The Science Behind Spending Habits & How To Break Them

November 07, 2017

I crave ice cream before bedtime. I know the high, empty calories are not good for me, but it’s still like a WWE fight in my brain every night – the good guy (don’t eat it) is on his back while the bad guy (go for it) has him in a figure 4 toe hold trying to convince him to surrender. The good guy is throwing counters at him – “this stuff is going to make you fat!” “you’re going to regret it tomorrow!” — while the bad guy keeps the pressure on – “you deserve it!” “it will make you sleep better!” Sometimes the good guy wins, but most nights I eat the ice cream and regret it in the morning.

What’s happening in your brain when you make a decision

What’s going on in my mind is called an intertemporal choice or decision. This part of our brain weighs the immediate versus delayed gratification, or how current decisions affect future opportunities. Marketers use our intertemporal utility function against us when they advertise. Being aware of what’s going on during this decision process can help us make better decisions, especially financially.

Here’s another example:

The case of the shopaholic

My daughter is a self-admitted shopaholic. I bet she has over 100 pairs of shoes. (don’t worry, she knows I’m writing this) She and I discussed what goes on in her mind when she makes the decision to purchase yet another pair.

What’s going on in her mind

She tells me that she sees herself wearing them with a particular outfit and getting compliments on how she looks. She has created an image around her shoes where her peers identify her as the “shoe princess.” When I asked her how she feels later about owning so many pairs, she says she has mixed emotions – she loves her title of the Shoe Girl, but she laments the amount of money she has wasted.

Conflicting priorities

At 23, she is starting to think about bigger financial decisions like getting her own apartment and purchasing a new car. With these new obligations, it will be very difficult to keep her title.

How she got to this point

The problem is that she has actually created a habit out of shopping, the same way other people pick up habits like smoking, checking their phone, or eating ice cream. Her brain has built in a craving for the next purchase. If she continues to let this habit control part of her financial life, she will struggle to accomplish her long-term goals.

Reversing the habit

So, what actions can she take to curb this craving and reverse the habit? The first thing she can do is recognize it as a habit. The awareness that her current behavior has negative consequences on her future is a good place to start. And understanding that seemingly small amounts of money spent or saved today, can have big impacts in the future.

Here are some concrete things you can do when facing an intertemporal choice around spending:

  • Create a budget line item for purchases. Some people go as far as opening a separate checking account and giving themselves an allowance every paycheck they can spend on discretionary items. If they have their eye on an expensive item, they wait until their allowance accumulates.
  • Have someone to run your purchases by. If you have a spouse, parent or friend whose opinion would be helpful in analyzing a purchase, make it a rule to call them before you pull the trigger.
  • Set some rules for yourself. Set a dollar amount for purchases that need to have a 24-hour waiting period before you can buy it. Many times, a day removed can make the impulse less favorable.

It’s working!

I have already seen progress in my daughter’s positive financial habits — these days she calls me when she wants to make a large purchase and plans out every paycheck. Now I need to take my own advice and start changing my own habits, like cutting out the bedtime ice cream snacks.

BTW – This blog is really about whiskey, not ice cream.

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