We are all told it is will power and our financial aptitude which governs our savings capacity. Whilst these factors do have a part to play, the idea that they are predominant is not true. Let’s look at a couple of examples of this with our Hack series!
The WAY in which you spend influences HOW MUCH you spend
Credit card companies make their money from you using this principle. What they realized is that we all have a very primitive and simple goal in life. We ALL seek pleasure and avoid pain.
“Eat the cake” “Don’t touch the red hot poker”.
We learn based upon a reward system which is also quite short-sighted. You eat the cake and you feel happy instantly. So you want more cake. You touch the hot poker and feel instant pain so you don’t do it again. Simple.
However, if you distance the reward from the pain of completing a task, it becomes more difficult for the brain to train itself to replicate this behaviour consistently. For example, the reward of going to the gym is a healthier and happier life. However, this is a gradual and long-term benefit which the brain, simple as it is, doesn’t easily appreciate.
Spending money on something contains both positive and negative elements. Simply, you get to buy that fantastic new item that you LOVE, but you have to give away some money in the process and that hurts because you love money too… When you purchase something with your own cash, both of these things happen at the same time and this influences the way you learn to spend.
What credit card companies do on the other hand, is quite different and devious. Credit cards create an artificial delay between the pleasure of the purchase and the pain of the repayment. The pleasure you get straight away, and it can be directly linked with the behaviour of purchasing a good. So the reward centre of the brain kicks in and says “Good job! We’ll done! More of that please”. However, the pain is much later on, up to 55 days later in fact. When you look at credit card bill and start thinking about how you can flee the country…. The pain is there, and it is real, but it is not associated as easily with a particular behaviour.
In the article “Monopoly Money: The Effect of Payment Coupling and Form on Spending Behavior,” the authors discovered that people were willing to pay $175 for a basket of goods using a credit card whilst then were only willing to spend $145 on the same basket of goods using cash. That is a difference of 20%!
So that brings us to….
Hack #1 Use cash where possible to reprogram your brain’s spending habits. If this is not always functional use a debit card. However, for your luxury purchases, go and get the cash out*. If after seeing all that money you feel it is too painful to part with for the item you want then don’t buy it!