Why You Probably Pay Cash When Buying Stuff You Don't Need

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We are rapidly moving to a cashless society.

Research from The Federal Reserve Bank of San Francisco shows that the share of payments settled in cash has decreased from 31% in 2016 to 20% in 2021:

When you look at the chart, it’s clear that people are rapidly switching from paying with cash to paying with their debit/credit card.

Cash is less convenient than paying with a card, and, importantly, from a personal finance perspective, paying with cash makes tracking your spending more difficult than paying with a card that allows you to track every penny spent.

Interestingly, the fact that transactions are hard to track provides the only viable use cases for cash; it spares you the pain of remembering all the money you wasted on crap that you can’t justify buying.

We pay with a card to remember and cash to forget

In a 2023 study, researchers analyzed 118,042 real-world purchases and ran six separate experiments to conclude that when people want to buy something they know is a waste of money, they strongly prefer to pay with cash.

Credit cards, debit cards, and fintech apps like Apple Pay leave a detailed paper trail of your spending history, including how much you spend, where you spend, and what you buy.

If your goal is to improve your finances, having a paper trail of your spending is very helpful. It allows you to track your spending habits, evaluate whether you are happy with how you spend your money, and make changes to align your spending with your goals.

But if all you want to do is bury your head in the sand and pretend that you didn’t pay $300 for a designer T-shirt, odds are you’ll use cash. With no paper trail, it’s easy to pretend it didn’t happen.

But don’t credit cards make it easy to overspend?

Previous research has found that paying with credit cards removes the pain of buying, making overspending easier.

When you dig into your wallet, hand over nice crisp bills, and receive back a handful of change, you feel the weight of your spending more than taping your card.

I wrote about the pain of spending in detail here.

These two points Seem to be at odds with each other:

1. Using cash to buy things you know you’ll regret
2. Cash increases the pain of spending—and thus reduces your spending

The researchers from the 2023 study had the same thought, so they dug deeper into the motivations and found that what matters most is which you decide first: what you’re buying or how you’re paying.

When making routine purchases like groceries, you likely head into the store already knowing how you’ll pay. Every time I go to the grocery store, I don’t always know every item that will go into my cart, but I know before I walk into the store that I am paying with a credit card.

I have already decided to pay with a credit card—because that’s what I always do—so it’s easier to make impulse purchases because the pain of paying is lower than if I used cash.

But, if I was dropping my kid off at University and I found my way into the campus bookstore—where I have no habit of how I pay— and decided to buy an absurdly overpriced hooded sweatshirt, I might use cash so that I am not reminded of how much money I spent.

You might benefit from doing the opposite of what most people do

When making routine purchases like groceries, paying with cash can reduce the odds of impulse buying.

But, when you make an expensive one-off purchase that you know you can’t justify to yourself, pay with your credit card. Assuming you track your spending or at least review your credit card statements—something you should be doing—you’ll be reminded of that purchase a few weeks later and given the opportunity to reflect on whether you’re happy with your decision.

So, yes, pay with credit to remember, but don’t pay with cash to forget. Pay with cash to rein in your spending.

A version of this story was originally published on the Making of a Millionaire Substack, the home of my writing. As a thanks for reading my work, existing readers can get 75% off their first year’s subscription here.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.