Money Matters: What Makes Savers and Spenders Tick?

When you think about it, money is nothing more than a social construct that’s been derived over many centuries and civilizations. People agree to assign coins, bills, and digital currencies value and importance and, as a result, money transforms the way we think. But have you ever considered that how you think may actually impact how you utilize money? In other words, your past experiences – and even the physical structure of your brain – dictates your attitudes towards saving and spending.

Are you a saver or a spender? Most people immediately know which bucket they fall into, but few take the time to understand why they’re driven to one extreme versus the other. By digging in and giving this issue your undivided focus, you can learn to leverage your strengths, counteract your weaknesses, and adopt a more balanced money mindset that’s ultimately conducive to building wealth and enjoying life.

The Psychology of Savers                            

Savers are known for tucking money away, clinging to their paychecks, and putting as much cash as possible into checking and savings accounts. To part with money is a painful proposition. Having money on hand – even if there’s no intention to spend it – brings comfort.

You might assume that you’re a saver by choice, but there’s actually something going on at neural level. The more you understand it, the more likely it is that you’ll be successful with money.

In a famous study conducted by Rick, Cyder, and Loewenstein and published in the Journal of Consumer Research, participants were put through exercises in which they simulated making buying decisions. As they pretended to make these purchase choices, their brains were scanned and researchers discovered something intriguing happening in the insula portion of the brain (which is stimulated when a person experiences something unpleasant).  When it comes to money, they found that insula stimulation leads a person to stop spending. Thus the researchers concluded that individuals who have increased insula activity in their brains are much more likely to be savers. On the other hand, those with less insula activity are prone to become spenders.

In other words, there’s scientific evidence to show that savers have a strongly negative neural response to the mere thought of spending. In an effort to purge this feeling from the brain, these individuals are more likely to hang on to their money and stash it away for a rainy day.

Savers commonly exhibit behaviors like:

  • Savers save first. In other words, a saver sets up automatic contributions to the company 401(k) plan so that a percentage of each paycheck is immediately funneled into investments before the direct deposit ever arrives.
  • Savers create strict budgets. They know precisely how much money is coming in and how much is leaving. Every dollar is carefully accounted for so that savings can be maximized.
  • Savers never impulse buy. They aren’t going to walk into a Best Buy and walk out with a brand new 70-inch 5K HDTV. In fact, they won’t walk out with anything they didn’t originally intend to buy (be it a TV, video game, or candy bar).
  • Savers have clear goals. If you ask a saver about money, they’ll be able to outline some clear goals that they have for the next one, three, and five years. Some even have savings goals that stretch out 15 or 20 years (like saving for a child’s college education).
  • Savers feel instant regret. When a saver does make a purchase, they feel a twinge of regret. Even if it’s something they’ve saved up for and set as a goal – like buying a house – there’s some pain that occurs when the money is parted with.
  • Savers often feel anxious. The problem with savers is that there’s never an acceptable amount. This leads them to feel stressed about money and anxious about the future.

Saving can be a good thing. (In fact, the current state of personal savings accounts in America suggests that most people don’t save nearly enough money.) However, it’s also possible to become too extreme. The first step is admitting that you’re a saver. From there, you can develop a plan for improvement.

The Psychology of Spenders

On the other end of the spectrum, you have spenders. If savers have lots of insula activity in the brain, spenders have very little. Instead of putting money away for something they might need to purchase in the future, spenders believe in the mantra that pleasure now is better than pleasure later. The spender prefers consumption today over consumption tomorrow.

Once again, there appears to be a scientific explanation for why spenders part so easily with their money. It has to do with the areas of the brain that process rewards, predict consequences, control memory, and spur on motivation.

Neuroeconomist Paul Glimcher is considered one of the leaders in this type of research. In one of his more famous experiments, he gave a small group of volunteers a choice between $20 now or more money in the future. The future payments ranged from $20.25 all the way up to $110. The results varied dramatically from person to person. One individual (who was presumably a strict saver) was willing to wait one month just to get $21 (an increase of a single dollar). Another individual was only willing to wait if the payment was jacked up to $68 (a 340 percent premium). Others fell somewhere in between.

While the varied responses were to be expected, the most intriguing part of the study had to do with the reason for the differences. Glimcher and his team measured the brain activity of the people while they were considering their response. Specifically, they analyzed activity in two regions of the brain – the medial prefrontal cortex and the ventral striatum.

When offered a choice between $100 today and $100 next week, the neural activity in these two areas of the brain plummeted as certain participants considered the delayed gratification. It continued to fall as the timeline was lengthened. (These people are spenders). In other participants, the activity stayed the same. (These people are more likely to be savers.)

That’s a pretty scientific explanation for why people spend, but it shows just how closely money habits are tied to activity in the brain. Something as biological as activity in the medial prefrontal cortex and ventral striatum impacts how, when, and why we spend money. When you think about it, it’s a pretty amazing nugget of human psychology.

You likely already know if you’re a spender, but just in case, here are some commonly exhibited behaviors:

  • Spenders have dry savings accounts. They rarely have enough money in savings to cover more than one month of expenses.
  • Spenders dream about purchases. As soon as a paycheck clears, they’ve already developed a long list of purchases to be made.
  • Spenders are emotional shoppers. Something as trivial as how a store smells or the type of sale a website is running at the moment is enough to motivate a purchase decision.
  • Spenders treat themselves. After a long week of work or a particularly trying circumstance, spenders are more likely to spend money. It acts as a reward – even a form of self-soothing
  • Spenders enjoy a shopping high. While savers feel a twinge of regret after making a purchase, spenders experience a rush of endorphins that gives them the consumer version of a high.

While spenders are more likely to be irresponsible with money and make decisions that compromise their future financial health, they’re also more likely to enjoy life and live in the moment. As with anything in life, there will always be tradeoffs.

Moving to the Middle of the Money Spectrum                                                                       

It doesn’t matter if you’re an extreme saver or an over-the-top spender. Ultimately, you’re seeking the same thing as the next person: control.

Savers save money to feel like they can insulate themselves from future risks and outside threats. Spenders spend money to influence how they feel at the moment. The key for savers and spenders alike is to leverage these innate strengths while simultaneously neutralizing the negative behaviors. In other words, we’re all better off gravitating to the middle of the spectrum.

If you’re a miserly saver, you may consider implementing some of these suggestions:

  • Create a line item for “fun” on your budget and mandate that you spend this money on discretionary purchases each week. It should be enough to make you experience slight discomfort, but not so much that it impacts your ability to save for retirement or pay for necessary bills and expenses.
  • When you want to buy something, set a deadline and let friends and family members know. Having them ask about the purchase periodically keeps you accountable.
  • Spend time with people who are a bit more carefree than you. They’ll likely push you out of your comfort zone and force you to spend where you’d otherwise be inclined to save.
  • Use spending as a reward for a task well done. For example, go shopping on a Friday after finishing a major work project. You’ll be much more inclined to spend under these circumstances.
  • Shop from retailers and companies that you believe in. You’ll spend more if you feel like they’re doing good in the world. You’ll also feel less post-purchase regret.
  • If you go into a store looking to buy three items, force yourself to walk out with four. Don’t buy something you don’t want or need, but do toss something else into your cart – even if it just costs a dollar. It’s all about exercising your spending “muscles.”
  • Next time you get a bonus from work, vow to spend at least 15 percent of it on you. If it’s a small bonus – like $500 – go ahead and spend it all on something you want or need!

If you’re a reckless spender, try adopting a few of these habits:

  • Make it a point to shop with cash rather than plastic. It’s scientifically proven that people feel a greater sense of loss when they use physical money.
  • Any time you walk into a store and feel inclined to buy an item that you didn’t come in looking for, ask yourself one simple question: Do I really need this? Only buy if the answer is genuinely yes.
  • Next time you find yourself shopping online and you discover something you “have to have,” set a 48-hour alarm on your smartphone. If you still want it after a couple of days, then you can consider it further. If you no longer want it, you just saved yourself some money.
  • Set short-term and long-term savings goals and develop a monthly budget to help you achieve them. Your budget should track exactly how much money you bring in each month, as well as every expense going out. In order to ensure accuracy, it should be updated each month.
  • For every dollar that you spend on a non-essential expense – like eating out or shopping on Amazon – require yourself to put a dollar into savings. This essentially doubles the price of every purchase, which makes you think twice before clicking that “Buy Now” button.
  • Practice taking spending hiatuses where you don’t spend any money on items other than essential groceries, gas, and bills. Start with a 24-hour spending hiatus. Once you’ve mastered this, move on to two- and three-day fasts. You’ll discover much about yourself during these controlled periods of spending.
  • Unsubscribe from the email lists and social media accounts of your favorite brands. Their constant messaging does nothing but entice you to purchase items you don’t actually need. Instead of spending time reading their content, keep a gratitude journal where you make notes of the things you’re thankful for in your life.

Set Yourself Up for Success

There’s no singular formula for managing money. There are wealthy people who’ve built their entire net worth by saving 90 percent of every paycheck. There are also plenty of wealthy individuals who spend like their hair is on fire. But if you study the majority of “rich” Americans, you’ll find that they strike a careful balance between saving and spending. You’d be wise to do the same. Hopefully this article has left you with a few helpful insights to achieve greater balance in how you manage money. Now go out and put some of these principles to use!

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