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Money Matters: 4 Ways Willpower Affects your Finances


This post is from our friends at Learvest.com.  It offers a great deal of information on Willpower and your Finances.

Needs vs. Wants

Accomplishing financial goals often requires choosing between now and later, determing needs from wants. But it takes WILLPOWER to make the correct choice on what to do with that unclaimed property check or tax refund.

What is Willpower?

Research psychologist, Roy F. Baumeister, and a New York Times science writer John Tierney published a book called “Willpower: Rediscovering the Greatest Human Strength,” detailing Baumeister and other scientists’ research regarding willpower, self-control and motivation.

They define Willpower as:  the determination to accomplish a difficult task, stay on a plan, break a bad habit.

Interestingly,  people have only one finite reserve of it.  As a result, if you’re trying to accomplish a lot of goals all at the same time, you’re more likely to fall short because your willpower is getting exhausted by everything that’s challenging it.

It appears willpower is actually dependent on glucose—the sugar that our bodies convert from food. Basically, if willpower were a car heading to a destination, glucose is the gasoline fueling the journey … and each mile empties the tank of glucose a little more.

What’s interesting is that it’s not just the resolve it takes to make “good for us” choices that wears out our reserves of willpower, it’s the mere act of deciding. The more decisions we make (about whether or not to go to the gym or how we should respond to our boss’s email), the quicker our stores of glucose are depleted, and the less willpower we have to make good decisions.

How This Affects Your Finances

Willpower has serious effects on your finances, from controlling your little splurges to helping you decide whether to buy the car with the high end trim package.

Depleted willpower can negatively affect your financial wellbeing.  Here’s how:

1. Avoiding Making Decisions

When our willpower is tapped, researchers find, people take the path of least resistance: that is, they avoid making more decisions.

In one study, people were told that they had $10,000 they did not need in a low-yield savings account. They were then given the opportunity to make a good investment with average risk and an above-average rate of return.

When subjects had their willpower depleted in a test setting, they decided to leave their money where it was, to avoid having to make the decision to invest. This made no logical sense in terms of their finances, because the savings account was not going to make as much money as the investing option.

In fact, given the good investing choice, the people who had full stores of willpower decided to invest.

2. Ignoring the Relationship Between Price and Quality

One of the most commone decisions facing shoppers involves the relationship between quality and price. One example the authors use to illustrate the relationship compares two bottles of wine: a $20 bottle and a $100 bottle. While a $100 bottle is usually better than a $20 bottle, they ask: “Is it five times better?” (The answer is probably no.)

Because of this dynamic, shoppers need to figure out exactly where the gains in price start rapidly outstripping the improvement in quality. However, studies show that when willpower is low, a shopper is less able to understand this dynamic, and will only look at one factor, either deciding to go with the cheapest option—no matter how poor quality the item is—or with the most expensive—no matter how absurd it is.

3. Being Easily Manipulated by Salespeople

Baumeister and Tierney point to a study done in German car dealerships showing that people who were asked to make many decisions—and therefore had their willpower depleted—were more likely to accept the option recommended by the salesperson. (Which, if you’ve ever dealt with a car salesperson, you’ll know is generally the most expensive option.)

If subjects were asked to make dozens of small decisions about buying a car, from the color to the interiors to the navigation system, they had very few defenses left to resist the salesman’s later recommendation of the most expensive engine available. Sound familiar?

4. Making Short-Sighted Decisions About Money

When given the option between $100 now or $150 a month later (and you don’t have to do anything extra to earn the difference in payout), the obvious “better” choice is to wait for $150.

But in one study, when subjects had their willpower depleted, they generally chose the instant cash; in other words, they didn’t have the willpower to wait a month.

How to Strengthen Your Willpower and Avoid Bad Money Decisions

Feed Your Brain

Boost your glucose levels by eating low-glycemic index foods.  No, we’re not kidding.  Vegetables, nuts, cheese, meat, raw fruits and olive oil feeds your brain a steady stream of glucose.  Quick sugars found in candy and white bread do not.

Once you’ve loaded up,  then make important financial decisions—be it choosing an insurance provider, rebalancing your portfolio or house hunting.   This will ensure that your brain’s source of willpower is replenished, and you’ll be able to make the best decision … rather than the best decision for the salesperson at hand.

Monitor Yourself

Self-awareness helps bolster willpower and keep you on the right path to reach your goals. By seeing exactly where your money is going, you’re less likely to make decisions with negative financial consequences. Research showed that using budgeting software (like LearnVest’s My Money Center) helped 80% of subjects control their spending, especially in categories like groceries, restaurants and credit card finance charges.

Making these cuts in your lifestyle choices can help you put more money toward your financial priorities to help you achieve your goals. The obvious answer? Start tracking your spending today using the My Money Center, and start strengthening your willpower to avoid the types of spending that can derail your budget.

Automate Your Finances

If decision-making depletes your willpower to make good decisions, then take decision-making out of the mix altogether. By automating your savings and retirement contributions, you won’t be confronted with the decision to put that $200 toward your 401(k) or a night out on the town. Here’s more info on how to automate your savings.

Plus, that leaves you with more willpower to make decisions in other areas of your life; we bet you’ll never snap at your significant other again.

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