The Neuropsychology of Saving

One of the things I enjoy most about my profession is continuing to learn. It's required at the regulatory level, with a certain number of hours of continuing education being mandated by the CFP Board, for example. But the broader reality is that with so much changing all the time continuing my education isn't just required, it's necessary.

One area that is gaining more prominence in continuing education coursework is behavioral finance. I've written previously about this field and its importance in understanding the how's and why's of one's relationship with money.

These topics are important because if we can understand our internal thought processes and biases regarding money, we can hopefully make better financial decisions.

Last week I attended a two-day conference in San Francisco put on by the NorCal chapter of the Financial Planning Association. There were several behavioral finance-related options, a change from recent years where there may have only been one.

One of the sessions I attended was The Art of Saving Money and it examined, among other things, the neuropsychology of saving. The content was interesting, so I thought I'd share some of the concepts with you, along with some added commentary.

The art of saving money, it turns out, has more to do with how we manage our impulses and internal biases then it does with how much money we make. We all know people who make a lot but seem to spend it all, right? Savers tend to have these common traits:

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They started young. Many started saving before they ever had any money. For these savers, this is often tied to a sense of abundance and security at a very early age, perhaps even 3-6. Maybe it's easier to save when your fundamental needs are continually met.

Apparently, many children who were deprived (whether it's of food, shelter, love, etc) at a young age become hyperactive consumers later in life, contrary to typical expectations. Perhaps these early feelings of scarcity lead some to consume any available resources immediately instead of saving them for the future. As you can imagine, this thinking has huge ramifications for one's financial life.

They're independent. Savers tend to be unconcerned about keeping up with the Jones's. They go their own way, often not perpetually splurging on the latest gadget. Instead, they save extra money and try to maximize the value of what they have. In a consumption-based economy (and culture) this means going against the grain, but eventually leads to more financial freedom by not overspending, going into debt, and so forth.

They're habitual. We all know how important it is to have good habits. Well, good savers think of the activity as being a habit. They regularly save into their retirement accounts, for example, in affordable increments until it becomes like muscle memory, something automatic, and not to be fretted over.

Neuropsychology tells us how everything we do is for pleasure or pain, and that we'll do more to avoid pain than to gain pleasure. If we see saving money as painful, we'll just avoid it. This could go back to childhood experiences or have other causes. But non-savers are likely in that category for bigger reasons than "I can't afford to save", which is one of the most common reasons cited.

Problematic saving may also have to do with most of our decisions occurring in our mid-brain, the area where pleasure and pain resides. If emotion trumps logic and survival trumps everything, it's good to keep this part of our brain in check when making financial decisions. To do so, we need to proactively engage our frontal lobe, where logic and critical thinking happens.

The presenter suggested three steps to slow down the typical emotional thought process as it relates to financial decisions:

Relax – Take a few deep breaths, assess yourself physically and mentally. Remember that the more excited you are, the less engaged your frontal lobe is and the less logical your decision is likely to be.

If you're feeling nervous or anxious when trying to decide on a purchase, that's probably a good indicator. Much of our consumer economy is built on fostering scarcity, so it can seem like you don't have time to consider, you must act now, and so on. This is rarely actually the case.

Reframe – Ask yourself questions like, "What am I really buying?", "Does this purchase solve a problem or create one?", "Would I encourage a friend to make this purchase?". If it's tough to immediately answer these questions, that's another indicator. When in doubt it's often best to do nothing.

Reevaluate – I'm not suggesting that you overanalyze every purchase or that you must save every extra penny. Instead, acknowledge the variety of reasons why you might be spending and try to reduce those expenses that, at least in hindsight, seem nonsensical.

Saving is counterintuitive, so it's naturally a challenging thing to do. Saving may also be difficult for deeper reasons than we imagine. By acknowledging and appreciating this, we can try to bring a little logic into financial decisions that are often ruled by emotions. If we can do so, we'll have a much better chance at thinking longer-term and having a healthier relationship with money.

Have questions? Ask me. I can help.

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