The disconnect between cards and cash

With the festive season upon us, Australians are gearing up for the annual peak spending period, and the growth of digital payment options could be widening the gap between what we regard as our spending limit and the balance of our bank account.

Credit cards make spending (and overspending) very easy, and a new breed of “digital wallets” like Afterpay, zipPay and PayItLater are replacing traditional lay-by. The convenience of credit cards and digital wallets comes with a downside. Research shows a clear link between the way we pay for purchases and how much we spend.

An experiment by the Massachusetts Institute of Technology for instance, involved students bidding on tickets to a basketball game. Some were told they could only pay with cash, while other students were advised they would use a credit card to pay. Among the students using a card the average bid was $60 – more than double the $28 average among students paying with cash.

 

The pain of payment

There is a reason for this difference. It’s what psychologists call the “the pain of payment”. When we take a note out of our wallet, we feel a sense of loss. By contrast, when we use digital forms of payment we have no real sense of parting with hard currency. And that makes it easier to overspend.
On one hand, digital wallets don’t charge interest in the way credit cards do. But they do charge late payment fees. Afterpay for instance charges a $10 late payment fee with a further $7 fee if you still haven’t paid up within seven days.
On the face of it, these fees are low but they act in much the same way as card interest – being a charge on an outstanding balance. If you only owe a small sum, the fees can be the equivalent of a very high interest rate.

Keep it real – keep an eye on spending

With Australians expected to spend billions of dollars at the check-out this holiday season (last year we collectively parted with around $48 billion), it pays to be mindful that no matter how you pay for purchases, at some point the money comes out of your hip pocket.
That makes it critical to keep track of how much you’re spending, and ensure you have enough to meet regular bills – both now and in the New Year, when statements for Christmas purchases start to arrive.

The plus of putting off festive shopping

By the way, if you haven’t yet given a thought to festive shopping, don’t feel too guilty. A study by comparison site Finder found those who start buying gifts in October spend an average of $716 on presents compared to $343 among the chain draggers who leave gift buying until closer to Christmas Day.

Maybe allowing too much time to buy can encourage us to spend more, not less. For expert advice, managing your cash flow over the holiday season, or at any time of year, please contact us.

© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Online source: Produced by AMP Life Limited and published 23 October 2017

Print source: By AMP Life Limited, originally published on 23 October 2017