Need to pay back your roommate for last month’s utility bills? Picking up takeout but forgot your debit card at home? With P2P (“Person to Person”) payment apps or digital wallets such as Venmo, Google Wallet, Dwolla, and Square Cash, you can transfer money from your phone instantly.
And while P2P payment apps are fast and easy, you also run the risk of overspending. Which begs the question: Do P2P payment apps help or hurt your finances? Let’s look at the pros and cons and offer some tips for using these apps wisely.
The Good. By automating your finances you can prevent late fees, save more, and decrease your financial housekeeping. Using P2P payment apps can also help you pay your bills with recurring payments.
Additionally, P2P payment apps make it super convenient to request payments from friends, so you may find yourself spending less when you go out. Sofia Durrani, a 29-year-old financial blogger at CaviarAndQuarters.com who uses Venmo says, “If you’re splitting the check at dinner, it’s much easier to exchange money right then and there.”
The Bad. The bottom line is we normally spend more with plastic. Research from New York University shows the more transparent the form of payment, the greater aversion one has to spending. Digital wallets allow us to pay with a single touch, which feels even less “real” than using a credit card and could result in overspending.
Digital wallets can be a friend or foe to your finances, depending on how you use them. So here are some tips on using P2P payment apps wisely:
1. Do your research. Before signing up, do your research to determine which app is best for you. For instance, it’s free to receive money on Venmo, but there’s a 3 percent processing fee per payment for credit cards or non-major debit cards, which could add up.
2. Set limits and monitor regularly. If you have a sneaking suspicion that your spending may get out of hand, set a spending limit. There’s nothing worse than getting a credit card bill that you can’t pay in full. It’s also hard to stay vigilant and monitor your spending on your own. So if you’re linking up a P2P app with your credit union credit card, using a tool such as CO-OP’s CardNav™ feature allows you to set limits and alerts. You can also use it to turn your card on and off.
3. Use it as a budget monitoring device. You can do this manually by only using your app for food purchases, allowing you to monitor your food spending every month. Or you can make your budgeting more robust by linking your payment app with budgeting software like Mint, so that all your spending is tracked in one place.
Digital wallets are here to stay, and with new features and competitors on the horizon they are likely to become a part of your everyday life. While it’s easy to see the benefits P2P payment apps offer, it’s important to be aware of your spending habits when using them. This way you can steer away from the perils involved in using them and maximize their ability to enhance your life.
Editor’s note: This post was previously published on December 14, 2014.