Have you ever gone to pay for something small with a large note, before deciding you’d rather not break that $50 or $100 bill?
You’re not alone, and our reluctance to break larger bills can actually be used to game our minds into spending less, science shows.
People generally relate smaller notes to smaller and miscellaneous purchases, meaning that if you’re carrying 10 $10 notes, you’ll spend those faster than one $100 note, research published in The Journal of Consumer Research revealed in 2009.
Dubbed the ‘denomination effect,’ our tendency to avoid spending larger bills also sees people prefer to receive money in larger denominations. No one wants a handful of shrapnel.
The psychology of spending changes again when we use cards over cash.
Paying with cash can actually boost our attachment to a certain good or service as compared to card payments, another study published in The Journal of Consumer research in 2015 found.
And, shoppers spend up to twice as much when they use a card to pay over cash, research from MIT revealed at the beginning of the century.
That’s because it’s easier to pay with a card, and it removes the psychological sting of handing over a note and receiving little or nothing back.
Reserve Bank of Australia research found the median cash payment in 2016 was $12, while the median value of card payments was $28 - falling from $40 in 2007 as Australians increasingly tap their cards for purchases.
And according to research from MyState Bank, 67 per cent of Australian parents believe a cashless future will make it harder for children to develop good financial literacy skills.
“In Australia, we have had an extremely fast adoption of online technologies. However, the overwhelming feeling from parents is that as money becomes less tangible, there is a need to help children understand the value of money and spend responsibly,” general manager digital and marketing Heather McGovern said.
“Small purchases can add up fast when spending is unseen and there is a clear need to educate children on this issue.”
What can we do?
Dial up the “pain of paying”, suggests Dollars and Sense: How We Misthink Money and How to Spend Smarter co-author Jeff Kreisler.
That is, don’t sign up for automatic bill payments, try to stick to planned purchases and try to pay in cash where you can, Kreisler told investment company Acorns.
"This concept of the pain of paying can be dialed up or down," Kreisler said. "If saving becomes painless and automatic, that's a good thing."
Or, as psychologist Dr. Mary Gresham told CNBC: “Take a $50 or $100 bill and wrap it around your credit card.
“That way, every time you consider making a purchase, you’ll consider how that purchase translates into physical money.”
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