Bryan Caplan  

How Much Cash Is In Your Wallet? Why?

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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.

P.S. Please don't repeat the textbook model of money demand. I'm asking for a concrete solution, not a general framework. :-)


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The author at 曼昆/Greg Mankiw's Blog in a related article titled How much cash to hold writes:
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COMMENTS (37 to date)
Larry writes:

On a very practical basis, the cost seems to be the time it takes to replace a debit or credit card, versus the the cost of just outright losing the cash. so I generally carry about $20 around, as I'm not prepared to write off more than that!

caveat bettor writes:

I tend to act more like Economist A. I feel that my credit cards are safer than cash on my person, as the former are much more easily replaced. The survivalist part of me thinks a chunk of cash at home is important, like water, batteries and other supplies.

Rachel writes:

I try to use only credit cards because they provide statements. When I use cash I have absolutely no idea where the money goes.

jcolter writes:

Transaction Fees

I usually take out at least a hundred dollars at a time. The reason is because of ATM fees. If I am withdrawing $100, I am already paying an effective tax of about two percent on that money (not including what my bank charges me). The more money I take out, the less I pay percentage wise in fees, and thus the lower my "bank tax" rate.

Acad Ronin writes:

1) My wife carries less cash than I do, and she pays for cash items when we are together. She can refill at almost zero time cost by taking cash back when she pays for the groceries by debit card.

2) I follow an S-s model with my cash holdings, drawing out about $100 when I fall below $20, unless getting cash would mean making a special trip to the ATM (i.e., one not in conjunction with other shopping and chores), in which case I try to borrow from my wife.

3) We generally pay for purchases in excess of $10 by debit card or credit card. I prefer credit card because my card issuer gives me about a 1% kickback.

Jacob Tomaw writes:

I try to use as little cash as possible. On average I might keep $20, but can go a week or more without my on person cash balance changing. It is often at $0.

As others have commented a credit cards are safer and more organized. I have permanent and world wide accessible online records of my spending. Also I am not losing the 3% interest on my money market and I am gaining 1% cash back on transactions with the card.

I live in the City of Chicago and only need cash when I leave home or make transaction less than $10 at mom&pop shops.

Barkley Rosser writes:

I tend to Economist B, but for different reasons, which may be out of date. Call it the black swan argument. I have been in all too many situations all too many times in my life, although fewer and fewer as time goes by, where I have been in an unexpected situation, a car problem in the middle of nowhere, for example, where I had to deal with somebody whom I had to pay quite a lot of money to, and in cash; they would not take a credit card. This is admittedly getting less and less common, but it is a habit now deeply ingrained, think of it as a kind of personal financial insurance, even though I realize that it is probably offset by the probability of getting robbed for my cash (but then, hey, credit cards can get stolen also).

Gabriel M. writes:

The bank is pretty close to me, so I keep just enough money for about 3 days worth of expenses. My daily expenditure is pretty stable.

I keep 3 days worth of money and when I see I have only 1 day worth left, I "withdraw another 2 days". But much of this is precautionary because I'm paranoid. I'm always imagining emergencies where I would need cash. I rarely do.

That being said, I'm starting to love my card. (Making purchases with cards, directly, is a relatively new thing in Romania). Since Amazon now accepts my orders without complaints and since I can buy large items (clothes, home electronics, etc.) with the card... cash is mostly for day-to-day paranoia and lunch.

Sigve Indregard writes:

Ah, you Americans and your antiquated bank system. Living in Norway, I never keep any cash. Paying by debit card, using a PIN code, consumes no more of my time than paying in cash. I pay no transaction fees. My bank is entirely web-based.

As an added bonus, I get a pretty detailed account of how I've spent my money (where, when and how much) on my statement.

I believe Norway should switch to electronic payment only. That would weed out a lot of the black economy.

Aren't cheques still in use in the USA? That's just... hilarious.

DJH writes:

I have no idea how anyone's lifestyle is such that "virtually everything" is sufficiently close to everything to eliminate carrying significant cash. There are plenty of daily transactions, ranging from likely to possible, which either require or encourage cash. How do you tip someone besides a waiter?

Necessity alone is sufficient reason before considerations of privacy, speed and distancing oneself from someone like Sigve Indregard. The arguments put forth by Economist B are true but uninteresting.

tim writes:

Credit cards carry a much higher risk of financial damage if lost or credit information stolen (lost wallet or waiter taking information at a restaurant) so I don't use them for day to day tasks. In addition Debit cards don't carry the same protection that credit cards do (financial damages limited to 50 bucks). If a thief gets your debit card - your account ends up being emptied until you can prove to the bank it wasn't you.

I carry just enough to handle weekly expenses such as lunch and gas which works out to be 150 bucks/week.

@Sigve Indregard

There is no incentive for many people -not- to use checks. Electronic transfers are much more expensive here in the states and debit/credit card fees tune many people out. I would also make the snarky comment that the US (a country of 300 million) is much different model than norway (a country of what? 4.5million) so implementing country wide changes to payment systems is a completely different ballgame.

tim writes:

One other note related to Sigve's comment. Norways privacy laws are much tighter than in the US. So for every debit and credit transaction you make - its logged.

A dollar bill has the advantage of being anonymous.

shane writes:

What about transaction fees? When I take cash out, I pay the bank a transaction fee for getting my own money out. When I pay by credit card, the retailer pays the transaction fee (which they have already included in the price as a cost of doing business). Since the price of a good at retail already includes the cost of transaction fees, regardless of payment method at sale, you are actually paying a premium for a good when using cash.

Mikael writes:

Sigve:

I've used my VISA all over the world and it always works perfectly (well, almost). Only in one country, a 2 hour drive from my home, have I gotten the message that "can't withdraw money, not norwegian VISA" when trying to use an ATM.

Norwegian VISA??? That's unique.

Phil writes:

If I don't use my own bank's cash machine, a withdrawal costs me $1.50. I go through about $500 cash a month. So I withdraw $500 at a time. I save $1.50 over drawing $250 twice a month. Two weeks' interest on $250 is about 25 cents after taxes. So I save $1.25.

I'm too lazy to do the calculation on what withdrawal pattern is optimal: it depends, too, on the probability that I'll be near my own bank when my money runs out (in which case I save the $1.50).

I usually only *carry* $200 with me, and I leave the other $300 at home. But that's just to keep the wad in my pocket smaller.

Horatio writes:

I keep ~$20 in denominations of $1 and $5. I use my debit or credit cards for most transactions. The bills are in there to tip servers or to get an occasional can of coke. My bank has convenient ATM locations, so whenever I plan to patronize a business that I'm pretty sure doesn't declare cash transactions (many Chinese businesses), I get some cash out. Think globally, act locally, less money in the hands of government means a better world for all of us. Your local Chinese or Mexican grocer is a great place to spend money that you don't want Uncle Sam to get his greedy paws on.

fmb writes:

I would take out $1000 per ATM visit if my bank let me. It's all about convenience -- I would frequent a bank that actually figured out how to do the ATM interface right (e.g., remember that I'll pay their damn fee, remember that I want as much as possible, remember that I don't need a receipt, remember that I speak english). In NYC, there are enough opportunities to spend cash (e.g. cabs, takeout, house cleaner) where other options are at least marginally less convenient, and getting caught without is annoying (and, from time to time, occurs at a very inconvenient moment).

But, if I could pay for everything with a fingerprint or rfid tag and require less frequent visits to the ATM, that would be even better.

I'd prefer more privacy, other things equal, but would invest very little time (but maybe some money) to get it.

Basically, Economist B is right as far as I'm concerned, and it's not even close for me. Things that could make it closer:

1. very high risk of loss, or a highly non-linear utility function.
2. no atm fees (though you probably pay for this in interest)
3. lots of time to kill.

Jason Malloy writes:

I may be a little younger, so I only carry my debit card, a phone card, etc. No money, only cards.

I haven't experienced many situations where I was required to have paper money, but when they occurred I just went to an ATM (which are ubiquitous).

I try to keep as little cash on hand as possible.

I use credit cards and my debit card for almost every purchase. In fact it's only when I go to the States that I use cash. I'm not sure why but it seems that the US has been slower in adopting the use of debit cards compared to Canada. For example very few people write checks anymore while I still see many people writing checks in the US.

Jason Malloy writes:

Ah, you Americans and your antiquated bank system. Living in Norway, I never keep any cash.

I do the same thing in America.

If a thief gets your debit card - your account ends up being emptied until you can prove to the bank it wasn't you.

My debit account is separate from my savings account, so I can limit how much money is stored in it at regular intervals over the Internet, just as easily as I could with paper money in my wallet. Typically I store no more than $150, unless I need to make a bigger purchase. Additionally, if I notice my card is missing, I can immediately call my bank and put a block on the card, which I couldn't do if the same amount of paper money was stolen from me.

Electronic transfers are much more expensive here in the states and debit/credit card fees tune many people out.

There are no extra fees on my debit account.

I use my debit or credit cards for most transactions. The bills are in there to tip servers or to get an occasional can of coke


Tips can be done just as easily with debit cards (written in along with your signature). I guess I don't use vending machines because they are overpriced and convenience stores are ubiquitous as well. One great thing about not carrying money, is not having to deal with great gobs of bulky, dirty coins. Pennies are not fun to carry around.

Troy Camplin writes:

You should have at least $20 at all times in case you're robbed. If you are able to give the theif something, you are less likely to get shot or stabbed. People who have no cash get shot or stabbed more often because the theif is angry over having wasted his time. Credit cards are good for almost everything anymore. However, when I travel, I also like to keep some cash on me because there are still gas stations in very rural places that don't take credit cards.

Lewis writes:

I believe that you should always pay with cash if possible becuase there is no point for paying interest. If interest is very little it still is money that you could avoid paying. Also with cash you will never have to go through the headache of dealing with credit card companies or people stealing them and you being held responsible.

TeeJay Bradford writes:

This has two points of view with very good reasoning for both. On the one hand if can use plastic everywhere then you really have no need for cash. If you are like me and buy a lot of stuff online then plastic is important to have; also, most gas stations don't take cash at the pump, so having credit/debit card(s) can save time as well. On the other hand if you can use cash everywhere it can be quicker, you always know how much money you have and you can easily donate or lend money to people. I work at a help desk for POS software for restaurants and there are times when the satellites go down and they are unable to take credit, debit or gift cards and it is imperative to have cash. I'm not saying to never carry plastic but to have both because there are certain things that you can only buy with plastic. There are somethings that are quicker bought with cash and others that are quicker bought with cash and others that are quicker bought with plastic. I wouldn't switch totally to one or the other but come to a happy medium. I would carry no more than $50 in cash under normal circumstances and no more than $100 for a short period of time. I also think that it is okay to keep a good amount of cash at your residence either in a well hidden place or secured.

ArtD0dger writes:

Why does economist B hold a lot of cash? If he really valued his time, then he would load up his wallet with lots of cash, and then let it run down almost all the way before bothering to replenish it.

That's the way I do it.

Steven Bass writes:

What about the disutility of carrying around coin change? Not only do I tend to lose it a lot more often, but it's just annoying to have more loose items floating around in my pocket. My hatred of coins keeps me from paying with cash. I use my credit card for everything I can.

Al T writes:

Very little cash. It's more difficult to keep visiting ATM's to always keep cash around (for some reason it's always disappearing). Whereas consistently carrying a bit of plastic is much more convenient.

Economist B's time is too valuable to wait the minute and a half it might take for a waiter to return with a credit card? Seriously?

Maybe B should use some of that cash to buy some pot and chill out.

I'm about about takin' care of business. I walk fast. I don't like small talk. But if you're going to drive out to some restaurant and drive back instead of bringing lunch and eating it at the office, unbutton that top button for a minute and use the card. (The nonspecific "you" that is.) Step two: draw the two-minute special hugging time out a little while. It's worth it.

However, if you turn out to be Economist B, I'll side with you.

Michael Sullivan writes:

jcolter: there's no reason to pay a significant number of ATM fees. Banks without large ATM networks generally offer money back for ATM fees. I get a credit of up to $36/month for fees. That's enough that I'm not paying the 2% -- my bank is paying it in order to not invest in a huge ATM network to be competitive.

I do not understand why anybody uses a bank that doesn't either have this policy, or a very wide network of ATMs in the area.

Ryan writes:

I agree with economist A, not just on the premise of Economics. While the convenience for customers and the push by establishments to use credit cards in immense, I prefer the rationale of security. I prefer to carry less cash and more cards. I find that if I am mugged, it is less likely that the mugger will ask for my debit pin number than for all the cash in my wallet.

It is about the convenience for the mugger too. Who wants to take the time to memorize all the pin numbers when one has ole' American greenback in the money pouch. Remember that the next time you happen to be mugged. Point that mugger over to your friend, Economist B.

Troy Camplin writes:

The problem is, as I already pointed out, that if the mugger finds you don't have any cash on you, you are much more likely to get stabbed or shot. A little cash on you can act as insurance.

Lord writes:

Few parking meters take cards yet. Few people (not businesses) can. In the old days, many businesses would refuse cards for less than $10 due to fees and for small amounts I would still say cash is faster. Everything else is charged. A $100 is a reasonable convenience.

Eric H writes:

I believe Norway should switch to electronic payment only. That would weed out a lot of the black economy.

Because, of course, the black economy deprives the state of funding, and some people cannot figure out how to do even small things without the state's intervention. Isn't that ... hilarious?

ArtD0dger writes:

There's an interesting marginal economic incentive story here. Credit card companies ostensibly charge the business for transactions, but this is of course passed on to consumers in the aggregate. However, there is no marginal incentive for an individual consumer to pay cash, so the price of credit is somewhat detached from its proper market equilibrium. Nice business if you can get it.

I don't begrudge credit companies for making a profit by providing what is, after all, a very valuable service. However, I am cognizant of the fact that I can not help equilibrate the price of credit either by using or declining to use it, and that I am doing a small favor to the business by paying cash.

Nathan Whitehead writes:

I agree with economist B. If you frequently travel around and are on the go, finding the right ATM and getting cash all the time sucks away time, and you can end up with transaction fees. The foregone interest on $500 is more than made up for with the reduced need to visit ATMs.

Another thing to consider: just because you have some cash doesn't mean you can't use your credit card. Having the cash gives you the option of paying in cash when necessary to save time at restaurant checkout, or grabbing a snack from a sidewalk vendor, etc..

Pedro writes:

I usually carry between $300 and $400 in cash on person. There have been plenty of times when I was able to buy cheap marijuana in 1/2oz and 1oz quantities for being at the right place at the right time. Any significant time delay of finding a cash machine would most definitely prohibited me from those price favorable transactions.

SheetWise writes:

Everybody doesn't take plastic (at least, not a lot of the people I deal with). Cash prices can be negotiated, while plastic transactions are recorded -- so you lose a huge bargaining position.

I carry a lot of cash + plastic. I always keep at least 2 $100 bills + change from the previous $100 in my front pocket, in case of robbery. I pay for everything out-of-pocket. The rest of my cash is safely carried with me, and is enough to sustain me for a couple months.

But then -- I lead the life of a gypsy. I'm semi-retired, and follow my whims. You never know when you might need money.

J writes:

I am assuming the question is meant for people outside Europe. I live in the Netherlands, and many of us here do not carry large sums of money. In fact the highest circulated euro bill in this country is €50. Our banking infrastructure in this part of the world is very advanced, that we pay bills (recurring bills are automatically deducted from our accounts), channel funds, and transact financial activities through the internet. Paying in commercial and public establishments –small to large, is best done with our debit cards, chipknip, and sometimes, the least popular, credit cards. All establishments are equipped with a payment system, and the mentality of consumers here is they prefer to pay with a debit card, which is as good as cash. However, some debit cards I believe also function as credit.

Because of this the biggest amount of money I normally carry in my wallet is €20. For most part of northern Europe, we live now in an almost cashless society.

So the discussion of value of time and foregone interest calculations doesn’t apply to us. We have a highly efficient, effective, secured, low-cost banking system here.

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