Anatomy of the Financially Savvy Brain is a 6 week series that will run every Thursday until April 7/11. The entire series can be found under Money Tips.

Ever wonder what is actually happening inside our brains as we plan our money management strategies, bravely stave off impulse spending , and work towards that end goal of financial freedom? This series will answer those very questions by looking at the seven main processes of the brain and how they effect our money management.

Last week we looked at the second process, the Amygdala.  This week we are going to look at the Hippocampus.

The hippocampus is the memory area of your brain. You can think of it as a cartographer. The hippocampus receives new inputs from your working memory, cross references that information from your existing memories and then forms new associations. This process is essential to your money management. Here is why:

Take for example, you are reading the paper and you see an ad from a bank offering mortgage rates at 4%. You hippocampus will reference this information against knowledge you already have- the fact that your current mortgage rate is 3.5% and that this is a deal you should not waste your time exploring.

Basically, the hippocampus functions as our frame of reference. We use it to guide us in what to do with the new information we receive.  I guess you could call it your internal compass. It helps point us in the right direction based on what information it receives.

As we age this part of our brain shrinks and it’s ability to function deteriorates. However this deterioration can actually be reversed. A study out of Columbus, Ohio figured this out.

For the study, researchers divided 120 sedentary adults in their mid- to late 60s into two groups: one group walked around a track for 40 minutes of aerobic exercise, three days a week, while the other group did stretching. The research team found that both groups performed better on a test of spatial memory. Spatial memory helps you to remember things like driving directions or where you left your keys. But here’s where the study gets interesting: MRI brain scans showed that, after a year on the exercise program, the aerobic exercise group’s hippocampus was about two percent bigger than it was when they started. If two percent doesn’t sound very impressive to you, consider it this way: this increase is equivalent to a reversal in age-related brain shrinkage of about one to two years, according to the researchers.

What does this mean? Your hippocampus shrinks by about one percent to two percent a year, so get outside and go for a walk and re-grow those neurons in your brain. This will not only help your memory function in general but it will also help with your money management.

So, there you have it; the breakdown of the third brain process that plays a role in your financial success.  Stay tuned next week where I discuss the fourth process, the Limbic System.

So what have you learned about your hippocampus? Are you going to make sure it doesn’t shrink? I hope so.