When Money Is No Object

Sure, using a credit card is easy, but paying with invisible money makes saving harder and spending easier. People behaved differently when they saved—and spent—cold, hard cash.

By Jason Zweig of The WSJ. Excerpt:

"Nowadays, zooming through with digital toll technology like E-ZPass, you may have no idea how much you just paid. Once money is dematerialized, using it doesn’t feel like spending.

“As we move away from paying with those gross motor movements,” says Kathleen Vohs, a marketing professor at the University of Minnesota, “we lose that sense of its being an exchange, the gravity of using money.”

Dozens of studies have shown that consumers using credit cards rather than cash are less likely to remember how much they spent, take less time deciding what to buy, are more willing to pay high prices and make a greater number of purchases. They also exert less self-control, buying more junk food, luxury goods and other impulsive items.

Studies on debit cards and mobile payments show similar results. A recent neuroscience experiment found that spending with credit cards, rather than cash, activates the same reward centers of the brain that are triggered by cocaine and other addictive drugs. If spending cash hurts, perhaps using credit makes you high.

Of course, it’s hard to say whether people are spending more and saving less because cash is dying—or whether cash is dying because people are spending more and saving less.

For most of the second half of the 20th century, Americans saved roughly 10% of their disposable personal income. In the late 1980s, U.S. consumers began to save less until, by 1995, they saved only 3% of available earnings. That number rebounded in the 2000s and 2010s, then shot up during the pandemic as the economy locked down and people received government stimulus payments.

One of the main factors driving the long-term decline of savings in the U.S. is the fall in interest rates since the early 1980s, says Jonathan Parker, a financial economist at the Massachusetts Institute of Technology. Lower interest rates reduce the return on bank accounts, cut the cost of borrowing, and raise the value of stocks and real estate, making people feel they can spend more."