Using Cash to Combat the Cost-of-Living Crisis
As Australia embraces a rapidly digitalising economy, and facing a cost-of-living crisis, the tangible feel of cash in our wallets is becoming rarer. Once a staple for transactions, cash is now only used in 16% of in-person payments, a steep decline from 70% in 2007. This shift towards cashless transactions isn’t just a trend but a fundamental change in how we interact with our money.
The rise of digital payment methods—smartphones, smartwatches, buy-now-pay-later schemes, and even cryptocurrencies—has been accelerated by factors such as the COVID-19 pandemic and concerns over hygiene. However, this shift brings with it an unintended consequence: the “cashless effect.” Research suggests that the less we use cash, the more we spend, often without realising it until it’s too late.
The Pain of Paying: Cash vs. Cashless
At the heart of this phenomenon is the “pain of paying,” a concept developed in 1996. This theory posits that the act of physically handing over cash makes us more aware of loss, triggering a psychological pain that deters excessive spending. On the contrary, tapping a card or smartwatch does not invoke the same level of emotional response. The ease of cashless transactions can lead to less thoughtful spending, which might be why a recent meta-analysis involving over 11,000 participants from 17 countries found that cashless payments are consistently associated with higher spending.
Neurological Insights into Spending
Further insights come from neurological studies using functional magnetic resonance imaging (fMRI). These studies show that brain regions associated with psychological discomfort are activated when we spend money. Interestingly, this discomfort is less pronounced with cashless transactions, perhaps explaining why it’s so easy to overspend when using digital methods.
A night on the town with your friends might not seem so expensive if you’re paying for your drinks and food with your smartwatch. That is, until you check your account the next day and find you’ve overspent by a mile!
Strategic Spending in a Cashless Society
The ongoing cost-of-living crisis makes it essential for Australians to find manage their spending effectively. Returning to cash, even partially, may be worthwhile. The tactile experience of handling money helps consumers pause and consider their purchases more carefully, potentially saving significant amounts over time.
Moreover, the context in which spending occurs influences the cashless effect. It appears stronger in situations of conspicuous consumption and weaker in pro-social scenarios, like charity. Understanding these dynamics can empower consumers to make more informed choices about when and how to use cash versus cashless methods.
The Future of Cash and Consumer Empowerment
While the trend towards digital payments is unlikely to reverse, the research presents a compelling case for maintaining cash as a viable payment option. Initiatives like the private member’s bill introduced by MP Andrew Gee, which mandates businesses to accept cash, highlight the importance of preserving consumer choice.
In an era where every dollar counts, particularly during economic challenges, the ability to choose the most psychologically and financially beneficial payment method is more than just a convenience—it’s a tool for better financial health. As we navigate the complexities of a modern economy, perhaps the old adage “cash is king” might still hold some truth, offering a tangible lifeline in the digital age.
Priority Advisory Group – Helping You Manage Your Money
At Priority, we advise clients on their investments, retirement planning, insurance, aged care, and of course, spending. The cost-of-living crisis continues to hit families hard, so now is the time to take control if you haven’t already. If you’d like to speak to us about how we can help you make the most of your money, you can reach us at 1300 349 188, or via our website.
Further Reading & References:
Less cash, more splash? A meta-analysis on the cashless effect – ScienceDirect
Please note the information provided within this article is general of nature and is not a personal advice recommendation. Prior to considering strategies discussed in this article we recommend you seek personal financial advice. Please be aware that, without the benefit of financial advice, you may be committing yourself to financial strategies or products that are not appropriate for your overall personal situation, needs and objectives.