Cash, Card, or App: The Psychology of Spending

Updated April 12, 2023

Cash, Card, or App: The Psychology of Spending is an advertising-supported site. Featured or trusted partner programs and all school search, finder, or match results are for schools that compensate us. This compensation does not influence our school rankings, resource guides, or other editorially-independent information published on this site.

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Making Conscious Financial Decisions

A simple swipe or tap that exchanges money for goods can provide a shot of serotonin. Even before the card-tap function, consumers spent more when using a credit card than when paying with cash.

Paying with virtual money provides instant gratification that has become even easier over the years. Consumers can buy almost anything at any time with a smartphone and credit line. They only need to tap one button.

This article examines the psychology of spending related to cash vs. credit. This page also explores the psychology of paying with a smartphone and how paying with apps impacts purchases. With this knowledge, consumers can make conscious financial decisions.

American Spending Habits

The Federal Reserve conducts an annual study to examine American spending habits. Its findings reveal consumers use less cash now than ever. However, they spend more.

The 2020 study revealed Americans used cash for 19% of all payments over a three-day period. This number decreased by 7% compared to 2019 data. Additionally, the average three-day spending increased from $4,236 to $4,760.

The researchers note that COVID-19 may have impacted this data. Some businesses stopped accepting cash payments and switched to contactless payment methods to prevent the spread. Additionally, many consumers had extra disposable income with stimulus checks and unemployment benefits.

Another study found that 64% of Americans changed their spending habits after the pandemic. Many spent less on travel and more on investing. More specifically, they increased investments by 41.9% and decreased travel spending by 21.6%. The pandemic's long-term impact on consumer spending remains to be seen.

Cash vs. Debit

Withdrawing cash and using a debit card remove money from a checking account. However, the two actions might place different implications on the account's balance. Some vendors charge small card processing fees, even for debit cards.

Consumers are often more willing to spend money when using a debit card than cash. Researchers note that people may spend more with a debit card than with physical cash because they do not see the physical money going away. Some experts theorize that society is moving toward a cashless future.

With the convenience and increased availability of contactless payment, consumers must learn how to use debit cards responsibly. This might involve checking a banking account daily as part of a morning routine. This step could help spenders visualize the physical money disappearing from their account. Adopting this practice could also help consumers understand the psychology of spending more with a card.

Cash vs. Credit

Most credit cards incentivize spending with cash back or travel perks. Some cards offer a significant bonus if users meet a certain spending quota within their first few months of opening the account. However, these benefits come with a cost. Consumers may spend more than they usually would. Additionally, many credit cards charge an annual fee to unlock benefits.

While responsible card usage benefits consumers' credit scores, one mistake like a late payment can lead to a negative credit mark and a higher interest rate. To mitigate the risk, consumers can register for automatic payments and pay off their balance monthly.

Just like with debit cards, credit cards alter spending habits. Some researchers refer to credit cards as Monopoly money since users fail to equate it with tangible, real money.

One survey on consumer habits suggests that individuals feel more emotionally attached to an item purchased with cash. They refer to it as a more painful spending method. Another study reveals that credit card payments increase unhealthy food purchases.

Before making a credit card transaction, consumers should consider whether the purchase is necessary and question the value it brings. Unlocking self-awareness when spending with a credit card helps consumers reap the benefits while spending responsibly.

Smartphone Apps

Consumers should also understand the psychology of paying with a smartphone. Financial content online often theorizes that paying with a smartphone carries a similar psychological weight as paying with credit cards. However, experts need more research to confirm this theory.

One study by University of Illinois operations management researchers shows that paying with a smartphone app increases the overall transaction amount and frequency. The researchers theorize that fewer people will carry physical credit cards in the future.

Retailers also encourage consumers to shop directly through their apps. They store credit card information to make the purchase as seamless as possible. With one press of a button, consumers can get almost anything delivered to their door in less than two days.

However, spenders can also use smartphone apps for good. Budgeting apps can help combat the impulse to spend more. People often think twice before spending when they know their checking account balance and savings goal.

Generational Differences and the Future of Spending

So, what lies ahead for the future of spending? According to the Diary of Consumer Payment Choice, society could become cashless. In 2020, cash usage decreased among all age groups. While the COVID-19 pandemic may have influenced the decline, past studies show a general downward trend. Interestingly, cash usage ranks highest among consumers aged 18 to 24 and those 65 and older.

All age groups began carrying more cash since the pandemic began. But while people still have cash on hand, they use it less. Some experts conclude that the U.S. might be moving towards a cashless economy based on these findings.

The psychological effects of different spending methods may shift as culture changes. Paying with cash may not impact spending habits for generations who grow up exclusively using cards and apps for payments. Time and further research on the psychology of spending will tell.

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