New Research Finds Carrying Big Bills Curbs Spending

College Park, Md. – March 18, 2009 – Keep large bills in your wallet if you want to spend less cash, according to new research from the University of Maryland’s Robert H. Smith School of Business. Researchers find people are more likely to think twice about making a purchase when they carry one large denomination of cash rather than many smaller denominations equal to the same amount of money — for example, you’re more likely to hang onto a $20 bill than 20 one-dollar bills. This is because there is a greater “pain of paying” associated with breaking a large bill and there is a good chance you will lose track of spending when you break a large bill. When those studied knew they had to save $100 or exercise self-control in spending, they were more likely to choose a single $100 bill than five $20 bills.

“If you want to cut back on your spending in this tight economy, keep your cash in a few big bills vs. a number of smaller ones,” said Joydeep Srivastava, associate professor of marketing at the Robert H. Smith School of Business, co-author of the research. “In the face of the temptation to spend, you’ll be more reluctant to break that hundred-dollar bill so you’ll end up saving it.”

However, Srivastava also cautions against the consequences of a “what the hell” effect that kicks in once self-control has been overcome. In three studies conducted, he and co-researcher Priya Raghubir, of New York University, found that once consumers decide to spend money, those carrying large bills actually spent more than those with small bills.

“Unfortunately, once you break a big bill you’re less likely to pay less attention to the total amount you spend,” he said. “You’re more likely to throw self-restraint to the wind once you’ve released the impulse to buy.”

Most economic theories base individuals’ spending decisions on the amount of money they have, but this study recognizes the importance of what the researchers dub the “denomination effect.” The research will be published in an upcoming issue of the Journal of Consumer Research. It follows previous research by the pair that finds consumers spend more when using credit cards or gift cards instead of cash.

“If you want to save then increase your exposure to the ‘pain of paying’ now rather than in the future, as is the case with credit cards” Srivastava said, offering advice for those who want to stick to a budget. “Leave both your credit cards and small bills at home.”