CAN YOU THINK YOURSELF RICH?

Yes you can, says Dan Ariely. Here’s how to put mind over money

Mastering your finances is all in the mind, believes behavioural psychologist Dan Ariely. He tells Emilie Martin how to change the way you think about money

Good with money… Whether you think this often-used phrase applies to you or you wish it did, it’s easy to imagine that financial nous comes naturally to some people and not to others. But the idea that some of us are better with money than others by nature couldn’t be further from the truth. The human brain simply isn’t hard-wired to make astute financial decisions, says author Dan Ariely. So, while most of us know most of the time how we should manage our finances, we don’t always act accordingly. It’s this gap between what we know and what we do that causes us to buy things we can’t afford or put off saving for retirement. The key to closing this gap is self-knowledge. By understanding the thought processes that contribute to certain financial behaviours, we can avoid repeating the same mistakes.

KNOW YOUR NATURE

Take shopping, for instance. To really get under the skin of our spending habits, we need to acknowledge that our brains are programmed to respond emotionally to things that get our adrenaline pumping. In the natural world, this instinct is critical to our survival. It gets in the way, though, when it comes to making well-thought-through decisions about what we buy – or, more importantly, what we don’t buy.

‘Imagine that you see a tiger in a forest,’ Ariely says. ‘Nature doesn’t want you to start thinking about cost and benefit; nature wants you to just start running.’ This instinct means that when we’re faced with an advert that creates a buzz, or a discount that generates excitement, we tend not to weigh up the situation rationally. Anyone who’s ever realised on the way home from the January

sales that they’ve bought a load of goodies that they didn’t actually need or couldn’t afford knows how easy it is to get caught up in the rush of bagging a bargain. Shopping when you’re bored is another example of emotion-led spending. To see whether you’re prone to doing this, check your recent bank statements for online purchases you’ve made in the evening when you’ve had nothing else to do.

Once you understand where your good intentions are coming undone, set yourself some rules. No online shopping to pass the time. No impulse purchases – when you see something you want to buy, walk away and see if you still want it half an hour later.

PAIN OF PAYING

Making rules is one thing; sticking to them is another. But digging deeper into how we feel when we hand over our hard-earned cash can help. ‘When we pay for something, we often experience a kind of mental pain,’ says Ariely. So, unsurprisingly, as with other kinds of pain, we look for ways to reduce it. One of the ways we try to do this is by increasing the length of time between enjoying something and having to actually pay for it. Paying for something on a credit card is a good example of this; it helps disassociate the thing we want from the reality that we will be financially poorer as a result of spending on it. Reducing the ‘pain of paying’ can increase our enjoyment of what we are buying or consuming, but it can also lead us to overspend.

In contrast, dialling up the pain of paying just a little by handing over cash instead of making a contactless payment when you order a coffee, buy lunch or pay for small daily treats can make you think twice about whether you really want or need them.

PLAY THE LONG GAME

If you’re someone who finds saving harder than spending – and let’s face it, who doesn’t? – it’s time to cut yourself some slack. Resisting the urge to buy today so you can afford something better tomorrow is not a skill the human brain excels at. In fact, we are programmed to want reward and enjoyment in the moment. That is why, even when we set ourselves a realistic monthly budget, we often find we overspend at the start of the month. Ariely suggests creating a weekly budget instead. This way, you’ll feel like you’re reining in your spending for a shorter period of time. Setting your budget to run from Monday to Sunday creates an added incentive to be frugal during the week, so you have more money to play with at the weekend. Apps such as Yolt or Money Dashboard can help with budgeting.

Ariely has another trick: ‘goals and anti-goals’. The idea is that you mentally pair up something non-essential that you frequently find yourself spending on with a bigger purchase you’d need to save up for. You might, for example, pair eating out with a weekend away, or buying clothes with a deposit on a new car. Set up an account to cover your spending on both things and transfer a set amount into it at the start of each month (say, £200). This forces you to consider the long-term consequence of buying a £150 pair of boots, or might prompt you to choose a cheaper restaurant when you eat out. It reminds you that by spending on something smaller to enjoy now, you are denying yourself the larger prize.

VISUALISE YOUR FUTURE

If you struggle to save towards longer-term goals, such as savings or a pension, Ariely suggests using a visualisation technique. This involves training your brain to consider the needs and enjoyment of your older self when you make financial decisions. ‘We think of our future selves as somewhat separate people, so saving for the future can feel like giving money away to a stranger,’ Ariely explains. He suggests imagining the lives we hope we will lead further down the line. ‘The more we can make the future defined, vivid and detailed, the more relatable it becomes, and the more we’ll care, connect and act in our future selves’ interests,’ he adds.

Whatever you discover about your approach to money as the result of a little honest financial introspection, self-knowledge is a powerful tool to help manage your cash. However, if you feel that control of your finances is slipping away from you, don’t rely on wishful thinking to get things back on track. Debt charities such as Stepchange (stepchange.org; 0800 138 1111) offer free advice and support to help you turn things around, so you need never pay for advice to get your bank balance back into the black. Small Change (Bluebird) by

Dan Ariely is out now