Anyone who's scarfed down junk food when feeling overwhelmed (but not necessarily hungry) knows that stress doesn't exactly cause humans to make the smartest decisions. But recent research shows that chronic financial stress doesn't just cause you to make a few bad decisions – it can actually lower your IQ.
It largely has to do with the idea of "bandwidth" – that you only have so much space available to think. And, that means if you're spending a lot of brain space obsessing over one thing, you have less space to think about other things. In their recently released book, "Scarcity: Why Having Too Little Means So Much," behavioral economists Sendhil Mullainathan and Eldar Shafir analyzed past research and conducted new experiments to show how the feeling of scarcity causes people to obsess over the thing that's scarce – whether it's time, food, relationships or money.
Their primary experiment had two parts. First, they asked a group of people to imagine they needed to pay $300 for a car repair. After that, they gave the participants tests to determine their IQ. In this version of the experiment, there was no significant difference in response to the intelligence test between poor participants and wealthy participants.
However, when the same experiment was conducted with a $3,000 car repair, the result was very different. The poor participants did significantly worse on the intelligence test than the wealthy participants – in fact, they scored 10 to 12 points less, about the difference between how you'd score after a good night of sleep and how you'd score after an all-nighter. The authors theorized that this was due to the loss of mental bandwidth – that it would be difficult and stressful for the poor to figure out a way to come up with $3,000, while the rich would have enough money to cover the expense without worry.
How You Can Free Up Space in Your Brain
Even if your budget is tight, there are ways you can make better financial decisions. The key is to create more space in your head by doing the following.
Automate as much as you can: Even if you don't feel like you have a bandwidth problem, automating your finances is a great way to ensure you're making good financial moves. There are several ways to do it:
- If you receive direct deposit for your paycheck, set a certain portion of it to be deposited directly into your savings account instead of your checking account.
- If your job offers a 401(k) or 403(b), set it up so that the money is automatically deducted before you ever see it. Plus, if your employer matches your contributions, you could have free money coming your way.
- Set up automatic bill pay for any bills you can, so you don't forget to pay them.
- Sign up for programs that make you automatically save. For example, some banks, including Bank of America, have programs in which for every purchase, they round the amount up to the nearest dollar and deposit the change in your savings account.
Set up reminders: For everything that you can't automate, set up reminders. You can use a calendar program like Google Calendar and receive an email notification when a payment is due. You can also send yourself free text messages from a site like ohdontforget.com.
Be mindful: One of the issues of bandwidth is that people often focus on the immediate problem without thinking about the future. When you feel yourself getting stressed about money, take a deep breath and give yourself some time to explore why you're feeling the way you are and how you can fix it.
Sabah Karimi writes for the consumer finance blog Wise Bread, where you can find more money tips.