Psychological Spending

Posted by: Michael S. | Dec 17,2007


There’s only one week of Christmas shopping left, so many of you out there may have already gotten your Christmas shopping done.  If you’re like me, however, you leave some of those gifts until the last minute.  Hopefully you haven’t put those gifts all on credit, as the Experts on Credit have advised.  We’ve told you here that in order to budget effectively, you should only take as much cash as you are willing to spend.  It can be risky to carry around wads of cash, but it has fewer long-term risks than putting huge expenditures on your credit card every holiday season.  

There’s another reason that you should be taking cash instead of credit, or even debit.  Using a debit card has the same psychological impact as using a credit card: i.e. it doesn’t entirely seem like real money. Say you owe $75 on a gift.  You hand over a debit card, there’s one swipe and you’re done.  Now imagine if you have cash.  You need to count tens and twenties and dollars – it’s a longer process and more tactile.  You get a better sense of just how much you’re spending, and as a result you’ll be less prone to overspend

Yes, there have been studies about this.  In the same study, it shows that most people are still paying off the Christmas spending from the previous year.  The median Christmas spending is thought to be around $600.  The median APR is 20%.  $600 a year over a five year span is $3000.  With an APR of 20%, paying the minimum balance on the credit card, which is also the norm, will take years to pay off.  You’ll pay around $150 each month, hardly putting a ding into the balance, especially if most of that payment goes to finance charges. Come next December, those gifts will still be on your card.  

The answer?  Small bills.  The more you have to count your money, the more you’ll be reluctant to part with it.  Use your debit card only once: to get money out of an ATM.  After that, be plastic free.  

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