When it comes to money, your brain, and especially your prefrontal cortex, is your “Onboard Accountant.” The prefrontal cortex is located in the frontal lobe area and, among other things, is responsible for “executive” functions such as resolving conflict, making choices, predicting future events, and governing social control. As society evolved, so did the functions of the prefrontal cortex. It’s now a powerful processor that routinely conducts cost-benefit calculations. Sometimes its calculations are correct, and other times they’re not. So, when it comes to spending, you may want to create a mechanism to check your “Accountant’s” advice.
A cost-benefit analysis is a process you can use to determine the value of a particular financial action you might want to take. In this case, the pre-frontal cortex instinctively weighs your desire for a product versus the pain of the price. For instance, you may salivate every time you see an ad for the latest and greatest phone, but the $500 price tag is a little tough to swallow. Without much conscious deliberation, your “Accountant” may spring to a logical solution – use your credit card. But there are other things to consider. Can you afford to pay back the charge in a reasonable time frame? What if your new iThing-a-ma-jig provides no additional value beyond instant gratification? You may not find the answers until after your buy, which may be too late. What we need is a way to accurately assess the purchase – its pros and cons. Fortunately, there are a few simple strategies that will help us out.
First, use cash. It’s a lot easier to swipe a piece of plastic for $500 than to put 25 twenty-dollar bills in the cashier’s hand. When we use cash, we force our prefrontal lobe to pay more attention to the pain of the purchase, rather than caving in to the desire. For instance, as an avid gamer, I was eager to get my hands on the latest gaming system, but I’m not a big credit card user. When the latest console first came out, it was $500, but I wasn’t eager to part with $500 in cash. Instead, I waited. This allowed me to purchase the system later on for $199, which included two free games. That $300 I saved allowed me to stay within my financial plan, and address more important responsibilities.
Second, get a Budget Buddy. Even though my career is educating people about the proper use of money, I’m still human. I sometimes have the same overwhelming desire to buy certain things like everyone else. Whenever I feel the urge to purchase something beyond my budget, I send a text to my Budget Buddy. Because my Buddy knows me pretty well, they play “devil’s advocate,” offering objective feedback about the pros and cons of the purchase, and I do the same for her. Whenever she’s battling over whether or not to buy something, she gives me a call. This partnership has helped both of us avoid some questionable purchases.
The last bit of strategy takes a bit more willpower, but it’s easy: Sleep on it. When you’re considering a major purchase, take a day or so to think about whether you really need the item. Taking time allows you to research the item thoroughly, do some price comparisons, and determine whether the product is in line with your expectations. This way, you stand a better chance of making a decision that’s right for you. I took this approach with my last television. As I was walking through the store, I noticed what appeared to be a really good deal on an HD set. My TV was working fine, but it was from the 90’s. I took a day to think about it, reviewed my budget and the pros and cons of the new TV, and discovered I did want to upgrade. I reviewed the set online and found the same one at a competing retailer for $100 less. A much better decision by waiting 24 hours.
Sometimes, our mind play tricks on us, but it’s not intentional, there’s simply a lot going on in our head. It’s okay to take a step back every now and then, especially when money is involved. Until next time, I’m Thomas Fox for Cambridge Credit Counseling.