The Psychology of Cash Management: How Large Bills Can Help You Spend Less

by A Guest Writer · 7 comments

in Guest Posts

Vik Tantry’s video blog,, is  dedicated to teaching people about personal finance.

Small bills are very convenient to carry around. After all, they do make it easy to pay in exact change. But according to a recent study published in the Journal of Consumer Research, carrying small bills can actually cause you to spend more on impulse than you otherwise would.

This phenomenon is called the “denomination effect,” and has a lot to do with the ease of making a purchase. For example, let’s say that I walk into a souvenir shop and see a baseball cap I just have to buy. After tax, the cost of the cap comes to exactly $13.00. If I had exact change (say a ten and three ones), it would be very easy for me to complete the transaction. However, if I were only carrying twenty dollar bills, then the transaction becomes a bit of a hassle. I’d have to break a crisp new twenty, and then count my change. Psychologically, breaking a large bill makes it seem like I’m spending more, thus increasing the probability that I’d reconsider the impulse buy.

A study conducted at UC Berkeley demonstrated how the denomination effect influences spending. One group of students was given one dollar bills, while each person in a second group was given four quarters. All of the students in both groups were given a choice: either keep the money, or spend it to buy candy. In the first group, less than a third of the students spent the money, while nearly two-thirds of the second group spent some of their quarters. Clearly, the idea “breaking the dollar” had some psychological impact on the students.

The denomination effect actually has even more power with larger notes. Studies show that you are far more likely to pass on a purchase if you only carry fifty or hundred-dollar bills. But there is a catch: once you do break a large bill by buying something, you are far more likely to go on a shopping spree. This is also psychological; once people commit to breaking a large bill, they often mentally commit to spending all of it. They have fired up the “impulse to buy,” and when they realize they still have cash in their pocket, they figure why not spend a little more?

In a recession, we are all looking for ways to save money. Ironically, carrying larger amounts of cash around may very well be a solution! If you are looking for a way to curtail your impulse buying, try experimenting with carrying larger bills for a few weeks. Keep track of your spending, and see if it helps. Of course, this in itself is not a full-fledged solution – it is always important to spend carefully and budget wisely. But maybe a few psychological tricks now and again can help us move in the right direction.

I know that if I carry cash around, I spend it. What about you? Are you influenced by the denomination effect?


1 Amy Reads Good Books June 29, 2009

Nice post! I always just carry twenties. Maybe next time I’ll try a bigger bill and see if it helps me slow down spending cash!
.-= Amy Reads Good Books´s last blog ..The 19th Wife =-.

2 Jon June 29, 2009

I do believe this to be true.It always seems harder to break those larger bills.Now if I just had a few to carry around.

.-= Jon´s last blog ..A Beautiful Day “Nani La ‘Ao”,Hawaii =-.

3 Kelly June 30, 2009

I agree- it would be nice to be able to think about this more in practice than in theory!!

4 Kika June 29, 2009

My husband hates breaking bigger bills so he shares this mindset (but then again, he doesn’t like spending in the first place). I don’t think this influences me; I know what we have in our different budget categories so whether I spend with coins, a big bill or my VISA (paid off at the end of each and every month) it makes no difference to me.

5 Abigail June 30, 2009

I definitely hate breaking any given bill other than $1 ones. That said, I always find it more terrifying to see cash drip away than when I use a debit card. So perhaps we will one day switch to all cash.
.-= Abigail´s last blog ..Do you have to play 'bad guy'? =-.

6 Vik July 1, 2009

This is Vik – the writer of the guest post. Thanks for the great comments. One thing I was curious about is whether people tend to use their credit card more if they're carrying large bills – any thoughts on this?

7 Andrea July 6, 2009

I have never heard of this before, but it makes sense. I never carry cash. I carry plastic. I always thought that if I had cash that I would be more likely to spend it than if I had carried the plastic. Hmmm. I wonder what would curb my impulse buying – I just don’t go shopping to much anymore. That works!

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