Editorial Policy

What to do if you’re hardwired for debt

Jennifer Nelson

February 19, 2016

We all know someone who always seems to be in a money jam — and that person may even be you! They’re in debt, owe everyone and often rob Chase to pay Capital One. It’s as if a dark money cloud hangs overhead. But what if there were more going on than just bad money practices? Studies of the relationship between money and the brain suggest some people may be hardwired for making poor money choices.

Here’s a closer look at some research on how your brain affects financial behavior — and suggestions for how to cope.

Study: You may be predisposed to risk taking.
In a Stanford University study, researchers used functional MRI (fMRI) to study doctoral students while they played a game selecting a risky, good or safe investment opportunity (a “good” stock, a “bad” stock or a bond with little return). Researchers recorded which of two areas of the brain lit up.

The area of the brain that expects a reward, the nucleus accumbens, lit up seconds before subjects made a “risk-seeking” choice (the bad stock). The area of the brain that is linked to anxiety, the anterior insula, fired seconds before study participants made a risk-averse pick (the low return bond), and participants chose rationally (the good stock) 75 percent of the time. The study conclusion? Emotions run high during financial choices.

Experts advise keeping emotions out of money decisions. “But every decision we make is connected with emotions — that’s how our brains work,” says Barbara Nusbaum, PhD, a psychologist who specializes in money issues. The goal is to use information and emotion wisely to overcome poor money choices.

“But every decision we make is connected with emotions — that’s how our brains work.”
— Barbara Nusbaum, PhD, psychologist specializing in money issues

The lessons to be learned from this study:

  • Set and enforce goals. Moving from a cash society to cashless society has been tougher for consumers because it’s harder to see where our money goes. “As a result, most people live under debt,” says Rachna Ahlawat, vice president of products at Ondot Systems, and an expert on consumer impulse purchase habits. By setting and enforcing financial goals for spending, saving and investing, you follow a blueprint, says Ahlawat. As a result, you’re less likely to get off track with poor choices.
  • Create a budget and stick with it. Don’t think of budgeting as a tool of self-flagellation, says Leisa Peterson, wealth coach and author of “The Scarcity Mindset – Overcoming ‘Not Enough’ so You Can Create a Business of Plenty.” If you don’t want to craft a budget or you’re avoiding it, ask yourself why. Resistance and avoidance are clues to a deeper emotion. Budgets are an assessment of where your money is going.
  • Overcome childhood feelings. How we feel about money is shaped by how we were raised and how our mothers, fathers or caregivers felt about money. We’re not carbon copies of our parents, but you must recognize repeated mistakes in order to break patterns. Peterson believes money personalities are formed by age 7. And, if you had trauma surrounding money in childhood, you’re on track to have a tougher time. Peterson tries to get at the root of a client’s childhood money trauma — a divorce, moving out of a big house and into one you were embarrassed to live in, not having enough money, going hungry, being bullied for your clothes, or even a seemingly inconsequential event — to sort through it. Ask yourself if you had a childhood money trauma that affects the way you deal with finances. You may need to talk this one out with a close friend or a professional.

Study: You may feel cheated more easily than others.
Researchers, also at Stanford, scanned volunteers’ brains while they played a negotiation game. In the study, a proposer and responder had to agree upon an amount of money to split. Agree and they snag the cash, disagree and no one gets any dough. Sounds great. Except 50 percent of the time the responder rejected low ball offers so neither received any money. Again, the anterior insula was to blame, responsible for anger, fear and distrust. People who felt low-balled walked away leaving money on the table for being treated “unfairly.”

The lessons to be learned from this study:

  • Recognize money can create anxiety. No question money brings difficult emotions: worry, anxiety, sadness and fear. It also brings positive ones such as ease, joy and excitement. Nusbaum says if you can recognize the emotions that dealing with finances evokes for you, you can counterbalance them. For example, if opening the credit card bill brings fear, what’s the wished for emotion? Calm? Resiliency? Spin a more positive sentiment.
  • Visualize positive financial outcomes. A TD Bank survey exploring the way Americans use visualization (pictures, idea boards) to meet personal and financial goals found if you visualize positive outcomes, you become inspired, motivated and more effective at setting up a plan. Focus on an experience, rather than a tangible item. “You don’t want to picture the car you always wanted, but picture an experience of what it would be like to be in a better situation,” says Nusbaum. Visualize opening the credit card statement to a zero balance, or the celebratory night you pay off student loans. Practice.

Study: You could be addicted to money.
Researchers at Massachusetts General Hospital and Harvard Medical School scanned the brains of study subjects playing a game in which they could win or lose money. They found money and drugs cause a similar neurological “high.” An addiction to money could be dangerous since it leads people to take ill-advised risks and make foolish decisions in search of that high.

The lessons to be learned from this study:

  • Ask about card control. Some banks and credit unions offer card control apps to help curb spending. Enter each card’s details and you’re able to keep a card inactive so you can’t make purchases, or set limits such as $1000 per month or only up to $100 in transactions. “Consumers are able to proactively control their finances and stop themselves from spending unnecessarily, and if an emergency arises they can lift the limits,” says Ahlawat (Ondot makes these card control apps used by about 400 banks and credit unions).
  • Get help. “If there’s a lifelong pattern of making poor decisions, you likely need more help,” says Nusbaum. You may need to work with a financial planner or psychologist who specializes in money issues.

Understanding how your brain circuitry and emotions play a role in your financial picture can help you stay out of debt and manage credit more effectively. When you’re clear about how your emotions affect your money decisions, you can move out from under that dark money cloud.

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