Our brain is a very powerful organ, but it is not fool-proof. We are often duped with visual illusions, we mishear things and our memory is not reliable at all times. It also does not help that we tend to make rushed decisions, which cost us money. Many of us think we saved money just because an item was on sale. Credit is good, but we have the tendency to purchase more than what we can comfortably pay.
This is not just some simple bad financial habit. Your brain tricks you to buy or engage in something that wastes money in the long run. If you are already used to finding difficulties when it comes to savings, you should know that removing this bad habit is not impossible, but ridiculously hard. However, you should do it before facing a financial collapse.
Before getting rid of this habit, you should first examine why you keep on engaging bad financial decisions. After you identify the source of your problem, use our tips to finally let go of it.
Spending More Money than What You Earn
This is the gravest sin you can commit, as far as financial management is concerned. Owning a home and a having a yearly trip is normal for a family with an annual income of $100,000. Yet, things go south when you buy things that affect your saving capability. Perhaps the promise of luxurious living is too cozy to ignore, but you’ll never thrive if you’re worrying about how to pay your monthly bills.
Science has a way to explain why you are overspending. Call it social pressure, or some weird psychological instance. The gift of credit allows people to own things they cannot normally purchase. Credit cards save you from carrying on you dangerous amounts of money. Plus, emergency expenses have never been this manageable.
It’s true that credit facilitated economic growth. However, we are often too dazed with the idea of buying expensive luxury items and paying for these later. This displays a false sense of wealth, getting us a status enhancement by having ridiculously expensive items. Admit it or not, we tend to judge people by what they have. We also feel good when we are holding the newest gizmo or wearing high end clothes in public. We also love to share photos of our international trips on social media. Thus, we try to paint our social status by spending on pricey things.
Moreover, we have a tendency to buy pricier items if we know we are going to divide the payment among our group. That alone is not bad, but we shell out more cash than what we originally planned to spend. Probably the members of our group have (more or less) the same financial status as we do. We just do not have the honesty to reduce our social status.
We also have a psychological stronghold over crisp cash, so we get rid of the older bills as fast as possible. Consumers tend to spend more using worn bills when they are shopping for goods. In relation with this, we have negative bias towards bills with smaller denominations. We think a $1,000 bill has a bigger value than ten $100 bills. Notice how fast you spend money whenever you have these smaller bills, rather than the larger ones.
Paying For Things Past Deadline
This could be an honest mistake, but it is indicative of larger problems. Penalties aside, paying beyond the deadline reduces your goodwill, as far as credit companies are concerned. You need to improve your credit rating through time, after all. Procrastination affects all of us at one point or another. It’s a matter of self-discipline and a bit of science to conquer this habit.
The limbic system serves as our primary signal that we are about to engage in something unpleasant. It tells our body to avoid activities that make us feel bad. Do you always feel lethargic whenever you have to stay in queues just to pay for bills? The comfort you feel when you procrastinate is due to your limbic system.
As stated, it is our default to seek comfort by bypassing burdensome activities. Yet, we also need to remember our responsibility to pay in time.
There is a part of our brain, namely the prefrontal cortex, which tells us to do something. It integrates information, then in turn, allows us to make decisions. This part of our brain made us distinct from other animals. However, remember that this is the weaker region of our brain. Hence, our limbic system takes over if we are not keen with our tasks. Perhaps we can trick our chronic procrastination by uttering mantras and reminding ourselves of the penalties.
Saving Yourself from Bad Financial Practices
If you became aware of your spending problem, rest assured that many people are also practicing bad financial habits, so you are not alone in this. According to Dr. Hersh Shefrin, only 25% of the population has a superior form of notification from their brains not to buy unnecessary things. This means they have the advantage of self-control, according to genetics. But you should not be discouraged, since you can always nurture this skill later.
First, you can develop mantras connected to the set of rules in your daily life. You are already living using your internal rules subconsciously. Adding money-saving items will not hurt. Sentences like, “I have to save 10% of my salary” or “I will buy this gizmo once I have the money” help to improve your habit. We tend to feel poor about ourselves whenever we break these internal rules.
Secondly, devise an auto-saving plan, where you have to set aside a certain amount of your money, even before you get a hold it. The way it works is by you not missing the money you saved in the bank, because it’s not included in your budget. This tricks the part of your brain which loves spending, and activates the prefrontal cortex. Also, tag someone else to do it, as we fall to status quo bias. You will likely not stop saving if someone else you tag along is still doing it.
Lastly, create a savings plan and stick with it no matter what. Even without science, your self-discipline is still the main key for living (or failing) in financial freedom. It will be hard, because our limbic system wants us to feel good, but nurture assets of our human nature, given the right regimen.
How’s your journey to financial freedom so far?