Our wallets and our brains are much more closely connected than you might believe. In fact, there’s such a strong correlation between the ways we spend and think, that a rising field known as neuroeconomics explores this connection.
At least a few of you know someone who always seems to have money set aside, who is never plagued by debt as you sometimes can be. According to science, that may not be purely coincidental. A study funded by Chase Bank titled “Born To Spend? How nature and nurture impact spending and borrowing habits” suggests that good financial strategies are just another part of nature, encoded in our genetic makeup. These genetic factors are passed onto only about 25% of the population, but luckily, our brains aren’t impervious to good financial advice. Here are four tips for turning your brain toward smart spending.
Make Saving Second Nature
An experiment conducted by Drs. Richard Thaler and Shlomo Benartz invited several people to set up a 401(k) for retirement. Taking money for the savings account directly out of employee paychecks, the experiment allowed participants to voluntarily increase the amount. Over a two-year period, the savings set aside for the average 401(k) in the study increased from 3.5 to 11.6%. It’s instinctive for us to spend money as soon as we receive it, a function of the prefrontal medial cortex, which thrives on instant gratification, but by depositing the money immediately, the participants were able to bypass this, activating the dorsolateral cortex which takes control by shutting down the brain’s response to immediate gratification.
Find A Plan That Works For You
Humans are social beings by nature — we look for and take our cues from each other before we act. Your financially literate friend is an important part of finding a workable plan for your finances and helping you stay with it. Choosing a plan that allocates a specific amount of money to be spent every month also sets a realistic goal of exactly how much you need to save while planning all your expenses accordingly — giving you the peace of mind rather than panic at the end of the month. Therefore, you might want to consider consolidation if you have multiple loans (like credit card or student loans). It might be worth it to look into a company like Credible.
Start Good Spending Habits Early
Financial literacy takes a lifetime to master — your kids don’t have to figure it all out on their own. Electronic games can be a particularly helpful way to learn about finances, regardless of how old you are, as they activate reward circuits within the brain. The earlier you start, the more plasticity your brain has as well, allowing you to absorb more information from games such as simulators of the stock market. At the same time, brain chemistry is activated when we play and unleashes our sense of competitiveness, triggering dopamine in the brain, which keeps you goal driven.
Begin With The End In Mind
This principle borrows a bit from a concept known as identity reinforcement theory. Rather than just setting a percentage of your earnings to save each month — make that percentage represent something. Instead of saying “I’ll set aside 8% of my earnings this month,” say “If I save 8% every month, I’ll be able to pay off my mortgage in the next three years.” You may also consider your student loans, or your children and their college tuition. You end up saving because it represents who you want to be.
This article is updated from its initial publication in Brain World Magazine.
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