We're all humans, and thus, all creatures of habit, which has a big effect on how we spend money and what we spend it on. Knowing the science and psychology behind what makes us spend money the way we do can help us control those habits that are keeping us from a better financial future.
The Psychology of Spending
It’s clear we have trouble valuing electronic cash the same way we value paper money. Here’s the nitty gritty when it comes to the psychology of spending:
We tend to spend more when we use credit cards
It seems like common sense to anyone who has ever made the jump from paper cash to plastic cards, but when we swipe, we tend to spend more. An MIT study proves it. There is now scientific evidence to suggest that credit cards can make us spend more.
In the study, participants were offered the opportunity to buy sought-after tickets to a basketball game. Some participants were only allowed to use cash or debit cards to make the purchase, while others were only allowed credit. What the study found is that people were willing to pay almost twice as much when using credit as they would if restricted to using only cash. It's possible that in the age of electronic money, we have become conditioned to react this way when certain stimuli appear.
Spending cash makes you appreciate what you buy more
We all know it can be painful to part with cash, but a University of Toronto study says this also makes us grow more attached to the stuff that we buy. In the study, participants were offered a chance to buy limited edition mugs. The researchers then attempted to purchase the mugs back. What was found is that those who purchased their mug using cash ask for a higher selling price than those who paid for it in credit when it came time to sell the mugs back—in short, they valued the item purchased more.
A lot can go wrong with paper bills, but the convenience of credit cards comes with a price. If it's easier to spend money, you'll spend more of it. Economists and marketing experts often talk about the term frictionless spending. The idea is that the easier it is to pay, the more you'll spend. But sometimes, the friction is so low that the speed is too fast and it can be hard to maintain control. Frictionless spending can cause us to spend a lot more and a lot quicker compared to the traditional way of paying with cash.
Be careful with rewards cards
Rewards cards can make using plastic seem like a better deal than it really is. There's an ever-growing variety of credit cards to choose from out there, and while choosing the best card is important, sometimes incentives come with risks. The problem is that those rewards, like that tempting signup bonus, can end up costing us more than we can save. If saving is your goal, rewards cards may end up steering you in the wrong direction.
Final Thoughts: Credit and Spending
Credit cards are a necessary part of life. They aren’t something you should try to shy away from. That said, it’s important to understand your spending habits and how they play into some of the research described above. The important thing to note about credit spending is always to do it responsibly, and never spend more on credit than you can reasonably pay. If you go shopping with a credit strategy in mind, instead of playing fast and loose with the cards in your wallet, you can avoid the psychology pit trap.