Save Money: Dump the Dollar Bill

Last Updated Mar 10, 2011 4:54 PM EST

When I first heard about the big push to take $1 bills out of circulation to save on printing costs, I was not a fan. Cash, as we know, limits our spending. Having fewer bills in circulation would likely result in more of us using credit cards to pay for purchases - that was my initial thought.

But there's a potential upside, too. By getting rid of $1 bills, we will be left with bigger bills in our wallets, and research finds that our spending decisions are influenced by the denomination of our bills. A study published in 2009 in The Journal of Consumer Research proves that the chance of spending drops when an equivalent sum of money is represented by a single large denomination (e.g., one $20 bill) relative to many smaller denominations (20 $1 bills). It's called the "denomination effect." Bottom line: The bigger the bill, the less likely you'll break it.

It's all psychological. Spending large denominations is considerably more "painful" than using smaller bills. And loose change? There's no pain whatsoever. How many times have you thrown money away in a fountain or said "keep the change." It's not just because you are superstitious, or generous: It's because you feel less attachment to that money. The authors of the study conclude that sticking with bigger bills like $20s and $50s is "a strategic device to control and regulate spending."

Some other behavioral tricks to saving money that work well:

Narrow Your Options
Too many choices causes confusion. Think of kids in a candy store. One way to deal is to identify a price range you're financially comfortable with and stick to it. For example, let's say you decide you only want to spend $70 to $80 on a pair of new sneakers: Tell the salesperson you need to stick to this range. That should help you avoid trying on - and getting tempted by - the $120 Nike Shox.
Shop with a Frugal Friend
This kind of peer pressure is healthy. Find a friend who reinforces your budget - a "money buddy," as I like to call it. You don't want to shop with a friend who thinks it's OK to blow your monthly budget just because some pair of jeans makes you look 10 pounds lighter.

Don't Procrastinate
We're all guilty of this at one point or another - especially around gift-giving seasons. We wait until the last minute. But this often leads to overspending, simply because we give ourselves less room for comparing options. At the same time, a sense of guilt may take over. We feel we shouldn't compromise the quality of the gift and spend less. After all, it was our fault for failing to allot enough time to find the perfect gift.

More on MoneyWatch: Photo Courtesy: Srish's photostream on Flickr
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    Farnoosh Torabi is a personal finance journalist and commentator. She is the author of the new book Psych Yourself Rich, Get the Mindset and Discipline You Need to Build Your Financial Life. Follow her at www.farnoosh.tv and on Twitter at @farnoosh.

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