Bankruptcy

Why Using Cash Helps

By Wendell Sherk, Missouri Attorney

Bankruptcy lawyers preach using cash, not plastic, to pay for everything you can.  Most people listen but they don’t actually do it.

But why should they?

You don’t spend money if it’s money.

It’s that simple.  Scientists and casinos have known for a long time that people will spend more if they don’t see actual currency leaving their hands.  Even the single level of abstraction created by a casino chip — which you paid hard currency for — makes your brain more likely to bet freely.

It’s the same part of your brain that will not let you touch, much less actually eat or enjoy, some very nice chocolate — if the chocolate is in the form of dog feces.

This more primitive part of your brain knows currency is precious.  But a piece of plastic is not  — even if the higher part of your brain knows it’s really the same as money.  So it’s easier to spend without thinking.

The science consistently supports this simple reality, whether it is with credit cards, debit cards, or stored-value gift cards.

And the nation of India recently experimented on this with investments.  India banned the payment of a broker’s commission on the sale of mutual funds out of the investor’s account and required the fee to be paid upfront by the investor.  In other words, if they charge $200 commission, you pay that immediately instead of having the $200 deducted from the total invested in the mutual fund.  In either event you actually pay — in one in cash, in the other, you get $200 less of mutual fund shares.  But after this change in regulations the sale of mutual funds has more or less collapsed in India.  People perceive getting less stock as less painful than actually handing the equivalent in cash over to a broker.

So put the plastic away.  Every kind of plastic.  Put actual currency in your pocket.  And watch how much harder it is to actually buy things.  And remember — that’s not a bad thing after all!

Full post as published by Bankruptcy Law Network on February 27, 2010 (boomark / email).