Your Brain on Money: The Neuroscience of Finances

Did you know that you can use neuroscience to inform and improve your financial decision-making processes? Gaining control of finances can be a real struggle for people, and it is a lot more common than you may think. By understanding the neuroscience behind why, and how, you make the financial decisions that you do, you can aim to gain more control over them.

Struggling Against Cognitive Limits

Your brain has cognitive limits. When faced with difficult, unclear, or low-reward decisions, your brain will often choose the path of least resistance, which is inaction. When overwhelmed with too much information or choice, the brain tends to become overly passive, avoiding decision-making altogether. This is commonly referred to as a cognitive overload or information blindness, and it is something that everyone has experienced at some point in our lives.

A lack of financial literacy (a problem that is perpetrated by the lack of inclusion of this in the general school system), stress from other areas in life, or a neurodivergence like ADHD or dyscalculia, are all complicating factors that can lead to reaching a cognitive limit when it comes to looking at one's finances. With this in mind, it is not hard to see why someone may “let” their finances get out of control.

Decision Fatigue and Simplifying Decision-Making

An overwhelmed brain is a stuck brain. Due to cognitive limits, the brain gets overwhelmed when it has to process too many things at once. With information overload comes decision fatigue, and you cannot engage in an active way forward out of the situation when in that state of mind. Avoiding decision-making when there is too much to deal with is your brain trying its best to protect you from harm. Realistically, we can only consciously process about three to seven things at once.

What is needed to move forward in these situations is fewer options; fewer things to think about. Easier said than done, that is for sure, but it is important to try as it is one of the most effective strategies to combat decision fatigue. By simplifying your decision-making environment, you can mitigate the effects of decision fatigue. Keeping choices manageable helps your brain to function more efficiently and move out of its “freeze” state.

This can take several forms, such as:

• Creating simple rules or mantras that you can follow without having to think, such as ? “don’t spend more than x percent of your income on rent or mortgages” or “don’t go shopping when you are hungry”
• Taking a broad, unbiased look at your financial situation and making a list of actionable next steps. Grab a pen, some sheets of paper and a cup of coffee and make a simple overview of what you own and what you owe. Excel may be a better choice for some of us. Either way: Keep it simple (but accurate)
• Blocking your Amazon account on your phone to make it harder to buy frivolous things on an impulse?
• Asking yourself whether a certain purchase would really make you fulfilled before going through with them. Imagine also how much lighter you would feel with the extra money in your account and less worries regarding your financial future?
• Consolidating debts into 1 repayment plan as there is only one scheduled payment and interest to consider and plan for rather than several throughout the month

Keep It Simple, Make It Easy

“Out of sight, out of mind”; use this to your advantage. Further reduce your cognitive load by taking advantage of technology and, where possible, automate what you can. If you set up an automatic savings plans or regular bill payments, not only will it reduce the need to make these decisions repeatedly, freeing up mental energy for other important activities, but it will also eliminate the emotional aspect to these decisions. It’s hard to feel conflicted about putting $100 into savings rather than going out to dinner with a friend when that money is automatically allocated for you. By establishing simple, smart routines like automatic withdrawals, you will significantly benefit your financial decision-making.

Reinforce the Behavior You Want To See

It is easier to change behavior, and sustain it, through positive reinforcement. This is true for raising children, leading teams, training pets, and yes, even improving financial habits. The more you make yourself feel “bad” or “guilty” for the situation that you may find yourself in, the harder it will be to stay motivated to change. While the brain learns strongly from negative experiences (aversive learning), these can sometimes cause paralysis or inaction due to fear. Practicing positive reinforcement and self compassion, on the other hand, reduces stress levels and can move you out of inertia. Because of this, it can often be more effective and sustainable. Striking a balance between these two forms of reinforcement is crucial for effective habit change. Whatever your situation may be, making yourself feel worse about it is not an effective strategy to get out of it.

Finding positive ways to reinforce changing money habits that do not involve a lot of spending can be tricky, but it is possible. Gamify tracking your savings by putting colored beads/sticks/stones into a jar for every milestone, when the jar is filled then reward yourself with something that brings you joy and still fits within your goals. We naturally learn better when play involved, so by making the habit that you are trying to form into a game, it is more likely to stick that much quicker!

TLDR: 4 Practical Tips for Financial Management

In a nutshell, here is what you can do to use neuroscience to your benefit when it comes to gaining control over your finances.

1. Keep it Simple: Avoid overwhelming your brain with too many options or too much information. Simplify your financial decisions by focusing on key priorities and limiting the choices you need to make.
2. Reward Good Behavior: Reward yourself for sticking to good financial habits. This could be as simple as acknowledging your progress or treating yourself to a small reward when you reach a goal.
3. Build Small Routines: Develop small, manageable routines that can be followed on autopilot. This reduces the cognitive load and helps maintain consistency over time.
4. Balance Reinforcement Methods: While it’s important to recognize and correct bad habits, try to maintain a positive approach. Making yourself feel worse is not the way forward.

Gaining control over your finances can be challenging, but with neuroscience on your side, there is light at the end of the tunnel. Understanding how your brain works, and using that to your advantage, is one of the ways that you can improve your financial decision-making.

If all of this seems like too much, just remember this: don’t spend more than you can afford. ??

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