Pain of Paying: Not All Money is Created Equal

We have an odd relationship with money. Many factors affect how we spend it and how we feel about spending it. I first learned about this from Dan Ariely and it led me to explore how this plays out in our everyday life

Income Taxes

The IRS is one of the best at understanding the pain of paying. They are so good at it that we are normally thrilled when they give us our money back. Let’s look at how this works.


Let’s say that you have to pay $5,000 in income taxes. The IRS has two ways to collect.

Option 1

  • Every pay period (26 in a year) your employer takes out $250
  • $250 x 26 weeks = $6,500
  • In February, you file your taxes
  • You get $1,500 back!

Option 2

  • Your employer collects no taxes
  • In March, you are sent a bill for $5,000

Which one would you choose? Which one would cause more outrage?


Walk into a Casino and try to play a game by putting cash on the table. It won’t happen. You have to buy chips. While some may say it is for security reasons, there is a no doubt a benefit to the casino when you remove the barrier between a gambler and their money. There is a huge psychological difference between seeing a fifty dollar bill on the table as compared to 10 plastic, 5 dollar chips. It’s like it’s not real money!

When You Pay Matters

The time that we have to pay for a good or service can change the way we feel about it.

Air Conditioning

We love air conditioning. We crank it up when we want to cool down the house on a hot summer day. So when you’re sweating on a 95 degree day in July, it feels good to go into your 70 degree air conditioned house. The best news is that you don’t have to pay for that until August. That’s next month’s you problem. Imagine if everytime you wanted to use the air conditioner you needed to put cash in, kind of like a vending machine. My guess is we would use heating and air conditioning much differently.


You decide you want to go on vacation, you book your vacation and you pay for you vacation. 3 months later you actually go on vacation. You come home and tell everyone what a good time you had. Imagine instead that your vacation wraps up and when you step off the plane at your destination, you had to go to a desk to pay for you vacation. That would ruin any fun you had. We like to pay in advance because when we get to our get-away it feels like it’s free.

All Payments Aren’t Created Equal

The way that people pay also affects their behavior.


This is the most painful. We stress when we have to part with our hard earned cash and physically hand it over to someone else.

Credit Cards

With credit cards, we aren’t as careful. We reap the enjoyment now and receive the bill later and as mentioned in the air conditioning example above, that’s next month’s you’s problem. (yes, I just used a possessive you)

Gift Cards

Gift Cards are like found money. You may treat yourself to a more expensive brand or order food you wouldn’t normally order. You may even order dessert.

Who Makes Paying Easy?


Amazon made famous the one click payment. As long as you set up a credit card, all you had to do was use the one click button. You never see your credit card details or that scary ‘review your order’ screen. You just click the button and they send you stuff.


I love my Starbucks app and I’m sure they love me. They have a great feature where you can load gift card into the app and also re-load the balance. I can’t remember the last time I paid by cash or credit card at the time of order, and that is great news for them. Even though I know all of this, I still load up a gift card with $25 and then act like the money was a gift from somewhere. I pay once to reload the card but the my next four to five trips seem like I’m getting something for free. If I order a coffee and only have two dollars left on the card, then I might as well get a breakfast sandwich too since it’s found money.

If we were rational, all of the examples above would have no bearing on how we act but we’re not rational. We live in a busy and complex world and we need someway to easily make sense of it. This is true if whether deciding how to pay for something or even shopping for refrigerators.

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