Saving money is simple: Live on less than you earn. But of course, that’s like suggesting that dieting is a simple matter of burning more calories than we take in. Neither discipline comes easy. You have to track your spending (calories); become a savvy shopper (eater); understand the basics of investing (exercise); get excited about concepts like compound interest (and weight-loss maintenance). So with New Year’s Resolutions in mind, here’s the easiest way to save money in 2011.
Three little words: Just pay cash.
Simply using credit cards that provide rewards will cause you to spend more money, according to a new study by researchers at the Federal Reserve in Chicago. The economists found that when a bank offered a 1 percent cash rewards program, the average cash-back to the consumer was $25. But at the same time, people increased their spending by $68 a month, and overall credit card debt by $115 a month.
You’re probably thinking – well, people just bought stuff with the card and paid it off at the end of the month to get the rewards, instead of paying cash. And some people did. But others simply spent more than they had previously, wiping out the benefit of the reward, researchers told the Wall Street Journal.
Previous studies have suggested similar problems with credit cards. Paying with plastic never feels the same as using cash. Richard Thaler, professor of behavioral science and economics at the University of Chicago business school, says people pay less attention when purchases are “decoupled” from payment.
Let’s say you buy a $50 jacket with a credit card. “Compare the impact of paying $50 in cash at the store to that of adding a $50 item to an $843 bill,” Thaler writes in a paper on the topic. “Psychophysics implies that the $50 will appear larger by itself than in the context of a much larger bill, and in addition when the bill contains many items each one will lose salience. The effect becomes even stronger if the bill is not paid in full immediately.”
A separate study found graduate students who were allowed to bid on items in an auction with a credit card bid up to 100 percent more than those restricted to cash payment.
I used to charge everything to my credit card and pay off in full at the end of the month to maximize my rewards. But I stopped doing that last year because doing so can hurt your credit score.
I shifted to a debit card on a high-interest checking account. I don’t think the debit is causing me to overspend, because I use it for groceries and other basics. But I have to wonder if I’d be a more careful shopper if I had to rely on a specific amount of cash taken from the ATM each week. Have you ever found that using cash made you less likely to spend?