Train Your Brain to Make Smarter Money Decisions

Remember that many behavioral decisions that save you money also improve your health and well-being, and you can train your brain to do the right thing.

It’s no coincidence that one of the most oft-covered pop songs in history is “Money (That’s What I Want),” which was co-written by Berry Gordy and became the first hit for his then-fledgling Motown label.

One Smokey, three Supremes, and Four Tops later, he had a lot of it.

Pink Floyd gave us a song with the same name, and the famous lyrics:

• “Get a good job with more pay and you’re okay
• Grab that cash with both hands and make a stash.”

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Our preoccupation with money is never ending, and so is our lack of success at keeping it. With a bow toward Warren Buffet, who seems to have never made a bad financial decision, most of us have made terrible ones. Whether you open your wallet or not, you make decisions about your money every day. It can be hard to think about next year or even next month when you're just getting by from paycheck to paycheck.

But even with limited resources, you can slowly and steadily prepare for the future.

Luckily our brains are somewhat like dogs: they can be trained to do the right thing, whether it’s not peeing on the carpet or spending and saving money wisely and with forethought. Here’s how.

Stop thinking credit cards are plastic money 

Financial experts say that’s how you get into a deep credit card debt. When you stop paying off the principal and pay only the interest every month, you’re in big trouble. Before you go that far, pay off your credit card debt and cut up your cards. Removing temptation is the not-so-secret secret of self-control.

Money is not an unlimited path to happiness

You’ll be happier if you can pay your bills easily. People with access to cash feel better. If that isn’t obvious, check out the research.

Happiness can also come from buying experiences that build relationships and support your sense of your true self, according to San Francisco State University Associate Professor of Psychology Ryan Howell. If your family gets closer on a snorkeling trip and your kids learn to share your love of nature, that’s a good buy.

But above a certain level, higher income may not make you happier.

Don’t spend mindlessly

It’s important to understand your own attitudes about money. Try taking the Life Values quiz, at the website Smart About Money.

Here’s a sample question — In deciding what to do with a sudden cash windfall, I would:

A.   Consider taking a trip around the world and enjoy myself thoroughly.

B.    Investigate a variety of investment possibilities and the long-term return of each.

C.    Use it to fund a need, wish, or desire of a family member.

D.   Buy a new house with all the amenities and comforts I’ve always wanted.

Find the middle way between agonizing and settling

When you have a big decision to make, it pays to think it through and look for the absolute best outcome, an attitude economists call “maximizing.” But on the small stuff — and more of it is small stuff than you might think — isn’t “good enough” good enough? People who can be happy with any satisfactory choice are less likely to feel regret and envy, some research suggests.

Know the specifics

Knowing what you spend each week and month is the first step to taking responsibility.

Once you have debt, procrastination will not make that fact go away. If you need reminding, a bill collection agency will be happy to make your life hell, and ruin your credit rating for free.

Make lifestyle changes

A big part of making bad money decisions is relying on consumerism for a sense of well-being. MyBankTracker, another website with money tips galore, advises consciously living smaller; you might realize you’re just fine and feel better while you’re at it. Being thrifty feels good for many of us.

Specific tips include:

• Look at your phone, internet, and cable plans and decide whether you need all the bells and whistles.
• Cut back on take-out or restaurant food.
• Use public transportation.
• Work out at home or in the park rather than in a gym with huge monthly fees.
• Give up expensive habits, like smoking and drinking sprees.

More advice: Make good friends because friends help friends and enhance quality of life. Dedicate time and effort to them. The moral? Don’t become a hermit with a 60-inch TV and a $5,000 comfy chair.

Behavioral decisions that save you money also improve your health and well-being

Just think about the price for a pack of cigarettes or a watered-down cocktail at a bar. You might be adding years to your life and dollars to your bank account.

Nobel prize-winning psychologist Daniel Kahneman talks about “mental accounting” as the key to training your brain to make the right decisions.

"We all keep our money in different mental accounts for which we have different rules," he says. "People spend their spending money, but then there is a hierarchy of the accounts that they will touch."

“Numerate people — people who understand numbers and make data-driven decisions — have a significant advantage over those who are not. So do people who are able to frame things broadly and keep their emotions in check,” he writes.

“We're not machines. We all have thoughts, feelings, and personal circumstances swimming around in our heads all the time, whether we're at work or at the bank or in the middle of a negotiation.”

The lesson is to train your brain to keep the irrational out of the equation. You also need to know your deepest desires and respect them. Easier said than done, admittedly. But awareness of those concepts is a good start.

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