Before, it was about common sense and conventional
wisdom. Now, it is has been proven through real research.
According to a study published in the Journal of Consumer Research, shoppers are less likely to spend their money if they are carrying cash in large denominations. There is even a name for this social phenomenon: ‘denomination effect.’ Through experiments, the study shows that if people carry a $100 bill, they are less likely to spend it than say a $20 bill. The lower you go, the more likely it is that you will spend it. The psychological rational behind this is that our brains overvalue larger bills and undervalue smaller ones. In other words, we think of a $100 bill as much more valuable than 5 bills of $20-essentially the same amount of money.
So what are some real life implications for this other than the obvious ones? well for one, while your wallet shouldn’t be empty, if you have to carry cash, make it in a larger bill. For general day to day activities, I am personally not in favor of carrying very large bills – say a stack of 100 dollar bills- I think $50 is the best thing.
Try to do your own experiment in real life. See what a different it makes when you have larger bills compared to those times when you have smaller bills. Better yet, compare it to those times when you have spare change. Do you spend more with spare change? For me, I have been applying this way before I read about this study and it always works. In fact, I generally like to divide my ‘personal spending’ money from my budget into some large bills and some small ones. This way, while I will go through the small ones, I may think twice about spending the larger ones, because as we all know, once a big bill has been broken, it is hard to stop spending it all.