The Double-Edged Sword of Financial Friction

The other day, I was at a home brew supply store. I had stopped in to simply buy some bottle caps with which to cap individual bottles of my most recent batch of home brew. Such a purchase would just cost a couple of dollars.

While I was in there, I found myself admiring their refreshed sale table – items that were on discount. The local store loves to do this – they’ll put items on the sale table all the time, and they put that table right up next to the register to tempt people.

My temptation was a particular book on home brewing that I’ve been looking at for a while, and it was marked at 40% off.

I thought about it for a minute. Did I have enough left in my hobby budget this month to swing this purchase? I was pretty sure that I did. So, after holding onto it for a minute or two (that ol’ “ten second rule” at work), I decided to buy it.

I took the book home and have thoroughly enjoyed it, but that’s not where the story ends. That evening, I looked through my recent transactions on my credit card and I discovered that I had made another hobby purchase earlier in the month that I had forgotten about, another fairly small purchase that just slipped my mind.

Together, those two overshot my hobby budget for the month.

How did that happen? Well, for one, it was my own fault for simply forgetting how much I’d already spent that month.

At the same time, the pure ease of use of that credit card enabled me to make that poor choice quickly and easily.

That’s because credit cards lack what I like to call “financial friction.”

Financial friction refers to the amount of effort necessary to actually complete a transaction. The less financial friction there is, the easier and faster it is to make purchases, but when it’s easier and faster to make purchases, it’s also easier to make a mistake while making a purchase.

Credit card purchases inherently have less financial friction than cash purchases. With a credit card purchase, you simply pull out a card and swipe it – at most, you just think about which card to use. With cash, you get out your cash, count it out to make sure you have enough, choose the bills needed for the purchase, hand them over, and receive your change from the purchase.

In other words, when you make a cash purchase, you are much more aware of the fact that you are actually handing over money to the retailer, as compared with a credit card purchase.

The same thing is true online. Online retailers do everything they can to reduce friction, taking you from a product page to a “Thanks for your order and payment!” page as easily and effortlessly as possible. Amazon has tried very hard to encourage one click ordering so that ordering dissolves down to one mouse click, for example.

On the surface, low financial friction can seem like a good thing. If there’s less friction in a brick and mortar retailer or at a restaurant, you spend less time actually dealing with the transaction. You’re not standing there counting out cash. You’re not waiting for the clerk to count out your change for you. You just swipe, (maybe) sign, and go. Similarly, if there’s less friction at an online retailer, you can spend a lot less time there – you can have your product shipped to you with just a few clicks or taps at most.

Here’s the drawback, though: the less financial friction there is in a transaction, the less you have to think about that transaction, and the less you think about a transaction, the more likely it is that you’re going to make a transaction that doesn’t really fit into your long term plans.

Let’s rewind back to my stop at that home brewing supply store. That sale item was on the table, so I snagged it and headed to the checkout. If I were paying with cash and I kept my hobby money purely in cash form, I would have seen that I didn’t have enough to buy it when I stopped to actually count out the cash. The simple friction of the purchase would have kept me from making that shopping mistake.

Because I didn’t have that friction, because I went for the low-friction purchase with my card, I didn’t have an opportunity to see that mistake. Instead, I relied on my memory, and human memories are faulty beasts. My memory didn’t recall any exceptional spontaneous purchases and quickly concluded that I had a few dollars remaining in my hobby budget that month, enough to afford that book.

The low friction of that purchase led directly to my overshooting of my hobby budget for the month.

Now, I’m not blaming credit cards for this. It was my own fault that I wasn’t fully aware of how much money I had left in my hobby budget. This was my mistake, without a doubt. I could have – and should have – reviewed my hobby budget before ever setting foot into that store so I would know exactly what I could afford to spend.

The truth is that credit cards and one-click purchasing and all other tools retailers use to lower the friction of purchases are like a very sharp knife. It is not the fault of the knife if you cut yourself. Instead, it is the fault of the operator – the operator isn’t mindful enough of the sharpness of the blade or careful enough to avoid cutting themselves. (I should know – I have a pretty significant slice on the tip of my left index finger that resulted from using a bread knife recently without enough mindfulness.)

In the hands of someone who is mindful of what they’re doing, however, a sharp knife is an incredibly efficient tool that makes meal preparation much faster. A sharp knife reduces meal preparation “friction,” in other words; it cuts down on the time one spends chopping vegetables or cutting up meat.

A credit card is very much like this. A credit card reduces purchasing “friction” – it cuts down on the time and thought one spends making a purchase.

Here’s the thing, though – someone who is prone to cutting themselves with a sharp knife should probably consider changing something about what they’re doing. Maybe they can start using some kind of knife guard. Perhaps the right move is to simply avoid cutting vegetables. Maybe they need to get into a habit of being extremely mindful when they’re chopping vegetables. (In my case, perhaps I shouldn’t try to use a left-handed bread knife for the first time without using extreme care when I’m right-handed and have never used one before.)

Similarly, a person who is prone to making financial mistakes with a credit card should probably consider changing something about what they are doing. Perhaps they should restrict their credit card use to only specific kinds of purchases, like buying gas at the pump, and use cash for everything else. Maybe they should delete their credit card information from online accounts. Perhaps I should keep their monthly hobby and entertainment budget in cash form so that they can keep track of how much they have left.

Perhaps most of all, the lesson here is to respect tools in your life that reduce friction. Anything that enables you to do a task faster than before, with less active thought, is very likely to backfire on you at some point. Think about cell phones – how often have you texted someone something that was ill-considered, or posted a social media response that you probably wouldn’t have done if you had more time to give it some thought? That’s low friction at work. Have you ever dashed off an angry email, something you would have never sent if you were communicating by written letter? That’s low friction at work. You might even discover that you make other financial mistakes besides credit card mistakes thanks to low friction, like buying or selling a stock investment online because it’s so convenient when you would have never done so if there was a bit more friction in the way.

The next time you head out to a store where you know you’re going to be tempted or distracted, respect the tool you’re using to make purchases. If you’re going to use a credit card, take extra care to be mindful of potential spending mistakes that you might make simply due to the low friction. In fact, you might want to consider just withdrawing cash beforehand from an ATM, so you know exactly how much you can afford to spend in there. That adds some real friction to the equation.

Good luck.

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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