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Money Management and Substance Abuse

January 29, 2013

Yesterday, I wrote some of the concepts researchers Chivers and Higgins (2012) had studies on how people with substance use disorder (SUD) can use behavior economic concepts to help them handle their money.  Some of these same concepts can be used by everyone.

Another concept in behavioral economics is mental accounting.  This is basically a system where you have an idea in your mind on how much you can spend in certain categories every month.  Just by thinking about this before the  month starts, you are more likely not to spend more in any one category even though you may have the money for a different reason.  If you can set up a written budget and follow it, I believe that is the most effective, but if this is a struggle at least think about how much you want to spend in different categories and by thinking about that through the month, you will handle your money a little better than having no plan at all.

A final concept is the failure to account for opportunity cost.  When we make a decision it is usually should I buy this or not.  By thinking about opportunity cost a person considers other things the person could do with the month.  If you are looking at going out to eat it is usually a yes or no answer, but if you think about all of the things you could buy with $35 or save up, then it helps people analyze what else they could do with the money and it tends to help people make better decisions.  When you are making a purchase don’t think about should I do it, yes or no, but think about everything else you might want to do with that money to help in your decision process.

One strategy that has been used for SUDs individuals has been ATM therapy.  With ATM therapy, an individual gives their checkbook, ATM card, money, etc. to a therapist they are working with.  When the individual needs money they go to the therapist to get the money.  The therapist works with the individual at the start of the month to set up a budget and then reviews it with the individual throughout the month.

This therapy has proven effective for a couple of reasons.  First, by having the money in a separate place, an individual can’t access the money immediately so it removes them from making hasty decisions.  Second, by setting up a budget, the individual does use a type of mental accounting to help them in their purchases throughout the month.  By adding one more roadblock in the purchase process many people are able to step back and make a good decision.

All of us can take tips from this.  When we carry around cash, credit cards, and debit cards, the question is should I buy this or not.  Based on common biases, there are many times we make a hasty decision with money that causes us to spend more than we would like.  By adding some type of barrier and an accountability partner, it can help us prevent the purchase of impulse decisions.  If you struggle with impulse purchases, think about how you can make a barrier for yourself.  This could entail freezing your credit card to giving your cards and checks to another individual to help keep you accountable.  This may be hard to do, but it is a lot easier than spending yourself into trouble.

Work Cited:

Chivers, L.L. and S.T. Higgins (2012).  Some Observations from Behavioral Economics for Consideration in promoting Money Management among Those with Substance Use Disorder.  The American Journal of Drug and Alcohol Abuse.  38:8-19.

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