In a study that will appear in December’s issue of the Journal of Consumer Research (but which was published online last month), Priya Raghubir and Joydeep Srivastava argue that “the denomination effect” makes us less likely to spend large denominations (a $20 bill, for example) than small denominations (such as twenty $1 bills):
The results suggest that the denomination effect occurs because large denominations are psychologically less fungible than smaller ones, allowing them to be used as a strategic device to control and regulate spending.
In other words, people have psychological barriers to spending large bills. This means that, as a little money hack, you can reduce your spending by carrying $10s and $20s instead of $1s and $5s. In fact, that seems to be what many people do already.
The authors conclude that some consumers intentionally choose to receive money in large denominations if they want to prevent themselves from spending it. They write: “Tightwads prefer to be paid in a large denomination when the need for self-control is high but prefer to be paid in many small denominations when there is no need for self-control.” Spendthrifts don’t have a preference.
Why is this? The authors surmise that tightwads feel the “pain of paying” more acutely than do spendthrifts. Because of this, choosing large bills may help them pinch their pennies. From the article:
Tightwads may be tightwads because they fear spending even though they are aware that they spend less than they would like to, and spendthrifts may be spendthrifts because they do not fear spending even though they are aware that they spend more than they would like to.
The authors note, however, that once a large bill is broken, the consumer may be more likely to spend. This is “similar in spirit to the shopping momentum effect in which an initial purchase provides the momentum for a second unrelated purchase.” (We discussed shopping momentum last year.)
Want to hold onto your cash longer? When possible, opt to carry bigger bills!
J.D.’s note: I want to see more research on this. When I carry big bills, all that means is that I’m likely to spend more money…
[Journal of Consumer Research: The denomination effect, via Coin by Coin. Photo by Refracted Moments.]
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I often find myself wondering if a place can break a 50 or a 100 – sometimes that keeps me from spending.
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This makes sense when I consider my own spending patterns with cash. I don’t often carry cash though, I usually use my debit card. I wrote an article similar to this comparing my emotions when using a credit card compared to using a debit card, and while not exactly the same idea, there is definately an emotional attachment to money coming directly from my bank account.
Those interested can read it here:
http://hundredgoals.com/2009/04/25/ease-of-credit-pain-of-cash/
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I agree with this 100%. All these little money hacks can add up. When you add this with giving every dollar a purpose (a.k.a. the envelope system), it can be a fantastic way to curb spending!
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I think that because I’ve trained myself to only carry money that I’m free to spend, I don’t pay a whole lot of attention to the denomination. If I’m carrying it, I can spend it on whatever I want, so it doesn’t matter if it’s a $20 or a $1.
Although, now that I think about it, when I have larger bills, I think I tend to actually spend more. I’ll treat myself to an extra snack or splurge on a goodie because I normally don’t carry more than $20 to spend on myself in a week.
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This is pretty interesting, but perhaps I’m an outlier. I hate fiddling for change and generally toss my one- and two-dollar coins in a jar at home (I live in canada). I hate carrying 50s/100s and don’t mind spending twenties.
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I am the opposite. If I only have a little bit of cash with me, I’m less likely to spend it, thinking I might need it for something more important later. But, if I have a lot, I have more wiggle room to spend. Though I don’t generally carry much cash, since I’m more likely to spend cash than not. As for the ‘spending momentum’, I TOTALLY agree with that. All it takes is one purchase at the mall and I’m off and running. It’s like some sort of seal has been broken!
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J.D.: You write that when you carry large bills, you’re just more likely to spend more money. I bet this isn’t true. I bet that if you carry MORE MONEY, then you’re more likely to spend it–if you have $100 in 20′s, you’ll spend more than if you have $20 in 1′s. But, I bet that you’d spend more (or be more likely to spend) $20 in 1′s than break a $20.
I know I’ve been in a store and sort of kind of wanted something small, like a soda or a pack of gum, realized that I only have a 20, and buy nothing. If I’d had a single, I’d have bought it.
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I’ve never felt comfortable with more than $20 cash in my wallet, seeing as if I lose my wallet I’m also out more than $20.
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Nope, I don’t do this – I do the opposite. Each month I get $200.00 in one dollar bills. I have only a few dollars with me at a time….keeps me from spending. Also, did you ever notice that when you have a twenty dollar bill in your wallet and you break it, it just tends to disappear after that, and you have nothing left? Usually I leave home with a couple dollars and I return home with a couple dollars.
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We pay ourselves our allowance in large bills. We have noticed that we both save more that way. Once the $100 is broken, it goes quickly. Rgiht now I am half way to a new laptop.
The unfortnate part of carrying a large bill is you set yourself up for either a mugger or (worse) a cashier that has no idea how to make change!
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It probably also has something to do with the ease with which vendors and vending machines accept small bills. If I have $2 then I almost always will buy a Coke from the vending machine that day. And some vendors do really resent having to break larger bills.
I have more than once looked in my wallet and been annoyed and relieved that I only have larger bills that are totally useless.
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I worked at an amusement park in the Games dept in HS around 15 years ago. We were trained that when someone needed change, we gave them as small bills as possible. Why? Because they were more likely to spend it at the park. Sometimes someone gave us a $100 and it wasn’t possible. I can’t give out all my 5′s or 1′s after all. But this isn’t anything new to people who want you to spend your money. It’s also one reason why ATMs dispense $20 bills.
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Based on the comments so far, I would say that it all depends on the person. I usually have between $40 and $100 with me and can resist the urge to splurge regardless of whether it’s small or large bills. Over the last few months I’ve trained myself to ask “Do I really need this?” on every non-essential purchase.
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I agree with this, it seems like a study that found out something most of us knew.
I hate to break a 20 because it just moves right out of my wallet once it becomes smaller bills.
I do carry a 100 in my wallet at all times. It makes me feel prosperous and I always know that if my debit card were to fail to work (you never know what could happen) I will always be able to “Cover it” with my cash.
I got this idea from an audiobook that suggested carrying a 100 bill and “spending it” in your mind. Look at things and realize “I could buy that, I could by that, I could by that….” By doing that you have a sense of wealth and prosperity. A very simple idea, and it works.
TW
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The authors “surmise” that tightwads carry large bills because it curtails spending, eh?
Or maybe it’s because we know we aren’t going to spend a ton, so we choose the most convenient way to carry cash – the largest bills we’re unlikely to have trouble breaking. Personally, I get my cash in $50s for this reason ($100s aren’t accepted by a lot of places in my area).
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My grandparents were prime examples of this philosophy.
I can remember countless occasions where the phrase “I don’t want to break a $100″ would come up during a day trip with them.
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It actually doesn’t make much difference to me. I buy almost nothing that isn’t planned. Even when I go to Barnes and Noble, it’s to pick up a specific book. I rarely go to places that lend themselves to impulse shopping. This includes thrift stores and used book stores.
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I don’t see how this possibly works in the age of debit cards. I don’t want to break a hundred-dollar bill for a $5 lunch? Ok, fine, I don’t have to, I can just use my debit card.
Of course, I use my debit card for pretty much everything, and rarely have cash on me at all.
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As TK noted, I don’t carry much cash to begin with; almost all of my transactions are done with plastic. In fact, the majority of the paper bills I spend are due to various extortions carried out by my graduate department (please contribute to buy a gift for this person, please donate to this fund, etc). If not for the social pressure to “chip in” (which I loathe), I’d hardly have any need for bills.
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@Sabrina: We did almost the same thing at the restaurant I used to work for. When providing a patron with change, we’d give as many ones as we could, on the premise that the person would leave more ones as a tip, since a $1 bill looks like nothing next to a $5. For example, if the change was $7, we’d give him back 7 $1 bills. This way, he’d probably leave more of a tip than if we provided him with a $5 and 2 $1 bills. This is on the premise that the person had no extra cash on him, but still. It worked to our advantage in tips more often than not.
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My brother did the opposite, but with the same intent and effect. His first paycheck was about a hundred dollars… so he went to the bank and got something like a hundred dollar bills. It made a nice wad of money. He didn’t want to decrease it at all because there’s something about the absurdity that appealed to him.
We once gave a cousin a hundred dollars in two-dollar bills. No one wants to spend a two-dollar bill. They’re too cool.
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I don’t use cash if I can help it, because I realized that if I did carry cash, I would spend it. I’m actually more averse to using my credit cards, and that keeps me from spending.
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I don’t usually carry much cash, but if I do, it’s for minor but planned purchases, like the movies. Truly frivolous spending brings out the checkbook, where I have a column for entertainment and another for miscellaneous. I know where I am in the budget before I spend. Knowing that, having the $20 doesn’t slow me down much. As an aside, one local bank will let you take money out in $5 increments. I’m not sure why.
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The premise of this makes complete sense to me, but sadly, I wouldn’t have any qualms whatsoever with breaking a $50 or $100 dollar bill. I did find that if I used my credit card, then I would spend 3x more than if I just carried cash though. So I spend less carrying cash, while I’ve read that many others do better with cards and not cash. So I guess it’s just being honest with what your temptations are and act accordingly. I no longer use a debit card or a charge card (except for air reservations), and stick with cash. It’s a little more inconvenient, but it keeps me from overspending.
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JD,
I agree. If anything, larger bills tend to make a quick look in the wallet seem like I have more cash on-hand than if the only bills I see are $1′s. Would be interesting to see some follow-up research on this.
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This makes perfect sense to me! I can easily “nickel & dime” small bills away, but I can’t spend a $20 in the vending machine. Hmmm… this may help with my snacking habits too!
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Interesting idea about the denomination of money, but I find that I am completely the opposite of this research. The size of the note has no effect on whether I spend it or not, in fact I am more likely to put the change from using a big note into a savings pot. This may be because what I do spend my money on 99% of the time is necessities so whether or not I use a large note or not makes no difference to whether or not I actually save money.
But I can see how this does make some sense when you are deliberating over a spontaneous purchase and don’t want to split a large note to do so.
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I loathe breaking bills $20 or higher, so this research does apply to me. $5 and $1 bills, though, seem to fly out of my wallet. I also hate using my debit card because I’m compulsive about balancing my checkbook, so the debit card represents a recordkeeping hassle if I’m feeling lazy.
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I disagree with this post. However, I do understand how it is harder to keep track of those smaller purchases. When living over in Germany, the ATM machines gives much larger bills. If I took out 160 Euros, it would be in 100, 50 and 10 bills. The 100 bill was usually the first bill to go, not the last. Next take the coins, the 2 & 1 Euros are coins. Most the time, those went into jars to get out of our pockets.
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Usually I only get 50 EUR at the ATM (in the package 20 + 2×10 + 2×5), and as I collect 5EUR bills, these are “gone” right away. From the others, I try to last as long as possible, and every 5EUR bill is taken out of the pocket and put on the pile – so I often break larger bills to get a 5 somehow *G*
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Wow, great advice. I think I knew that it was true even before I read it. I just didn’t think about it before.
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I can attest to this. Holding a $50 bill, I definitely don’t want to spend it. Holding a $20, I take note, but it doesn’t feel as sad as breaking a $50. So that whole “momentum” effect really rings true with me too. Interesting to note that it also applies to shoppers/shopping in the malls (a place I rarely go!).
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I have a technique I used to use (when not all of my purchases were 100% planned ahead): whenever I broke a bill, I would put the change away. Usually only the coins, I would keep the smaller bills, but every single coin I put in my coin jar. Every so often I made coin rolls out of them and deposited them at the bank.
I realised I didn’t really miss the money I wasn’t spending, and in the end I had more in the bank. That worked well for me.
Now I avoid cash altogether, though. I’ve noticed (which seems to be the opposite for most people) that I spend more if I have cash on me than if I only have a bank card. (Debit, not credit).
I think I might feel like, if I’m carrying cash, it means I can spend it. If I’m not carrying any, I shouldn’t spend.
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Those guys are right.Make small spending then and not to carry more money than you plan to spend on that particular day.
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I carry $60 to $80 dollars of cash just about all the time, in $20 bills if I can. (In Nebraska, there are still some places that can’t take a credit card, and won’t take an out of town check.)
I find that once bills are broken down to ones I have a bit of trouble with vending machines. I can’t resist soda and candy bars, but when I don’t have any bills that the machines can take I just don’t use them. Once I break a 20 into ones, it is only a matter of time before they are all spent.
Don’t tell the vending people, but if they had a machine that took credit cards, they could own me. People say you can’t buy happiness, but I think the Pepsi Cola company has managed to bottle it, and they only sell it for a meager $1 per bottle.
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I think the idea of better realizing how much money you have at hand to prevent you from spending it is good in theory. Keeping money in your pocket -may- do that for you, however, there are some serious drawbacks to this that have nothing to do with savings:
* You paint yourself as a -much- bigger target for robbers. Flashing this much cash, even briefly, is more than enough to let others know you would make a good victim.
* By paying in cash, compared to say a credit card you pay off each month, you forfeit protection if it is lost or stolen. I personally treat my credit card as a debit card and pay off big purchases immediately, but if it ever gets lost or stole I am only liable for a tens of dollars and not hundreds of dollars. If you lose your wallet, you’re out 100 bucks.. 200 bucks.. etc.
* Having large amounts of money in your wallet would mean that when and IF you decide to break it for smaller change, you now have a wallet that appears to have a lot more money in it, circumventing the original idea.
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I’m with J.D. – I’m also more likely to spend more money when I carry big bills. The denomination isn’t a deterrent for me. Maybe I should leave my cash home next to my credit cards.
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I mostly deal with this by not carrying cash at all, so that I can’t buy something.
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I notice more when I have to break a 20 or bigger than I would a 10 or smaller.
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When operating on a cash system for the weekly essentials, i.e. gas, groceries, etc., it doesn’t matter what the denomination, the money has to be spent. So, I think this philosophy applies for impulse purchases. If the question is ever asked, “I don’t want to break my (WHATEVER the denomination) for the impulse, the issue is not keeping the cash, it’s the will power to say NO to stuff that’s not on the budget. BTW, the budget should include mad money. Also, after all the spending is done, we save our 5s as a result of flucuating expenses, i.e. lower gas prices, sales at the grocer’s. Very quickly we had more than $100 saved up.
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I don’t need research to tell me this – I’ve definitely done exactly this since my first job when I was 15! I cashed in all of my tip money from waiting tables for the biggest bills possible, and allowed myself to use anything less than a 20 as spending money while 20s, 50s, or 100s went into an envelope for savings. I use credit/debit for virtually every purchase, but when I do use cash I consider a $20 bill gone if I’ve broke it – the change from the $20 will be spent on lots of little stuff I wouldn’t bother breaking a 20 for.
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It seems like I go into a lot of places that won’t accept bills over $20.
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This is so true. I definitely notice when I have to pull out a larger bill to break. Thanks for bringing it out in the open!
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