How much cash should you carry?

by on September 4, 2007 at 5:08 pm in Economics | Permalink

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!

1 Mikael September 4, 2007 at 5:18 pm

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.

2 Brent September 4, 2007 at 5:27 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.

3 Dan September 4, 2007 at 5:31 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).

4 Yogi September 4, 2007 at 5:44 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.

5 Richard Green September 4, 2007 at 5:48 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.

6 Telnar September 4, 2007 at 5:55 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.

7 triticale September 4, 2007 at 6:07 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.

8 Caliban Darklock September 4, 2007 at 6:13 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.

9 chug September 4, 2007 at 6:28 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….

10 Josh September 4, 2007 at 7:03 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.

11 Germophobe September 4, 2007 at 7:26 pm

Being a germophobe, I avoid cash. You never know where it’s been.

12 shawn September 4, 2007 at 7:54 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.

13 Shane Milburn September 4, 2007 at 8:14 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.

14 Hao September 4, 2007 at 8:54 pm

Here’re my reasons for using credit cards wherever I can:
– it builds credit history
– cash back rebates on grocery and gas
– you get to see your exact spending on your monthly statement
– safer, zero chance of counterfeit, insurance against online fraud, etc
– cleaner
– one month of money sitting in bank collecting interest, HSBC has 5% apy now
– I hate coins

The the big question is, why aren’t we living in cashless world yet? It’s 21 century, where’s my flying car?

15 fustercluck September 4, 2007 at 9:36 pm

The answer, of course, is 42. Dollars.

16 gorobei September 4, 2007 at 10:20 pm

Cash. It’s way faster. And, when you pay your share of a $1000 bar bill, you chuck in a $20 or so per drink and you are done. Let some other drunk try to figure out 20% of 783, and then sign his name to his math.

17 DanC September 4, 2007 at 10:38 pm

BTW my credit card expenses are about $5,000 per month, I pay the balance every month, so I have a $5,000 interest free loan every month. Plus I get various rewards, non trivial, at the end of the year to thank me.

18 ALEX September 4, 2007 at 10:58 pm

For the most part i don’t carry very much cash if any at all. It’s not a matter of safety for me, i just don’t always have time to go to the bank or an atm being a college student because my check is directly deposited. During the summer and long breaks when i work and get a check i do carry cash but that is only because i am forced to go to the bank to put my check in. I really have no preference on having cash or not because i still have the money on the plastic.

19 Tyler September 4, 2007 at 11:26 pm

In my case I usually carry about fifty dollars on me at all times. I have a debit card that I carry with me that has the rest of my money on it. I feel that if something were to happen and I need to have cash, I would have enough to get me to a bank or somewhere that would take my card. Also, if I have a lot of cash on me I feel that I can spend it more easily than I do when it is on my card.

20 zlguocius September 5, 2007 at 1:02 am

I’m a little confused. (I didn’t read all the comments, some of which may have dispelled my confusion.)

I thought the contrast was between (A) carry cash and (B) credit card. Not between carry cash and (C) going to the ATM to get cash whenever you need it.

Tyler’s reasons may apply to (A) versus (C) but seem to miss the debate between (A) and (B).

21 AZ September 5, 2007 at 8:23 am

I wonder what the average age of the “carry more cash” crowd is and the average age of the “who uses cash” crowd is. Just curious. Count me in the “carry more cash” group, although I have a feeling I’m on the younger side (30) of the “carry more cash” group. Especially when driving long distances – I had to make an emergency stop one time, and it was not one of those “super center” exits off the highway, and the cash register at this place looked like it was 80 years old. Needless to say, this guy didn’t take credit cards.

One added bonus of carrying more cash: A group of us were out one night and this guy, who was on his first date with one of the women in the group, just tossed his money clip on the table. Now it was probably just a 100 wrapped around some 5s and 10s, but later on I asked another of the women in the group for her take on the guy just dumping his money clip on the table to pay for things and she said, “It never hurts to see someone drop a wad of cash like that”. Apparently tossing the gold or platinum or super-duper-titanium credit card doesn’t have the same effect.

22 Jeff Brown September 5, 2007 at 9:34 am

Don’t forget the opportunity cost of worrying whether you’re being efficient.

23 Peter September 5, 2007 at 9:57 am

One added bonus of carrying more cash: A group of us were out one night and this guy, who was on his first date with one of the women in the group, just tossed his money clip on the table. Now it was probably just a 100 wrapped around some 5s and 10s, but later on I asked another of the women in the group for her take on the guy just dumping his money clip on the table to pay for things and she said, “It never hurts to see someone drop a wad of cash like that”. Apparently tossing the gold or platinum or super-duper-titanium credit card doesn’t have the same effect.

Apparently studboy never learned the First Rule of Poon Tang:
If you gotta pay for it, it’s not worth it.

24 Marina September 5, 2007 at 10:32 am

For those of you claiming that cash is faster than plastic … have you watched a cashier struggle to give you change recently? I’d rather pull my hair out.

After living in Los Angeles for a year — where I don’t think I ever even *saw* cash (probably because everyone is living on credit) — I stopped carrying cash around. My Wells Fargo debit card gives me rewards points that translate into an extra $25-30 a month in my pocket.

However, this perspective does hinge somewhat on where you live. I withdraw cash when I’m visiting Manhattan for cab fares and such. In Portland (OR) where I live, however, all cabs take all major CCs, and I add tips at the end when I’m buying drinks at the bar, so I have yet to come across a situation where I need cash in hand.

25 Henry September 5, 2007 at 10:54 am

I carry cash and almost always use plastic.

But there are times when cash saves lots of time. Small purchases (coffee & bagel, a newspaper, a pint) — if you have a few singles, or maybe a five, you leave the bills on the counter and don’t need to wait for change.

Restaurants — if you have at least a five or ten to go along with the standard 20s, you just round up the tip, leave the bills on the table and walk out the door. I especially want this option when we’re eating out with the kids.

Splitting the bill — always easier with cash.

Riding the bus — I always want a few singles on me, just in case I forget the ride pass or have used it up.

26 AZ September 5, 2007 at 2:17 pm

Because you all are dying to know (maybe just Peter and Hao), Mr. Wads of Cash left to bring his date home (who turned out to be about 15 years older than I thought she was) and then apparently returned trying to find the one who was impressed by the wads of cash. Mr. Wads of Cash ended up with no cash, no women, and probably an empty gas tank after driving back and forth around the city.

I can’t complain though, because in trying to impress the women Mr. Wads of Cash paid for drinks all night long for the whole table, including me. Of course, it didn’t matter to me whether or not he used cash or a credit card at that point.

27 Arho September 5, 2007 at 3:20 pm

I vote mostly credit card. Why?

I tend to wear jeans so tight that I can’t fit a wallet in the pocket. It is even hard to get cash out, especially coins, if I just stuff it in there. So, I have a credit card holder just big enough for a credit card and an ID.

I guess I’m from a different demographic group than most of the readers of the blog, though, as this wasn’t mentioned in the first 50 comments.

28 Peter September 5, 2007 at 9:17 pm

Because you all are dying to know (maybe just Peter and Hao), Mr. Wads of Cash left to bring his date home (who turned out to be about 15 years older than I thought she was) and then apparently returned trying to find the one who was impressed by the wads of cash. Mr. Wads of Cash ended up with no cash, no women, and probably an empty gas tank after driving back and forth around the city.

[cue Nelson Muntz voice] HA HA!

29 fustercluck September 5, 2007 at 11:08 pm

If the central issue for the person making this decision is time-sensitive (e.g. – ATMs are not in abundance in his/her area, for example), probably the best strategy is to withdraw the maximum sum so as to reduce the # of trips to the ATM but to keep a large chunk at home to minimize the chance that the whole bankroll is lost/pilfered.

I hope I never become so anal about my time that a trip to the ATM is a life-altering event.

30 Gabriel September 6, 2007 at 9:47 am

Well, cash is king. But in the bank, in my opinion.

3 reasons:

Security: If your wallet is stolen, you cancel your credit card, but don´t cancel your money.

Spend: There´s an old saying here in Brasil: “Dinheiro na mão é vendaval” which means, money available is money spent.

Membership Rewards Points: Great way to earn something out of nothing.

Regards,
Gabriel
http://www.donttalkaboutlife.com

31 CDeBoe September 6, 2007 at 11:21 am

Cash migrates from my wallet to my wife’s purse to someone’s cash register. With cards, the transfer rate is slower, and I have a record of what happened.

32 frank September 6, 2007 at 11:54 pm

CASH.

I’m not in love with credit card companies. They conspire to put all their customers in debt forever.

I’d rather not let them have 2-3% of every purchase I ever make

33 John September 10, 2007 at 9:36 pm

Personally I try to stay away from credit purchases, the whole interest thing just bothers me. I will use credit as a last resort, or for an emergency, but as long as I have enough in my bank account I will use either a debit card or cash. I usually don’t carry large amounts of cash on me, I will carry some small bills for small purchases but mainly I use my debit card, its quick and easy and if it gets stolen all you have to do is cancel the card. If your cash gets stolen you probably wont get it back. With everything considered my personal choice is the debit card. Its safe, its quick, its easy, and there is no interest.

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