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How much cash should you carry?
Bryan Caplan gets abstract:
At a recent GMU lunch, two economists sparred over the optimal quantity of cash to keep in one's wallet. Economist A holds very little cash, on the grounds that you can pay for virtually everything with credit cards. Economist B holds lots of cash, on the grounds that the foregone interest is virtually nothing, and his time is very valuable.
Whose side do you take, and why? Value of time and foregone interest calculations are welcome.
My view is simple. If you have a job ("economist"), and you live in the safe suburbs, hold gobs of cash, even if you don't want to use it very often. Economists like Bryan stress that people notice monetary opportunity costs but often ignore time opportunity costs, so the bias is toward too little cash on hand. Paying with cash is sometimes quicker, you make fewer ATM trips, and you pay fewer special fees for using non-home bank ATM machines. The cashless society may someday come, but it's not here yet. Don't join it before its time.
Here is an earlier and related post on the tennis ball problem.
Addendum: Greg Mankiw weighs in, hold more cash!
Posted by Tyler Cowen on September 4, 2007 at 05:08 PM in Economics | Permalink
Comments
I usually hold little cash. It's the "lutheran" me acting paternalistically with regards to the wasteful me. I know that with a lot of cash, I spend more.
If I have a lot of cash on me, I tend to find that the likelihood is higher that when the blood sugar gets low in late afternoon (and my discount rate
increases significantly), I will spend it on snacks. I also tend to buy more magazines at the kiosk while waiting for the bus and so on...stuff I always
regret in hindsight.
Posted by: Mikael at Sep 4, 2007 5:18:36 PM
I go to the bank about once a week and get $200-300. Most of these trips combine with a trip to deposit a check or two. But I use credit cards most of the time for spending. I agree the foregone interest on cash is trivial, and I agree one can use credit cards for almost anything. But sometimes credit cards are considerably slower than cash to use. (Lunch, magazines, newspapers). Taxicabs in NY rarely take credit cards at the moment, although that may soon change, and the few that do take forever to make a transaction. Plus my wife takes about $100 per week.
Posted by: Jonathan at Sep 4, 2007 5:26:39 PM
My philosphy is that I should always have enough cash on me to be able to pick up the first round of beers at happy hour -- so about $50 cash -- at all times. Cash is cool. I also find that I tip better to wait staff/cabbies, etc better than if I'm cash poor.
Also, I bank close to my office, and I save more time using the credit card less than I do making a weekly run by the ATM for a decent amount of cash.
Posted by: Brent at Sep 4, 2007 5:27:34 PM
I live in the suburbs, am employed and carry very little cash. (Why use my money when I can play with the bank's money for 30 days?) I pay the entire balance on my ONE credit card at the end of the month. ATM fees? I joined a credit union. What fees?
Posted by: Ed at Sep 4, 2007 5:29:01 PM
I agree on time opp'y costs. When I reach $0 in my wallet, I got to the ATM and get $400 (the most my ATM will dispense at once).
Posted by: Dan at Sep 4, 2007 5:31:41 PM
I don't understand this:
Paying with cash is sometimes quicker, you make fewer ATM trips, and you pay fewer special fees for using non-home bank ATM machines.
You only have to go to an ATM to get cash, so if you never use cash you will never use an ATM...or what am I missing? My paycheck is directly deposited and I use a debit card for almost everything, so I visit an ATM about once a month, usually to buy stamps.
And what are the time-savings that come with paying with cash? You can't be talking about more than a few seconds per transaction.
Posted by: Bob Montgomery at Sep 4, 2007 5:40:28 PM
Don't forget there are hidden costs to using plastic cards. The business pays a slice of that transaction to the card company. I try to use cash at small businesses, like local coffee shops and restaurants.
Posted by: Yogi at Sep 4, 2007 5:44:31 PM
I live in Hyde Park in Chicago, which means I carry very little cash with me.
Posted by: Jar Jar Binks at Sep 4, 2007 5:47:19 PM
I think there's a common irrationality {which I know I share) whereby people tend to spend less when they have to hand over cash rather than electronic details. Maybe it's simply that psychologically, the scarcity involved is far clearer when it is physical scarcity in your wallet, rather than absract scarcity of correctly alinged electrons.
So I find that carrying cash lets me save money.
Though this tends to come in on impulse buys of $15 or more, rather than small change based impulse buys described by the first poster.
Posted by: Richard Green at Sep 4, 2007 5:48:04 PM
I carry enough cash to cover expected expenses for a couple of days even though I intend to use a credit card. Credit cards and the associated technology occasionally fail. If you have no cash alternative, what are you going to do?
Failure can mean something mundane liker a computer or communications problem. It could also mean a hurricane, flood, etc. has thrown modern life back to a cash economy.
Posted by: Fred at Sep 4, 2007 5:48:51 PM
Life is full of surprises and they don't have to be frequent to be worth protecting against when the cost of insurance is low enough.
I've had merchants' credit card processing systems break down when I wanted to make a transaction in a hurry, and have had my logistics change suddenly in ways that required $100 cab fares. This is all above and beyond smaller things like the convenience of not needing to ask waiters to provide multiple checks when trying to split a bill because neither person was carrying cash.
Do these things happen often? Of course not, but the larger ones could have cost an hour or more to solve without cash and often would have caused disruption larger than that to other plans. The annual bank interest (at, say, 2%) on $500 is only $10. I'd be amazed if increasing the average cash balance of an upper middle class person's wallet wasn't worth at least that in convenience gains. The cash only needs to save 20 minutes a year on average for someone who earns $30/hr to pay for itself.
Posted by: Telnar at Sep 4, 2007 5:55:51 PM
These last mirror what I said over on econlog. I have been around in too many odd situations where
unexpected things happened where it was suddenly very handy to have a bunch of cash. So, I am cautious
and keep plenty on hand, even if that means I might get robbed of it sometime. But, hey, a thief can
take one's credit cards as well. They're not much safer in that regard.
Posted by: Barkley Rosser at Sep 4, 2007 6:05:46 PM
When I lived in Hyde Park in Chicago I always made sure I had cash on me. Muggers have a threshold yield below which they become very violent.
Posted by: triticale at Sep 4, 2007 6:07:24 PM
What about cashback and other benefits. Including, developing a strong credit history.
I carry little cash and almost pay by credit card, since I have a card that gives me 1% cash back. Most months I will spend between $500 and $1,500 on the credit card (including things like all grocery purchases and my cell phone bill, gym bill, etc...) and this provides me between $5 and $15 a month extra.
Also, the record of spending and quick payback has a positive effect on my credit report. You should carry some ash for emergencies, but there are really very few places that won't take credit nowadays.
Posted by: lannychiu at Sep 4, 2007 6:13:30 PM
Personally, I still can't stop giggling about the tennis ball post ending with "I feel that twelve balls is too many." Yeah, I'm immature. Eat my shorts.
I myself only carry cash if I know for a fact I'm going somewhere that doesn't take plastic, and I'll actively avoid any such place if it's reasonably convenient.
When I pay with a card, nobody has to make change. If I myself pay with exact change, I waste my time and effort doing so. If I don't, the cashier wastes his time and effort, and I'm stuck waiting around.
I suggest the time savings of never having to wait while change is counted probably outweighs the time savings of using cash, because it is distressingly common that my cashier CANNOT EFFECTIVELY COUNT.
"Your total is $13.79!" "Well, just to make it easy, here's $25.04!" "Uhhhhhhh..."
That seems easy to me. I pull out a twenty, a five, and four of the pennies jingling up my pocket. My resulting change is a ten, a one, and a quarter. But to my cashier, it's a freaking calculus problem. He's so screwed up by the idea, he can't even figure out that if he types "25.04" into the cash register, IT WILL TELL HIM THE ANSWER.
Hidden benefit of not carrying cash: "Got any spare change?" "Nope!" And since I do not in fact have any cash on me at all, zero guilt.
Posted by: Caliban Darklock at Sep 4, 2007 6:13:46 PM
Caliban,
I don't get it. Is it so bad to have two five dollar bills in your pocket rather than a ten? Why not just give the cashier $20.04 if you really want a quarter rather than 21 cents?
Posted by: Mike at Sep 4, 2007 6:27:25 PM
I like my AmEx card that gives me 1.5% cash back (they don't offer this one any more). And my Shell card that gives me 5% rebate on the statement. And my MC for everything else, but that's only 1% cash back when I go over 25,000 points. And all are paid in full every month.
Take my rebates as cash and use that cash throughout the year. Use an ATM maybe once every 18 months.
$200 - $300 once a week is tuition and room and board at most public colleges in Virginia....
Posted by: chug at Sep 4, 2007 6:28:55 PM
It would be helpful to test the assumption that a consumer’s time opportunity costs associated with cards is higher than with cash. My guess is it’s false, especially with advances in contactless payment and signature-free payment for small-ticket transactions. (For example, think about paying at the pump versus walking into the station twice, once to pre-pay and again to collect your change.)
Studies here (http://www.aei.brookings.org/admin/authorpdfs/page.php?id=1060) and here (http://www.aei.brookings.org/admin/authorpdfs/page.php?id=1048) consider an even broader view by pointing out the relatively large time opportunity (and direct) costs associated with cash and checks versus electronic payments faced by merchants, banks, and the broad financial clearing system. In any sort of competitive market, these savings from electronic payments will be reflected in lower prices.
Posted by: john at Sep 4, 2007 6:52:04 PM
I hardly ever carry any cash on me because I find that if I have it then I more than likely will spend it. You can buy almost anything you want if you have a credit card or debit card. If you have a debit card then most of the time it doubles as a credit card and you can withdraw money from an ATM so you don't really need to carry cash on you except for like an emergency situation when you can't use your cards. Cash may be a tiny bit quicker but how long does it really take for you to sign a receipt and be on your way? I side with Econonmist A and his idea that you do not need to carry much cash because you can pay for almost everything with plastic now in the day in which we live.
Posted by: Josh at Sep 4, 2007 7:03:51 PM
Personally, I find I spend a lot more money with more cash on hand. Being a rational consumption smoother, I keep most of my cash at home.
Being an irrational investor, interest rates do not factor into my decision at all. In fact, my first reaction to the appearance of interest rates in this argument was "what the heck are these people talking about?"
Posted by: Robert Olson at Sep 4, 2007 7:15:02 PM
Being a germophobe, I avoid cash. You never know where it's been.
Posted by: Germophobe at Sep 4, 2007 7:26:34 PM
I use my credit card for everything and pay it off every month.
I have my paycheck direct-deposited to a money-market account (4.9%) from which I write
two checks every month: rent and credit card. Since the credit card has rewards:
miles, cash back, concierge services, it benefits me to use it. I carry one twenty
at all times, just in case. If you lose your cash, it's gone. If you lose your card,
all you have to do is cancel it.
Posted by: Anders at Sep 4, 2007 7:32:47 PM
ATM? What is that? I've not been to one in over two years. EVERYTHING gets paid for with my credit card, which gives me double miles. That means, every year, paying 25k on this credit card gets me a $500 airline ticket, for a $39 fee.
I'm uncertain how, if you remove the ATM time costs from your equation, Economist B has any case.
Posted by: shawn at Sep 4, 2007 7:54:15 PM
oh...and...there are places, apparently, that don't take credit cards. I don't shop there.
Posted by: shawn at Sep 4, 2007 7:58:48 PM
I'm a cash guy. I can't stand going to lunch with my friends at work and having to wait for all their debit cards to be run. In addition, that's about $0.25 per transaction for the restaurant owner who has to up prices. What a waste.
Study after study has shown that it hurts less to spend plastic than cash, so I think often paying cash ultimately saves me dollars in the wrong run. I don't have references, but have read studies showing that we tend to spend more on plastic than if paying cash.
Posted by: Shane Milburn at Sep 4, 2007 8:14:06 PM
