Wednesday, 25 April 2018

When you were a child and got your hands on some cash, what did you do? Save it for a rainy day or spend it right away?

It's likely your answer offers clues to how your brain is hard-wired. And your habits as a child — whether you were a spender or a saver — have probably followed you into adulthood.

During the 1960s and 1970s, Stanford University psychologist Walter Mischel, PhD, tested children's self-control with the now-famous “marshmallow test." Here's how it worked: He gave a preschooler a marshmallow and prepared to leave the room. He told the child if they waited to eat the marshmallow until he got back, they would get another one. But if they ate it immediately, they wouldn't get another.

In follow-up studies decades later, the children who showed self-control by waiting to eat two marshmallows were more likely to have lifelong habits of delaying gratification, resulting in stronger finances, marriages, and careers.

Brains wired to save or spend

There are emerging fields of study, such as neuroeconomics, dedicated to exploring the connection between biology and financial choices. While there's not a huge body of research just yet, some scientists claim that so far, studies seem to support the assertion that we are predisposed to be either savers or spenders.

For example, a psychological test known as the “Tightwad-Spendthrift Scale" seems to reveal our biological makeup influences our money management. This test classifies people by the amount of pain they feel in spending money: Tightwads feel too much pain and therefore spend significantly less, while spendthrifts feel too little pain so they spend more than they should

How to retrain your brain

If, in fact, these researchers are correct and our approach to money is hard-wired, that doesn't mean you are doomed to a lifetime of overspending or deprivation. Think about physical health: You may have a genetic propensity toward heart disease, but with good nutrition, regular exercise, and other heart-healthy behaviors, you can possibly avoid serious health problems.

Typically, being hard-wired to save is a positive attribute and will more than likely result in a favorable financial outcome. However, if your brain is hard-wired to spend freely, you could find yourself struggling to save or even getting into debt. While it can be challenging to retrain your brain, it's not impossible. Here are a few tips to help you get started.

1. Track your spending. If you're accustomed to spending freely, you may not even realize where your money's going. Try writing down everything you spend for at least a week or two. This should help you identify where you are overspending and how you can save. Use this data to develop a spending plan designed to reduce wasteful spending, pay off debt if you have it, and start saving each month.

2. Decide what really matters to you. If you determine you are spending too much on a wide variety of items and activities, figure out what matters most to you. Gaining control of your finances doesn't mean you have to eliminate all discretionary spending. But you probably don't truly value all of the things you're spending money on.

3. Connect with savers. There have been studies supporting the theory that our friends influence our eating and drinking habits. It just makes sense they could have a similar influence over spending habits. Consider finding some friends or associates who are savers and start spending time with them. Pay attention to their habits: Do they stay in and invite friends over instead of going out for dinner? Do they split a meal with their partner rather than paying for two? 

4. Make savings automatic. "Pay yourself first" is the time-tested mantra of basically all personal finance professionals. The key is to put money into savings before you can spend it. The best way to do this is make saving automatic.

If your paycheck is directly deposited, consider having some deposited into your savings account each pay period. Or have an automatic transfer from your checking to savings each month.

If you don't have to actively do anything to get the money into savings, you'll trick your brain into thinking you never even had the money. And when you check your savings account balance in a few months, you could be pleasantly surprised at your progress.

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