It is true. Spending cash is painful to us, while using a credit card doesn’t quite feel real. Oh sure, logically we know that we are spending the money on that new television, iPad or boots, but there is a well-documented disconnect in our brains that makes it much easier to spend when we do it with a credit card.
Think I might be wrong? The average household credit card debt through the end of 2012 was $15,422. The average cash debt? That is $0, of course. With cash, you don’t want spend what you don’t have.
So why does it hurt more to spend our money when we hand over the cash than when we swipe the credit card? Well, believe it or not, psychologists have looked into this phenomena, and their studies came up with some pretty interesting results. The experts call it “coupling.” When we pay for something with cash, we associate the purchase with consuming something, our cash resources. When we use a credit card, that coupling doesn’t take place. There is no immediacy. We get our credit cards back after the transaction, so it doesn’t feel like we are out anything at all.
Add to this the fact that most of us pay our credit card bills online, and there is a further disassociation between making a purchase and then having to give up the money for it. Even if you are highly attuned to watching your bank balance get smaller with each paid bill, the pain of losing that money is delayed. It makes the transaction more disconnected and less real. The debt on the credit card doesn’t seem like a debt at all. There is usually little pain or urgency associated with it when we spend.
Think about it. Imagine you are carrying around a $50 bill, but you want to buy a cup of coffee. How likely would you be willing to break that large bill, an asset, to spend the two dollars for a cup of Joe? Probably not too likely. I bet you wouldn’t hesitate, though, to swipe a credit card, which could represent a bill of thousands (depending on your credit limit).
The trick is to put that pain of spending back into your awareness. The easiest way of course is to avoid using credit cards at all and instead pay cash. Using an envelope system to budget is one system that might work for you. You label a set of envelopes to represent different weekly or monthly expenditures, such as groceries, entertainment, or coffee, and place specific amounts of cash into each envelope. It gives you a good way of seeing, in real time, how much you are spending.
If using a cash only system is impractical or unsavory, then things will be a little harder for you to overcome the disconnect. Not impossible, though. You will need to train yourself to rethink what a credit card represents. When you use a credit card, you are essentially taking out a short-term, high-interest loan. Reinforce this in your mind whenever you make a purchase with a credit card, such a picturing handing over the same amount of cash to a smarmy loan officer or signing a document that gives away your rights to a financial future. It sounds harsh, but it just may be what it takes to make that credit card spending feel real.