Rewire your brain - control temptation and natural desire to spend

If behavioral science has taught me anything, is that we, humans, are irrational creatures. We like to think we make rational, thoughtful decisions, but the truth is that our decisions can fluctuate and can be affected by emotions, context or even social pressure.

Dan Ariely, one of my favorite behavioral economists once said "thinking a lot about money would be fine if by thinking more about it we were able to make better decisions." In his book, Dollars and Sense: How We Misthink Money and How to Spend Smarter, he delves into reasons why it is so hard to manage our money and how can we combat our desires to be smarter and more rational with our money.

Money is always on people's mind, it is one of the main causes of stress for many Americans. Thinking about saving, debt, everything that has to do with money makes us anxious and can even sometimes interfere into our daily routine.

We like to think we are doing the right thing with our money, by budget, save or even, in some cases, invest.

However, we are still humans, and most of the time, money is spent with our heart rather than with our brain. As Ariely says in his book, you can be your worst enemy when it comes to money.

How we think about money and why we spend it?

• Ease of payment

Paying with credit card and cash is different? I mean, we are spending the same amount, right? The truth is that research has shown that we are more willing to buy something when we use a credit card, and we tend to leave higher tips. Not only that, but we are more likely to forget how much we have actually spent with our credit card.

The experience of paying nowadays takes about 30 seconds: take our your credit card, pass it through the machine and THAT IS IT ... (make sure you read this sentence twice)

• Context

YES, we are influenced by context. Changing the context influences our choice.

In situation where people do not have a good idea of how to value objects, they use information from the context to help them make that judgement.

For example: compromise effect, take the preferred option and surround it by an option that is weaker and cheaper, and another one that is stronger and more expensive ... you are most certainly going to choose the one in the middle

• Hyperbolic discounting

People devalue the future and tend to prefer smaller/sooner (SS) reward over larger/later (LL) ones. For example, SS might present a tempting chocolate cake while LL might represent better long-term health

Rewire your brain and manage your desires SMARTER

• Smarter goals:

First and for most, your goal has to be clear. When goals are clear, it is easier to understand exactly what you need to do to achieve it. The goal states specifically what needs to be done, and therefore, there is no room for debate or interpretation

Specific: know exactly what you are wanting to accomplish - save $400 in 2 months

Measurable: how ill you know met your goal? when I have reached $400 in 2 months

Achievable: make sure your goal is not too far to reach, but fat enough to be challenging

Relevant: link the goal to something important to you e.g. I can finally take the holidays of my dreams

Time-Bound: when do you want your goal to be met? e.g. I want to reach my goal by the 26th of March

• Automate everything

Set up automatic savings before receiving the money and reduce friction costs. You are more likely to avoid spending the money if you haven't seen it in the first place.

This is just an example on ways you can set up automatic defaults in your bank account to reduce the temptation and desire to use that money straight way and feed your sooner/shorter rewards system.

• Decoupling costs and benefits - do not buy everything at once (how you pay affects how much you spend)

The frequency with which you pay has a dramatic impact on how much you actually consume

You are more likely to exercise more frequently by framing your $600 annual gym membership fee as $50 a month membership

hint: pay for what you are going to use!!!!

• Picture your future self

We all like to think that our future self will be full of success and accomplishments... well at least myself. Try and emotionally connect with your future self and image the life you want to have growing older

• "Ulysses contracts" - creating contracts using Stickk

Ulysses and the sirens. The sirens sing beautifully but they are dangerous. What they did is that Ulysses instructed his crew to tie him to the mast. Further, he had wax put into the ear of his crew. The crew could not hear the singing. Ulysses could hear the singing, but he couldn't do anything about it

Pre-commit to doing something for the future, and then figuring out a locking mechanism to make sure that they follow through on that

Social contract: pre-commit to doing something using Stickk. Start by finding a judge (this is someone who's going to monitor your progress). You will then place an amount of money (of your choice) you believe is important for you and is going to push you to commit. If you do not meet your target goal, StickK could donate the money to a charity, not of your choice, but a charity that they believe is going to be something that you hate... that doesn't sound good.

Designing a product, or designing a service, where people, in fact, almost forget that they are in a contract: Save More Tomorrow

Today you’re committed to setting aside some percent of future salary increase into a separate mental account. And by the virtue of the fact that it was a separate mental account, people never saw that extra money being aside

Peer pressure

Piggy banks or saving boxes: you keep one key and I keep another one

If I have to dip into my savings, the only way I can get to that saving is to ask you to provide your key

The fact that I’m actually going to expose my lack of self control to you can be a powerful motivator in encouraging people to save more

• Start today

If you start today, you will begin seeing results one day earlier that if you start tomorrow

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Think about money differently and smarter. Instead of directly trying to save money (which can be a VERY difficult process), try at least to reduce your temptation and desires to spend the money you have. How have to learn how to save before you spend it. Save money and money will save you.

XoXo

Sofia's Choice

ps: save before you spend

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