There is an enormous amount of research concerning the psychology of money, and to me, the most fascinating research surrounds our spending habits, in particular how they change between using cash versus credit cards.
We all love earning points with our credit cards, but the point system was designed specifically to encourage you to spend more. Even if you pay off your credit card bill each month, studies suggest you’re still likely to spend more money with a credit card than cash, in part because you are disassociated from the purchase. You concern your future self with how you are going to pay the bill, as opposed to ensuring you can cover it now.
We don’t suggest abandoning credit cards altogether, but it’s worth creating parameters for how and when you use them. For instance, maybe you only apply groceries and gas to your credit cards, while using cash for things like dining and retail shopping. Your long term investment strategy will be even more effective alongside a strategy for your day-to-day finances.
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