Perfect Articulation of Plastic as Real Money for Young People

In episode of Freakonomics from 10/3/2013, Steve Levitt and Steve Dubner discussed a listener question that I thought was a perfect articulation of my opinion concerning the studies that show that people tend to spend more when using credit cards in comparison with cash.


young woman with credit cardSteve Reta wrote: “This morning I was reading an article on how credit card spending is making us ‘irresponsible’ because it removes the ‘pain’ of paying with cold hard cash.  I found this assertion to be untrue for those of my age group.  I am 22 years old… For me and my colleagues, we have found that on the rare occasion we actually have cold hard cash, it actually feels almost like spare money.  It doesn’t come up in our bank accounts since we’ve already either withdrawn it some time ago or accepted it as repayment for something else.  It seems to be a widely accepted concept that credit cards are causing us to be poor spenders, but could it be that this so-called irresponsibility of credit cards is simply an issue for those who grew up using hard cash instead of hard plastic?”


He described this situation better than I ever have!  In our money management system, the dollars that count are the ones that show up in our bank and credit accounts.  When we do our month-end reconciliation, we don’t count how much cash we have on hand.  It’s always a low amount and, like Steve said, had already been withdrawn (and therefore practically already spent in terms of our tracking) some time before or was a reimbursement.  We still enter cash transactions into Mint, but they are so few and far between that they don’t make a big impact on our monthly spending.


I had the exact same thought as Steve, that these studies are probably done on diverse demographics of people and that the subset that has always used plastic as their primary mode of transacting (more likely to be young people) wouldn’t contribute to the general effect of higher spending with plastic over cash.  In fact, for myself I know that I feel that cash is dirty and I want to get rid of it.  I noticed this the last time I was at the farmer’s market (where I have to pay cash) – I saw how much money I had and kept adding pieces of produce to my purchase until I had spent as closely as I could to the amount of cash I had on me.  I never do that with plastic spending at the grocery store – I just buy what I need and don’t try to increase or decrease the amount of the overall purchase.


I won’t go so far as to say I think every young person spends as responsibly with credit as with cash.  I do think that cash provides an automatic level of accountability – when it’s out, it’s out!  But for those of us who fastidiously track and budget and have always used plastic (debit or credit) I think the negative effect with credit should disappear or even reverse.


However, I haven’t conducted a study on this.  I do respect empirical studies rather than people extrapolating based on anecdotal experience, as I have been in this post.  After looking at a few papers, it seems that the conclusion cannot be as simple as “people spend more when using credit than cash,” particularly because the effect is neutralized for certain sub-groups.  However, I haven’t yet seen behavior broken out by age like Steve suggested.  Maybe I’ll look more into the various studies I can find for another post!


If you are wondering, Steve Levitt (the economist in the Freakonomics partnership) completely disagreed with Steve Reta.  A discussion of mental accounting ensued.  However, Levitt was kind of answering out of thin air (he starts with “I don’t know anything”), as is the point of these types of FAQ episodes.


Is your spending different between cash and plastic?  What sub-group do you think would use credit cards as responsibly as cash, even if the general population doesn’t? 


photo from Free Digital Photos


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36 Responses to "Perfect Articulation of Plastic as Real Money for Young People"

  1. Cash Rebel says:

    I couldn’t agree with you more Emily, maybe you should do a survey by age. Once I have cash, I feel free to spend it however I want because my Mint account won’t know about it. I just went to a concert, paid for all 4 tickets and got handed about $150 in cash. I feel much less hesitation to spend it all of fun stuff.
    Cash Rebel recently posted..What would you do with your furlough time?

    1. Emily says:

      Haha, yeah, cash is like a secret from Mint! That’s why I would definitely deposit a sum as large as $150 to get it out of my wallet because I would just throw it away if it stayed.

  2. dojo says:

    The reason I start using more cash again, I can ‘feel’ it when it’s gone. Same with PayPal, I tend to be too ‘loose’ when it comes to it, since it’s just a number.
    dojo recently posted..Freelancing: How to start working as a freelancer on Elance

    1. Emily says:

      That’s great that you figured out what works best for your psychology. Keep it up with the cash!

  3. Having it on plastic, makes purchases easier to track for me. Cash to me seems like easy money I can spend on whatever I want.

    1. Emily says:

      I totally agree. I love the easy tracking with plastic transactions.

  4. I notice that I spend cash more freely as well, but I have to admit that I could be interpreting this entirely the wrong way. That is, am I simply noticing my spending more because I’m paying cash? Is the fact that I’m noticing my spending more indicative of spending more, and might I actually be spending less than I normally would but getting more data points?

    All that goes to say that I have no great baseline for either mode of spending: cash or credit.
    Done by Forty recently posted..October Budget Porn

    1. Emily says:

      It is really difficult to tell what’s true when you only have yourself to observe, with all your biases and self-justifications.

  5. I have heard of this before. I am the opposite. I actually spend any cash that I have faster than credit. I usually put everything on credit and pay it back at the end of the month and get the points. Its awesome.
    Debt and the Girl recently posted..Finding Your Rock Bottom When It Comes To Your Finances

    1. Emily says:

      As long as you don’t love those rewards so much that you spend more, it’s a system that can really benefit you!

  6. I’m exactly the same way. With cash, I find myself buying things I wouldn’t have even thought of buying if I didn’t have money in my pocket.
    Lotto tickets are a great example. As a rule, I don’t buy them because I know I’m not going to win. Besides, you can’t use plastic to get them. But if I’m at a convenience store and have extra cash, I’ll usually buy a ticket.
    Edward Antrobus recently posted..Net Worth Update: September 2013

    1. Emily says:

      That’s a good example. I’m surprised to see so many people think the same way I do, actually! Is this how we would behave all the time if we used only cash?

      You can’t buy a lottery ticket with debit or credit?? I had no idea! Come to think of it I have never bought a lottery ticket…

  7. My wife and I treat money in either form (cash or plastic) as what it is: monetary assets. We use credit cards for most purchases, to get rewards, but using cash or plastic does not fool us into spending more. Of course, someone’s “buy one, get one free” might hook us, but that’s a different can of worms.
    Bryce @ Save and Conquer recently posted..Do You Hide Things From Your Spouse?

    1. Emily says:

      Sounds like you’re doing well in combating mental accounting!

  8. E 2 says:

    Each time I buy something with a card, I think, “Do I want to spend $x on this?” and x depends on the cost of the items more than a preconceived budget (within reason, I’m not going to spend $140 on groceries if my budget is $70). But when I do withdraw cash for one of a few cash-only purposes, like the farmer’s market, ordering transcripts, or a bar with a high credit card minimum, then I feel like I can spend “up to” whatever I withdrew, which is generally a multiple of $20. That’s because the “real” amount of money in my head is my bank account total – as soon as the money’s withdrawn, it’s like it’s already spent in my mind, so if I have $6 leftover from the farmer’s market, I don’t feel bad spending it at the bar.

    I don’t know if I spend more with cash though, since it tends to be in pretty small leftover amounts, and if I were to make an active decision to use a card, I might spend $10 instead of the $6 in my wallet. It just doesn’t feel like as much of a decision because I’ve already classified it as “spent”.

    As long as your mental accounting works such that you stay on budget, it doesn’t really matter whether you call it spent when it comes out of the ATM or when it comes out of your wallet.

    1. E 2 says:

      P.S. Having thought about it more (yes, I’m actually coming back to add to my comment the next day), all plastic is not equal – when people mostly used cash except for when they needed credit, maybe it was tempting to spend money you didn’t have on credit, but when most paychecks are direct deposit and most transactions are electronic, using a debit card is more similar to using cash. The cliche may have to do more with people spending on credit cards feeling like they have more money than they actually do, but with a debit card, you’d better keep track, or you’ll run out of money! I started using a debit card a few years before I had a credit card (thanks Mom), so I treat credit like debit and don’t spend more than I have in my checking account.

      1. Emily says:

        Great point about if credit is your money-alternative if you are out of cash. I agree that the credit/debit card distinction is an important one. Using credit like debit is much more similar to cash than using credit as credit.

    2. Emily says:

      Yes, what you’re describing is exactly what I noticed myself doing with that farmer’s market purchase. With cash I’m fairly reticent to start spending, but once I start I have that total in mind and may spend up to it. Like you said, once it disappears from the bank account, I start thinking of it as already spent.

  9. I’m not sure that I spend differently with cash vs credit. I almost never carry cash, so I can’t say if I spend it more freely. I do however think that that old adage that people spend more when they use credit cards isn’t always true (I know it’s not for me). I use my credit cards for everything and always pay my bill in full at the end of the month.
    KK @ Student Debt Survivor recently posted..Pay to Pee?

    1. Emily says:

      I think it’s a pretty difficult behavior to try to tease out experimentally.

  10. I suppose its possible that I might spend a bit more with credit, only because I don’t like dealing with breaking bills and getting coins back. But, that’s probably only a slight difference, or at least that’s what I think without analyzing any actual data.

    Ultimately though, I pay my credit cards in full each month. By having discipline with credit cards, you can take advantage of a variety of benefits that are largely absent with cash.
    Tie the Money Knot recently posted..6 Childcare Options for Working Parents

    1. Emily says:

      That’s a good point. I guess it sounds like a justification, but I wonder if rewards garnered outpace the small bit of additional spending with credit, for those who do.

  11. These past few days I was just thinking if it’s the right time to get a credit card. Before my parents always remind me not to get a credit card but then I finally decided not to get one and I’m happy with it. 🙂
    Clarrise @ Make Money Your Way recently posted..Budgeting lite, a budget for the budget haters

    1. Emily says:

      I used debit almost exclusively for three years before I switched to using credit for all eligible purchases and I think it trained me very well. I do recommend developing habits with debit before switching to credit (and being willing to switch back if you can’t handle it), but maybe you are ready by now!

  12. Matt Becker says:

    I definitely relate to your line of thinking. I never pay with cash if I can avoid it and view it more as a burden than anything else. I think there’s a lot to the fact that younger people have simply grown up with different tools and therefore think differently about it, though as you say it would be nice to see some studies looking at the issue. But intuitively it feels like it could easily be correct that the dynamic here is much different than what’s traditionally reported.
    Matt Becker recently posted..Buying a Car: Sealing the Deal

    1. Emily says:

      Glad to hear my (and Steve’s) reasoning resonates with you. You are so right that we grew up with different tools. I mean, back in the day you would wait for a month-end paper statement to see what you put on your credit card, and now you can pull up your Mint app to see all your transactions instantly! I can definitely see how you might be “delaying the pain” of spending in the first case, but that’s just not how things are now.

  13. My husband and I use credit for everything (pay in full each month, collecting points along the way) and weigh in on every purchase. However, when we have cash, we spend a little here and a little there… Because it’s so much harder to track, it goes so much quicker- and on little very unnecessary things!

    1. Emily says:

      If your “real” money is in Mint or your auto-tracking software of choice, there is no accountability with cash – unlike the system under which running out of cash money is the only accountability.

  14. David W says:

    I’ be interested to hear your thoughts on this relative to Dave Ramsey’s class. He has a very singular approach to finance, and credit cards are not part of it. We personally have only one credit card, specifically for travel and gas, and all other expenses are paid for via debit cards. My wife was much better at responsible spending via credit, while I was more likely to spend using credit. Cash to both of us feels like extra money, probably largely due to being used to using plastic.
    David W recently posted..A Closer Look at Cash Value vs Term Life Insurance

    1. Emily says:

      Seems like you’re caught between systems! You are loose with credit as well as cash so debit seems like the best option. Broadly, Dave advocates debit for non-discretionary stuff and cash for discretionary stuff. It doesn’t really make sense to me to lump debit and credit cards together with “people will spend more over cash.” There is ultimately a limit with debit spending that is the same as cash.

      Actually last week our FPU coordinator asked a few of us table hosts how many credit cards we have (he has 2) and I said “7 between me and my husband” and another table host told me not to say that too loud!

  15. For me, I still think that it’s easier to spend when I can swipe because I can easily just say “oh I have enough” when in fact, I don’t really know until I check the statement!
    Lisa E. @ Lisa Vs. The Loans recently posted..Links Lisa Likes – 10/7/13

    1. Emily says:

      Knowing that about yourself, do you try to stick to cash? Why not track and budget all through the month instead of waiting for a statement?

  16. S. B. says:

    I don’t think my spending is affected by whether I use cash or credit. I know money is fungible. 🙂 I feel like these cash vs credit discussions sometimes obscure the more important issues. What really matters is your spending level relative to your income and your assets.
    S. B. recently posted..List of Blogger Stock Portfolios

    1. Emily says:

      You are right to bring us back to the big picture!

  17. […] My conclusion is that the use of credit cards is a personal choice.  I certainly don’t think everyone has to have one, and I think that people who use credit cards responsibly should not have to feel defensive about the practice (even in FPU!).  We should help educate people who use credit cards irresponsibly as to why they are so damaging and how beneficial it would be for their finances to stop using them.  Those are the people who really need to be preached to, not those of us who use credit cards exactly like debit and don’t even spend more than when we use cash. […]

  18. […] The landscape could be different for young people. (No empiricism here, only conjecture.) Quote: […]

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