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The psychology of money - how to make it work for you

Money. It makes the world go round, it doesn’t grow on trees, and you have to spend it to make it. There’s a lot we can say about money, but why do you handle it the way you do? Why does Sally get satisfaction stashing her money away for a rainy day, but Steve prefers to buy what he wants today, with little concern for the future?

Recent research has shown money habits aren’t just based on conditioning and what we’ve been taught from our parents. In fact, brain chemistry has an enormous impact on how we view and deal with money.

Knowing the psychology of money and how our brain impacts how we use it, means we’re likely to be better placed to master it. Here’s what Suzanne Kearns of Money Crashers had to say on the topic:

Brain Activity


In a study conducted by Rick, Cyder, and Loewenstein published in the Journal of Consumer Research, participants’ brains were scanned as they pretended to make buying decisions. Researchers observed activity in an area of the brain called the insula, which is stimulated when you experience something unpleasant. The more stimulation in the insula, the less likely you are to keep doing what you’re doing. When it comes to money, insula stimulation can stop your spending.
On the other hand, the act of saving – either by having cash in a bank or by experiencing a significant savings on a product or service – brings savers intense pleasure. The victory of a good bargain makes everyone feel good, but savers feel the rush even more since it’s a relief from the discomfort of needing to spend.

Meir Statman, a behavioral economist at Santa Clara University uses this analogy: If you go out to eat at a restaurant that typically charges $70 for a plate and you get your meal for only $7, it will taste better to you. But if you ate at that same restaurant without knowing the cost, you wouldn’t enjoy your food as much. Knowing the total amount saved gives savers immense pleasure.
Researchers concluded that people who have more insula activity in their brains are more likely to be savers, and those with less tend to be spenders. And since we tend to skew to extremes, spenders can end up in financial trouble later in life, and savers can end up with great regrets. Recognizing which one you are can help you reach a healthier balance.

The Spenders


In an early experiment on children, commonly called the marshmallow experiment of the ’60s, researchers at Stanford presented nursery school children with a tray of goodies that contained marshmallows, pretzels, and cookies. Researchers told the kids to select one treat, and that if they ate it immediately, they wouldn’t receive any more, but if they waited only a few minutes, they’d receive another one. If they could delay their gratification for a few moments, they’d double their candy. They observed the children until they were adults and learned that the ones who were able to delay their gratification achieved much more success in life than the ones who wanted instant gratification.

If you’re a spender, you can’t delay the gratification. With cash in front of you, just like the marshmallow, you can’t resist the urge to have it right now even if you’d have more later. That’s why you don’t have much savings in the bank, but it doesn’t bother you. You’ve been happy making purchases and enjoying them in the moment. It’s worked out well enough for long enough, so you just stick with the habit. But if you’ve realized that you’re trending toward extreme spending, then you’re probably looking to kick or curb your habit.

These seven ways to calm your impulses will help you cut back on spending:

  • Never use credit cards or other lines of credit. By using cash, you force yourself to consider just how much you’re spending.
  • Pay as you go. Don’t run a tab at a bar, and don’t pay everything up front for a romantic weekend getaway. Pay for everything as it comes, and you’ll better understand how all that money just “gets away from you.”
  • Be vocal about your savings goals. If you tell close friends and family how much you intend to save and by what date, they’ll hold you accountable. You can even use personal goal setting tools like stickK to put money on the line to achieve your long-term financial goals.
  • Reward yourself when you meet your savings goals, but only by spending a responsible percentage of what you saved. This can help prevent frugal fatigue.
  • Stop and ask yourself before each and every purchase whether or not you truly need the item. Know the difference between needs and wants.
  • Look at the future, no matter how uncomfortable it is. Ask yourself questions like how much money you’ll need to retire, or how you’ll pay for your child’s college education.


The Savers


In another famous experiment, adults had the choice of receiving $50 immediately or waiting a year and receiving $100. Most participants surprised researchers by taking the $50. The instant gratification appeared more valuable than doubling the earnings after a delay. Savers are the rare ones who sacrifice plenty of gratification to make sure to get the full $100 when it’s available.
Sometimes you’ll go without things that you really need, like good medical care through a health insurance policy or a warm coat, because money in the bank is more satisfying than anything you could ever buy. You rarely carry a credit card balance, and even on an average salary, you astound others with the huge nest egg that you’ve built up over the years, while they took just one marshmallow and the instant $50.

While many people take pleasure in buying things, savers don’t feel that same way. Instead, you’re uncomfortable with shopping, and you feel real emotional pain when you’re paying. But what makes you tick and brings you pleasure as a saver? Are you missing out on some of life’s simple, inexpensive joys? Are you sacrificing too much and endangering your health?
Researchers explain that two primary motivators drive savers: pain and pleasure. And if you’re not experiencing enough pleasure, you deserve to loosen the pursestrings and enjoy spending just a little bit.

  • When it’s time for something pleasurable, like a vacation, distance yourself by paying with a credit card. You’ve already set your budget and you have the cash to cover it, so now you can take your mind off of the expense and relax.
  • Be vocal about your spending goals. When you’re planning to make an exciting purchase, even if it sounds like a boring necessity, tell everyone you know and set a date to close the deal.
  • Treat your purchases as a reward for something that you’ve done well, so they’ll take on more value in your mind.
  • Think of your future: Do you really want to have regrets over the things you didn’t do because you wouldn’t spend some money on enjoyment?