Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 563

Trying to save money? Pay in cash

Cash is in crisis. In Australia, it’s now only used for 16% of in-person transactions, down from about 70% in 2007.

The situation is so dire that Independent Federal MP Andrew Gee has introduced a private member’s bill that would force businesses to accept cash or else face big fines.

The reality is that over the past decade, technological advancements have utterly transformed the way we pay for goods and services. Phones and smartwatches can now easily be used to pay by card, and buy-now-pay-later schemes and cryptocurrency payments offer further alternatives.

The shift away from cash only accelerated throughout the COVID pandemic, as health experts recommended avoiding using it for hygiene reasons.

Despite these big changes in how we spend money, Australians have perhaps been more focused on how much amid a stubborn cost-of-living crisis.

In light of this, our research team wanted to investigate how our choice of payment method can interact with our actual spending habits. Our latest research offers a simple solution for anyone looking to save money — carry more cash!

We pay less when we pay cash

Drawing on both academic and industry sources, our research team combined the results from more than four decades of prior research on spending behaviour and payment methods into a large dataset.

This data spanned 71 research papers, 17 countries, and more than 11,000 participants. State-of-the-art meta-analysis techniques then allowed us to collectively analyse the results from all these prior studies, and re-examine their insights.

We found that cashless payments were indeed associated with higher levels of consumer spending compared to cash transactions, something that is referred to in the literature as the “cashless effect”.

This cashless effect was consistent across all other payment methods in the data set.

Put simply, it doesn’t matter whether you use a credit card, debit card or a buy-now-pay-later service – you are likely to spend more money using cashless methods than when you pay with cash.

The pain of paying

Under the traditional economic view that consumers behave rationally, there should be no differences in spending behaviour between different payment methods – money is money after all. But the existence of the cashless effect shows that the payment methods we use do influence our spending behaviour.

The leading theory to explain this effect attributes it to differences in the “pain of paying”, a concept first coined in 1996 that describes the emotions we feel when spending money.

Importantly, our choice of payment method can influence the level of pain felt. When paying with cash, we have to physically count out notes and coins and hand them over. Humans seek to avoid losses, and paying by cash sees us physically lose a tangible object.

Conversely, nothing has to be handed over to pay cashlessly. We don’t lose anything tangible with a swipe or a tap, so it feels less painful.

Preliminary neurological evidence suggests that the “pain of paying” isn’t just an abstract metaphor, and we may feel actual psychological pain with each transaction we make. Research employing functional magnetic resonance imaging (fMRI) scans to observe brain activity in consumers has shown that paying activates brain regions related to experiencing psychological discomfort.

Picture this: You’re at a theme park, excited for a fun day. You use your smartwatch to pay for snacks, souvenirs and rides. It’s all so convenient that you don’t realise how much you’re spending until you check your account later and see that you have completely blown your budget!

This is the cashless effect in action - if nothing is physically handed over, it’s easy to lose track of how much is spent.

A great tool for budgeting – while it lasts

The cost of living crisis has made spending control front-of-mind for many people. Our meta-analysis suggests that returning to “cold hard cash” whenever possible could be one valuable tool to help.

The increased friction felt when using cash could help people better control their money, even just by providing a moment to pause and consider whether a transaction is necessary.

This could help individuals make more mindful decisions, saving money while they can in an increasingly cashless world.The Conversation

The Conversation

 

Lachlan Schomburgk, PhD Researcher in Marketing, University of Adelaide; Alex Belli, Senior Lecturer in Marketing, The University of Melbourne, and Arvid O. I. Hoffmann, Professor of Marketing, University of Adelaide

This article is republished from The Conversation under a Creative Commons license. Read the original article.

 

11 Comments
Leigh
June 10, 2024

Pizza shop in Arnold's Creek (Melton) charged 2% extra on eftpos (debit card) for $78 transaction. I realise the business should maybe charge a small fee, but believe this amount is deliberately profiteering at the customer's expense.

Old School
June 07, 2024

Why is it that most shops/retail stores charges a surcharge when paying by non-cash? I'm sure it's extra profit for them. Compared to cash handling costs and security costs when they receive cash instead. Why don't they increase their prices instead of adding a surcharge!

Lyn
June 08, 2024

Recently queried business re $231 fee charge for relative's large purchase by Dr card, said the bank's merchant fee, was horrified, hadn't let me do bank transfer for her now set up for use to show her, needs to learn how but scared, invoice was due immediately.

john
June 10, 2024

??

Martin
June 07, 2024

My wife has been espousing this for years. Where can she pick up her PhD?

Lyn
June 08, 2024

Martin, did she use cash from pay packets & line up on mantlepiece for milkman, food, petrol etc as my home & to bank Mon.lunchtime deposit leftover to save for first house? If milk money vanished I'd make gulity party go to door to tell him why not paying this week the evening he collected.

john
June 07, 2024

I have seen especially the young ones mindlessly splashing their smartphones around with the included virtual digital wallet. Then receive an unpleasant surprise at the end of the month.
Sung to the tune of Old Macdonald had a farm.
" My young nephew had a - smartphone E. I. E. I. O.
And on that smartphone he had a digital wallet E. I. E. I. O.
With a ding ding here. A ding ding there, Here a ding ding, there a ding, ding- -
Everywhere a ding ding E. I. E. I. O. ""

Geoff
June 07, 2024

Day jobs. They're important and give people's lives meaning.

Hang onto yours John. Poetry is not your strong suit. :)

Fred C.B.
June 07, 2024

This finding is true in my own experience. I think twice before making a purchase with cash, which quite often results in decline of a transaction. ?????

Jim
June 06, 2024

OK let's say you spend $100 k a yr on credit cards that charge 1.5% . That's $1500 . In surcharges you could save paying by cash . It's a no brainer

Manoj Abichandani
June 06, 2024

I convinced my wife to purchase cigarettes with cash instead of card - it works!

 

Leave a Comment:

RELATED ARTICLES

Household spending falls as higher costs bite

CPI may understate the rising costs of retirement

This vital yet "forgotten" indicator of inflation holds good news

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The gentle art of death cleaning

Most of us don't want to think about death. But there is a compelling reason why we do need to plan ahead, and that's because leaving our loved ones with a mess - financial or otherwise - is not how we want them to remember us.

Why has nothing worked to fix Australia's housing mess?

Why has a succession of inquiries and reports, along with a plethora of academic papers, not led to effective action to improve housing affordability? Because the work has been aimless and unsupported by a national consensus.

Latest Updates

90% of housing is unaffordable for average Australians

A new report shows that only 10% of the housing market is genuinely affordable for the median income family, and that drops to 0% for those on low incomes. This may be positive for the apartment market though.

Taxpayers betrayed by Future Fund debacle

The Future Fund's original purpose was to meet the unfunded liabilities of Commonwealth defined benefit schemes. These liabilities have ballooned to an estimated $290 billion and taxpayers continue to be treated like fools.

Property

The net benefit of living in Australia’s cities has fallen dramatically

Rising urban housing costs in Australia are outpacing wage growth, particularly in cities like Sydney and Melbourne. This is leading to an exodus of workers, especially in their 30s, from cities to regions. 

Shares

Fending off short sellers and gaining conviction in a stock

Taking the path less travelled led to a remarkable return from this small-cap. Here is the inside track on how our investment unfolded, and why we don't think the story has finished yet.

Planning

The nuts and bolts of testamentary trusts

Unlike family trusts, testamentary trusts are activated posthumously, empowering you to exert post-death control over your assets. Learn how testamentary trusts offer unique benefits and protective measures.

Investing

The US market outlook is more nuanced than it seems

Investors are getting back to business after a tumultuous election year. Weighing up the fundamentals is complicated, however, by policy crosscurrents that splinter the outlook in several industries.

Investing

Book and podcast recommendations for the summer

Dive into these recommendations for your summer reading and listening. Uncover the genius behind a secretive hedge fund, debunk healthcare myths, and explore the Cuban Missile Crisis in gripping detail.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.