Debit Card Beats Cash as Budgeting Tool

Plastic or paper?  Americans have spoken.

In 2013, they made $4.1 trillion in purchases on their credit and debit cards, according to the Nilson Report – and that figure keeps marching upward.

Some researchers view this as a dangerous trend.  Plastic cards, they contend, put distance between a man and his bank account. Without the tactile sensation of handing over one’s hard-earned cash, it’s easy – too easy – to spend money and harder to save.

New research out of The Netherlands has an entirely different take on the cash versus plastic debate. The study, based on a detailed Internet survey of nearly 1,500 Dutch people about their financial habits, shows that they view the debit card “as the better expense monitoring tool.” (The study compared cash and debit cards, excluding credit cards.)

How people choose to follow their budgets depends on how much they earn, according to another finding.  People with high incomes attach less importance to being able to see and track their daily expenses.  They have the luxury of not anguishing about pesky overdraft fees or whether they can afford the rent this month. Not surprisingly, low-income workers have a much greater need to closely track their spending. A $25 overdraft fee can have major consequences, say decimating the week’s grocery allotment.

Income levels also play a role in how the cash-debit card debate shakes out.  Most people prefer debt cards as a monitoring tool – it is precise record of all transactions and constantly updates balances – but low-income people do not, the researchers found.  People without any financial leeway say cash is actually better for tracking three things: the types of purchases they make, the amounts, and how much they have left to spend – perhaps whatever’s still in their wallet.  The study doesn’t speculate on the reasons for this preference, which could be cultural.

There are also behavioral differences between self-identified “savers” and “spenders.”   Savers, like low-income people, are more likely to buck the plastic trend and believe that cash is more useful than plastic when trying to stay on a budget.

Although debit cards are increasingly popular, some people still prefer cash.  But cash is rapidly becoming more scarce in the developed world. Maybe one day it will no longer be an option.