Financial planning could be difficult if you don't understand how your own brain deals with money.
We picture our brains as little computers that carefully consider all available information and select the best course of action for us. We like to believe that we are intelligent and logical individuals. However, our brains have primarily evolved to assist us meet our basic needs such as food, clothing, shelter and safety.
Here’s what you should know about how your brain relates to money as we all have prejudices towards money!
General bias towards money
To live your best life, it helps to understand the limitations your brain has towards money. Here are 3 biases that you need to be aware of:
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We are hard-wired to value things more now than in the future
We are biologically programmed to value things more in the now, than later and we continuously pay a high price for this. A good example here is every N10,000 we spend today is N10,000 we could have invested instead. If we had just left it unspent and invested instead, that N10,000 may have been worth much more in the future.
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Bias towards the first price you hear
The first price you happen to hear will usually be the one that establishes your concept of what is normal because you don't have an internal, predetermined idea of what most items should cost. Restaurants occasionally even include an unexpectedly pricey dish on the menu - and such prices are only there to make everything else look more reasonable in comparison (and not because people love ordering them).
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Believing in luck
The third bias you should know is that humans have an innate propensity to believe in luck. For instance, you convince yourself you’re on a roll when you’re having success (do you know any chronic gamblers?), or you tell yourself you are entitled to a victory when you are on a losing streak. Making decisions about your investments in this way is extremely risky.
What can you do about it?
It may be beneficial to consider having two distinct brains. One of them is smart, logical, and thoughtful about things. Your adult brain is here, and it's capable of making difficult choices (known to scientists as system 2 thinking).
Another one makes rash decisions and acts only on instinct and desires. You have a monkey brain (known to scientists as system 1 thinking). Everyone possesses a small amount of the monkey brain, which is the part of the brain that actually makes the majority of our decisions.
What else can we do to make things even simpler for ourselves? Rather than worrying about a hundred small things, we are going to automate aspects of our finances. This allows us concentrate on improving a few simple things that have a large impact.
Your willpower is a finite resource; therefore, we're going to put it to good use. You can do this by setting up a direct debit to help you hit your savings and investing goals. You can also use your calendars to remind you to save and do your budgeting on the same day of every month.
Key takeaway
Your brain was not created to manage money. By automating your finance choices, you remove the temptations that are sure to come up along the way, thus making it simpler to make better money choices, rather than spend your money unwisely.
Did you find this article insightful?
This is your adult brain in charge! Use this opportunity to make good choices in your life. Like joining our InvestNaija community- and if you have already joined, make sure you check out our other content that's sure to help you on your financial independence journey. Click here to watch how to manage your money.
