for one simple monthly payment. It allows easy record-keeping. There's no need to tote around cash or change. Plus that one- or three-percent cash-back adds up pretty quickly.

But then, of course, there are the negatives. Here's one everybody's heard:

A study by Dunn and Bradstreet showed that the credit-card user spends 12 to 18 percent more when using credit instead of cash. It hurts when you spend cash, and therefore, you spend less.
— Dave Ramsey, Total Money Makeover

And if you prefer, a more scientific slant on that:

In the case of credit cards, there are two additional reasons that the pain of paying is dulled. First, the payment is temporally separated from the consumption. Second, credit cards allow mixing of purchases where several purchases are combined into one payment such that a single payment is not attributable to a specific consumption. In sum, the extent to which people match more transparent payment forms to necessities or utilitarian consumption and less transparent payment forms to frivolous luxuries, using cash discourages spending and using a credit card or a gift card encourages spending.
— Priya Raghubir & Joydeep Srivastava, "Monopoly Money"

So Let's Look at June

So how'd it go in June? Well, here are seven expense categories in which I would've expected to see "cash only" effect some changes:

My Quicken reports have lots more spending categories than that, of course. But as I scanned through most of the others (utilities, insurance, and so on), I was able to discount many of them: We didn't go cash-only with utilities, for example. And even if we had, it wouldn't change what we spent.

But Was It Really Because of Cash?

As we can see, in the spending categories listed above, we spend just a nudge under 19 percent less in June than we did in the previous three months (averaged across March, April, and May). That, in my mind, is significant.

It's possible, of course, that we spent less in June on things like groceries and household items simply because we had "stocked up" on these items in May. If this was the case, it was unintentional.

Also: There's this thing with "special occasions" and increased spending. For instance, my wife mentions that May included some wedding-related clothing spending that otherwise wouldn't be there.

My response to this? Well, what she says is true. But every month has that sort of spending somewhere. There are no "perfect" months.

This is why I'm using a three-month spending average for comparison — it helps smooth things out just a little.

So Let's Try This Again!

As I see it, the best way to prove/disprove the impact of cash-only spending at MY household's level would be to keep doing it over several months. By doing this, I could compare a cash-only monthly average from June/July/August to our "use cash-back credit cards at every opportunity" normal spending average from March/April/May.

To be honest, I was really surprised to see "cash vs. credit" the spending difference be as high as it was for June. I was expecting to see perhaps an eight or ten percent decrease. But not much more than that.

Obviously, I was wrong.

Which is why we plan to do more cash-only in July! Let's see what happens...

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— Posted by Michael @ 9:46 AM


Our family has been using cash almost exclusively for three years now. My vote has been cast - it save money! Thanks for the post.


Interesting post, Michael. I thought it was relevant to a discussion happening over at Green Panda Treehouse, so I plugged it here:

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


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