Cash or plastic?
I'm not referring to how you pay for gifts this holiday season, but rather how you should present someone with a monetary gift, if you decide to go that route. For those who give gift cards, a gift of physical cash versus a gift card worth the same amount could actually be more financially beneficial.
What are some of the issues with gift cards? Meir Statman noted in his behavioural finance book, What Investors Really Want, that gift cards can lead to users spending more than the face value of the card, and that they tend to spend that money on more conspicuous consumption.
Some of us don't want to leave money on the table so a $50 gift card could lead to spending more than $50 at a particular store. If the item you want is $40, we might find something else in the store that we don't even need so that the full balance of the card is used.
Think of any online purchases you may have made at sites like Amazon: if your purchases aren't large enough to qualify for free shipping, have you ever bought something else just to break the free-shipping threshold?
Of course, not everyone will add to a purchase to qualify for free shipping nor to maximize the full gift card balance. Some will wait to spend the remaining $10 at a later date, in theory. Some will simply forget about that balance altogether.
In either case, more or less than the original $50 gift is spent. Gift card balances also tend to be spent more on wants than needs. So from a purely theoretical standpoint, dollars on a gift card tend to be used inefficiently.
Given these issues, a gift of actual cash could be far more efficient. Any amount not spent on an actual gift simply becomes part of the recipient's regular cash flow. Give someone cash and they are more likely to use it for making a bill payment, paying down debt, or groceries. Any cash not spent, will be saved and hopefully earn interest for the future. It won't get forgotten.
But while physical cash, or a cheque, might be the most efficient gift, holiday traditions are rarely based on logic. Many will have a hang-up about giving, and even receiving, cash.
If you decide to give it a shot, remember to use an envelope and card. And if you think the potential social repercussions are too much of a gamble, I wouldn't blame you for not trying.
For some recipients, giving a useless gift that ends up gathering dust in the basement for years to come is a much more socially acceptable choice.
Would you give someone the gift of cash or do you think a gift card is still a better option? Leave your thoughts in the comments section below.
Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network. You can read his blog at WhereDoesAllMyMoneyGo.com and follow him on Twitter at @preetbanerjee.