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Don’t Fall For These 6 Psychological Money Traps That Make You Spend More!

Don’t Fall For These 6 Psychological Money Traps That Make You Spend More!

When it comes to the numbers of money, many times psychological quagmires overrule rational thought. What we may originally think is a great idea, turns into a gigantic pitfall. Take a look at these psychological money traps and see what you can do to avoid them.

1. You don’t know when to pull out.

Otherwise known as the “Sunk Cost Fallacy,” this trap occurs when we believe that just because we already own or have invested in something that we must keep it. If you find yourself saying, “I have to keep this going, in order to recoup,” or “I will just wait and see if I make my money back.” Then this is probably your pitfall of choice. Both of which are understandable yet counter intuitively irrational thoughts. There are certain times when projects or investments should be simply be abandoned.

How to avoid this trap: Don’t become too emotionally attached with your investments. Most often the reason why we hold onto investments or projects longer than we should is so that we are seeking to prove that it was a wise choice in the first place.

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2. You fall into the allure of the word Free.

I completely get it, the word free is extremely enticing. However, don’t let the perception of the word lead to irrationality. Free isn’t always free and many times it is already factoring into the price of other goods and/or services.

How to avoid this trap: Slow It Down. While the allure of free is nice, you do not want to jump into a rash decision and regret it later. Take into account a couple of things: first, how much do I need this free item and more than likely the service or good I have to purchase in order to obtain it? Secondly, quickly calculate a cost estimate that is likely to go with that item. For instance, if there is an offer for a free <insert item you may not have needed here> you should consider your maintenance and upkeep of the item before accepting such an offer.

3. You Rush to Buy Things.

It is completely understandable that when the salesman is reiterating that this sale is for today only and there is a very very very small amount left, you want to buy it immediately. Or, you see a new pair of shoes and you just have to have them. However, by quickly jumping into the purchases you put yourself in a position where it’s possible that you will become upset with the product a few days or weeks down the line. While immediate gratification is nice in the beginning it quite often leads to buyers remorse. More often than not, typically you then have a hard time saving money for other more important things as well.

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How to avoid this trap: It is completely understandable that you want to reward yourself. So measure what you are considering purchasing against long term goals. Realize that if you buy those shoes you won’t be able to eat at as nice of a restaurant when you take your vacation to San Diego.

4. You have cash piles at home even when you are in debt.

This is otherwise known as mental accounting where you separate money and/or debts based on predetermined status like the source of the money or what you initially set it aside for while it is done with the best intentions at heart, it is a recipe for trouble in the long run. The problem with this method is because you are most often accumulating debt much faster than the “money jar” or other methods savings you have set forth. Having a separate pile of cash for food and another for gas may also seem like a good idea initially, but both prices and our needs fluctuate with time. While you may need $500 in food and $150 in gas for the month of January. You might need to adjust that for summer months when you are munching on salads and taking road trips. Participating in mental accounting provides you less flexibility.

How to avoid this trap: Allow all money that you have to be a part of your financial plan. Also, try to change your perspective of your finances and look at it on a holistic level. Keep in mind that money is money no matter what is the source or intended purpose. A quick change may result in a more positive financial result.

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5. You base your buying decision on the default option.

While you may originally believe that a company providing you with a default option is a matter of convenience to the customer in actuality can be done in a manner to persuade your choices and buying habits. If done properly the default effect (where you allow the default option to influence your decisions), shows the same evidence as nudging. Psychologists have narrowed it down to work in three manners: Loss Aversion, Cognitive Effort, Switching Costs.

How to avoid this trap: Keep in mind how much of a product you actually need. Just because a large soda is only a 60 cent upcharge, will you actually drink it or will you end up wasting it? If you aren’t going to have a need for that soda or anything else that requires an upcharge, your money will be better spent elsewhere.

6. You invest in something just because you’re familiar with it.

Otherwise known as the ‘Familiarity Bias’, it is a tendency that causes you to do things such as invest in stocks for companies we work for or only look to investments from a close area or proximity to where you live. Familiar biases can be a money trap because even though you may be familiar with a company or the area they are based in, it may not be the best or wisest investments. While it makes sense to factor in things such as transaction costs, basing an entire invest just because you are familiar with something is illogical.

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How to avoid this trap: Be willing to step out of your comfort zone. Expand you research outside of your typical areas. If there is one thing that investors mention until they run out of breath is a diversified portfolio. Also, speaking with or bringing in a professional may be a good use of your time and resources. Don’t forget that mother knows best, “don’t put all of your eggs in one basket.”

If you’ve managed to navigate through life and not fall for any of these traps, then kudos to you. However, if you are like the majority of us, follow the above suggestions and your financial future will be certain to be brighter.

Featured photo credit: Cohdra via mrg.bz

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Last Updated on March 4, 2019

How to Use Credit Cards While Staying Out of Debt

How to Use Credit Cards While Staying Out of Debt

Many people will suggest that the best thing to do with your credit cards during these tough economic times is to cut them up with a pair of scissors. Indeed, if you are already in huge debt, you probably should stop using them and begin a payback strategy immediately. However, if you are not currently in trouble with your credit cards, there are wise ways to use them.

I happen to really love my credit cards so I will share with you my approach to how I use mine without getting into deep financial trouble.

Ever since about 1983 when I got my first Visa card, I continue to charge as many of my purchases as possible on credit. Everything from gas, groceries and monthly payments for services like my cable and home security monitoring are charged on credit. Despite my heavy usage, I have maintained the joy of never paying any interest fees at all on any of my credit cards.

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Here are some tips on how best to use your credit cards without falling into the trap of paying those nasty double-digit interest fees.

Do Not Treat Credit Cards as Your Funding Sources

Too many people treat their credit cards as funding sources for major purchases. Do not do this if you want to stay out of trouble. I use my credit cards as convenient financial instruments so I do not have to carry around much cash. In fact, I hate carrying cash, especially coins. When you buy things on credit, the purchases are clean and you will not get annoying coins back as change.

I do not rely on my Visa, MasterCard or American Express to fund any of my purchases, large or small. This brings me to my golden rule when it comes to whether I will pull out any of my credit cards either at a retail or online store.

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I never purchase anything with my credit cards if I do not have the actual cash on hand in my bank account.

If I really cannot pay for the item or service with cash that I already have at the bank, then I simply will not make the purchase. Remember, my credit cards are not used as funding sources. They are just convenient alternatives to actual cash in my pocket.

Make Sure to Always Pay Off Balances in Full Each Month

The next very important part of my overall strategy is to make absolutely sure that I pay the balances in full each and every month no matter how large they are. This should never be a problem if the cash has been budgeted for my purchases and secured in the bank. I have always paid my full balances each month ever since my very first credit card and this is why I never pay interest charges.

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Using Credit Cards with Rewards

Most of my credit cards are of the “no annual fees” type, including one MasterCard on a separate account I keep at home as a spare in case I lose my wallet or incur any fraudulent charges. However, I do use a main Visa card which does have an annual fee because all purchases on that card reward me with airline frequent flyer points. For me, the annual fee is worth it since I do travel and I get enough points to redeem many free flights.

You have to decide for yourself if you will charge enough purchases on credit each year without paying interest charges to warrant a credit card that rewards you with airline points (or other rewards). In my case, the answer is “yes” but that might not be the case for you.

I occasionally use a MasterCard or American Express card on small purchases just to keep those accounts active. Also, I have been to the odd retailer that accepted only a certain type of credit card, so I find that having one from each major company is quite handy. Aside from my main Visa card which earns the airline points, the rest of my cards are of the “no annual fees” variety.

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So this is how I use my credit cards without getting into any financial trouble with them. This strategy is recommended only if you are not in debt, of course. In fact, it is worth keeping in mind once you’re out of debt so that you can keep your credit cards active and treat them responsibly.

What are your credit card usage strategies? Let me know in the comments — I’d love to hear what methods you use.

Featured photo credit: Artem Bali via unsplash.com

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