Every budget has a “mystery” category. For us, that box is called “Cash.”

For the most part, my husband and I pay for everything with a credit card and pay the balance off in full every month. But sometimes we come across something that we can’t pay for with credit - or even a check or debit. We need cash: for a co-pay. For entrance to a board-gaming event. To get snacks out of a vending machine.

Inevitably what happens is that we take $20, or $40, or $60 out. That money gets dutifully recorded in our budget software - under the heading of “Cash.” At the end of the month, I look at the Cash category and realize that $200 or $300 has flowed through our hands, basically unaccounted for.

Some personal finance gurus advocate a cash-only lifestyle as a way to get out of debt and find financial freedom. Cash in hand, they argue, is more tangible, and thus we are more aware of it slipping through our fingers every time we buy a latte.

I would argue, however, that cash in hand is prey for the the sunk cost fallacy.

What is the sunk-cost fallacy? Let Wikipedia answer the question! Many people have strong misgivings about “wasting” resources. This is called “loss aversion”. In the above example involving a non-refundable movie ticket, many people, for example, would feel obligated to go to the movie despite not really wanting to, because doing otherwise would be wasting the ticket price; they feel they passed the point of no return. This is sometimes called the sunk cost fallacy. Economists would label this behavior “irrational”: It is inefficient because it misallocates resources by depending on information that is irrelevant to the decision being made. Colloquially, this is known as “throwing good money after bad”

I’m not alone in this behavior, either. Shuchong discusses this, too, in “Cash to Burn: Why a Credit-Only Lifestyle Works for Me.”

I had very good intentions. I took out $40, because I went to the thrift store, and they only take cash. I spent $19 at the thrift store. What I should have done was re-deposit the extra $20 when I passed the ATM on the way home. What I did do was spend about $3 on pizza, because I forgot to pack lunch one day this week. And then $3.25 on a video rental (My roommate had never seen a James Bond movie before. I had to rectify this glaring gap in her cultural education, poor deprived child, and the library was closed for the evening. It was an emergency AND money well spent.) Another $3 for vitamins at CVS. And I must have spent another $6.00 somewhere, because I only have $5.75 left.

Here are some of my suggestions-to-self (and to you) about stopping this gap:

  • Instead of taking out $20 every time I need to pay a co-pay for a lunchtime doctor’s appointment, I should make it a point to take the checkbook with me that day instead.
  • The post office accepts credit cards. No, really.
  • The dining hall at Brandeis accepts credit cards. No, really.
  • Pre-registering for conventions means you won’t be coughing up $60 cash at the door.
  • The next time the clerk at High Farms Variety - the only place to get the coveted town garbage bags - tells me they can’t accept my credit (or debit!) card for purchases under $20, I’ll remind them that they’re breaking their service agreement with the credit card company by doing so. I can’t guarantee that telling them this will help, but notifying the credit card company might.

What about you? Does money flow throw your hands faster with a credit card, or with cash?