An investment in knowledge

5 Oct

Are you curious how spending affects your brain?

My recent newsletters have focused on credit and the importance of controlling debt.  As we settle into the new school year, the parents amongst us may worry about children who are living away at college or university for the first year, and how they will handle their budgets for food, books and other activities of post-secondary life.  Much of the success of that derives from how we have taught them to handle money thus far in life.  Some of it depends on how they make purchases.

I recently came across a really interesting interview on a CBC radio on a show named Spark hosted by Nora Young.  Click to hear the broadcast on how our brain may help or hinder us follow a cash flow plan to ensure we use our money to fund what we really want out of our money.

There is a fascinating explanation by Dr. Moira Somers,  a neuropsychologist and financial psychologist at the University of Manitoba, on the different reactions in the brain when we consider making a purchase with cash vs credit. Studies showed that there are different patterns of brain activation when we imagine making purchase, using cash or plastic.  When paying with cash, two separate parts of the brain are involved – one is associated with pleasure and the other with a little bit of disgust.  When the same purchase is contemplated using credit cards, only the pleasure centre of the brain is activated and there is none of the disgust or pain, making it easier for us to spend when we use plastic.

In short, in real situations when we look at people actually spending money, discretionary spending goes down by 20% to 30% when they use cash vs credit.  That is powerful!

Dr. Somers talks about how casinos use credit to eliminate the pain of gambling, to circumvent the brain’s disgust at using cash.  This is something I can personally identify with. I only once went to a casino and the effect of throwing away my money into a machine disgusted me so much I have never gone back.  I’m very glad I didn’t use a credit card on that first experience!

barteringLife today runs at a very fast pace and we can spend money 24/7.  Spending using credit or plastic is also somewhat remote and abstract.  We are not that far away in years from the days when our ancestors fished or lived on farms and traded one for the other.  They wouldn’t trade more than what they needed.  Our brains haven’t evolved as quickly as the constant marketing messages that induce us to spend money.  Those messages play on our emotions and you can see why the brain has difficulty controlling discretionary spending.

Tips to educate your children or teens on personal finance

  1. Use cash to be more wary before making a purchase.
  2. Resist signing up for credit cards if these are offered in student welcome packages or on campus. Banks may say it’s an opportunity to build credit but there will be other opportunities later in life.
  3. Set goals to save for things they really want and determine an amount to save each week or month toward those financial goals. (Note – your brain may lead you to enjoy the purchase more because there is no debt associated with it.)
  4. Set an example yourself by setting goals following a Cash Flow Plan.
  5. Educate them to recognize how their emotions can drive impulse spending to compensate for stress they face. Ensure they understand how clever marketers urge them to buy.
  6. Make sure they understand how lending institutions encourage credit because of the profits they make by collecting interest
  7. The last tip is for you: support them as they master this passage through life. I know you will.

Would you like to discuss how a Cash Flow Plan can help you get more life out of the money you already have?  I offer a 15-minute complimentary consult to determine if this can work for you and your family.  Put a system in place so that the credit card bill doesn’t surprise you at month end.  Contact me today.

It’s just good advice.