What would you do if money wasn’t real? Like you could spend as much money as you wanted, with no repercussions?
If you’re a parent, you know that’s what many children believe. They may even ask, “is money real?” But you — the adult — know better. You know that spending money has real consequences — right?
The truth is that it’s not as black-and-white as you might think. It all has to do with an idea called “financial abstraction,” and it has big effects for you and your family’s happiness, both in the short term and in the long run.
Why we spend more when we pay with cards
You’ve probably heard about studies that say you overspend when you use swipeable cards as opposed to cold, hard cash. And indeed, that’s true. This effect has been found time and time again, including in a 2003 paper where credit card users spent an average of 32% more than cash users at a grocery store.
Researchers aren’t exactly sure why this is yet, but it likely has something to do with how you perceive the money you’re spending with different methods. For example, you can sense cash with each of your five senses. You can see it, smell it, feel it, hear it, and if you’re a hungry kiddo with a distracted parent, even taste it.
Perhaps even more importantly, you can visually see how your stash of cash gets smaller when you buy something. If you have $10 in your wallet and you take out $5 to pay for a drink, you’re painfully aware that you have less to spend going forward. If you buy one more drink, in fact, you’ll be out of money.
Compare this with spending with a card. It looks the same and feels the same regardless of how much you buy. There’s no feedback on how much you’re spending in comparison with what you have left. You’ve become disconnected from your spending. Money starts to hold a fuzzy meaning, hence the term “financial abstraction.”
When you spend with a card, it doesn’t hit your brain the same way as it does with cash. That’s likely why it’s so easy to overspend. Sure, you might realize in the back of your head that it’s not a bottomless pit and it does have limits. But in the heat of the moment, it’s all too easy to buy those extra cookies, say yes to that extra drink, or add on an extra service.
The $10,000 Monopoly experiment
It’s a problem that all parents are familiar with. Financial educator Adam Carroll noticed it, especially while his children were playing Monopoly.
“I noticed that they were making decisions that didn’t seem like they were based in a respect of the money. It was more like, ‘Oh, we’re just rolling the dice and moving pieces,’” he said. “And so I thought this might be a good opportunity to teach them with some real-world experience and some hands-on tangibility in cash.”
Believe it or not, Carroll went to the bank one Friday afternoon and temporarily withdrew $10,000 in physical cash from his home equity line of credit. That Sunday, he and his kids sat down to play in a high-stakes, winner-takes-all game (albeit with a smaller cash prize of $20).
He immediately noticed some changes. “Interestingly, our game went faster, the kids were more conservative about their decision making,” Carroll said.
For example, Carroll noticed that his daughter wasn’t buying any properties at first. “I said, ‘How come you’re not buying anything?’ And she said, ‘I like having cash in my hand.’ And to this day, my daughter will always have cash, like almost to be prepared. That was her realization.”
Similarly, his youngest son bought fewer properties than usual. His other son, fond of buying expensive Boardwalk and Park Place, realized that he could leverage himself faster by buying cheaper Oriental and Baltic Avenues.
And the biggest lesson for the parents? “My wife and I’s takeaways were that they’re far more apt to spend our money than they are their own money.”
Not Only Monopoly Money
Carroll’s experiment showed an extreme example, but the lessons learned show up in everyday life. Financial abstraction is a real problem, and it doesn’t extend to swiping a credit card versus paying in cash.
“What strikes me is that this will continue to be a problem,” said Carroll, “and the reason being is that we are going more and more virtual all the time.” Think of the last online purchase you made, for example. You didn’t even need to swipe a card. All you had to do was enter a number, and everything took place digitally behind a curtain of smoke and mirrors.
There are more and more ways for the earn-spend feedback loop to get muddied up today than ever before.
For example, more people are using credit card points than ever to pay for things. Cashback apps reward unfettered spending. Apple Pay lets you simply tap your phone to purchase goods. Student loans can essentially give you a blank check before you’ve even mastered the basic concepts of financial management.
It’s possible to take on debt for almost anything, and with such free access to money, it’s also hard to wait until you’ve saved up. Why delay getting LASIK surgery or a new car, for example, when you can simply take out a loan for it today?
How can we overcome financial abstraction?
Luckily, even though we live in a world of financial abstraction, we’re not out of options. There are real things that we can do to teach our kids how to do better, and how to do better for ourselves as adults.
Teach your children good money habits
“I think as parents, we have to raise kids in a financial environment where there are boundaries,” says Carroll. The best way to do this is with payment for helping out around the house — i.e., an allowance.
“We told them, ‘there are things that you’ll pay for, like going to the movies, going to a basketball game with a friend, buying a gift for a friend if they invite you to their birthday party.’” said Carroll. “We wanted them to experience having money flow through their hands so they understood the fragility of it. Like there’s a limited amount, so I have to make decisions. ‘I can either do this, or I can do this.’”
Carroll also set up certain veto powers with how his children can spend their allowance so that they didn’t end up spending it all on candy. It’s important to keep a distance so that children can make their own spending decisions.
“In reality, they need to have money flow through their hands so if they’re making poor decisions and then we can coach them on making better decisions.” After all,
Find a budgeting system that works for you as an adult
What about those of us who didn’t have (or at least didn’t learn from) those wise lessons as a kid? The answer is the same for everyone: find a budgeting system that works for you, and use it.
“I think for adults that find themselves in this situation, getting logical about it and saying ‘here’s how much and I have, and here’s how much I can spend. I have to decide what the priorities are that I’m willing to spend money on,’” says Carroll.
Finding a budgeting solution can take time. You need to find the right one for you, decide on how you’ll allocate your income, and then you need to get used to using it on a regular basis.
That’s why the envelope budgeting system is so popular among new budgeters. It provides strict guidelines that you can’t break as easily as if you set up a passive budgeting system like Mint or YNAB, which only record your spending after the fact.
Think of them as training wheels. They might be a bit embarrassing to use at first, but they’ll keep you from falling while you’re learning. And they’ll allow you to make sure you and your family are taken care of in the long run, regardless of how many roadblocks occur on the way to get there.
“I think setting a budget does this. Whether you use the envelope system in cash or the Qube app, it’s like fencing in your backyard,” says Carroll. “And that’s what budgeting does, it creates a safe boundary.”