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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 August 20, 2019

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. And that’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways on how to set financial goals and then actually meet them with ease.

5 Steps to Set Financial Goals

Though setting financial goals might seem to be a daunting task but if one has the will and clarity of thought, it is rather easy. Try using these steps:

1. Be Clear About the Objectives

Any goal (let alone financial) without a clear objective is nothing more than a pipe dream. And this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore if you are saving today, then you should be crystal clear about what it is for. It could be anything like kid’s education, retirement, marriage, that dream vacation, fancy car etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives, however small they may be, that you foresee in the future and put a value to it.

2. Keep Them Realistic

It’s good to be an optimistic person but being a pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going out of the line will definitely hurt your chances of achieving them.

It’s important that you keep your goals realistic in nature for it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said – “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”. And this quote sums up the best what inflation could do your financial goals.

Therefore account for inflation whenever you are putting a monetary value to a financial objective that is far away in the future.

For example, if one of your financial goal is your son’s college education, which is 15 years hence, then inflation would increase the monetary burden by more than 50% if inflation is mere 3%. So always account for inflation.

4. Short Term vs Long Term

Just like every calorie is not the same, the approach towards achieving every financial goal will not be the same. It is important to bifurcate goals in short term and long term.

As a rule of thumb, any financial goal, which is due in next 3 years should be termed as short term goal. Any longer duration goals are to be classified as long term goals. This bifurcation of goals into short term vs long term will help in choosing the right investment instrument to achieve them.

More on this later when we talk about how to achieve financial goals.

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5. To Each to His Own

The journey of setting financial goals is an individualistic affair i.e. your goals are your own goals and are determined by your want to achieve them. A lot of times we get on the bandwagon of goal setting only to realize later on that it was not meant for us.

It is important that your goals are actually your goals and not inspired by someone else. Take a hard look at this step at all the goals you’ve set for after this step, you will be on the way to achieve them.

By now, you would be ready with your financial goals, now it’s time to go all out and achieve them.

11 Ways to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a 2 step process –

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough; and invest those savings wisely so that they grow over a period of time to help you achieve goals. So let’s get down to ensuring healthy savings.

Ensuring Healthy Savings

Self realization is the best form of realisation and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your monthly expenses. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you would be surprised to see how small expenses add up to a sizeable amount.

Also categorize those expenses into different bucket so that you know which bucket is eating the most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pump up your savings rate.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classical mistake which almost everyone of us do. We pay ourselves last!

Ideally, this should be planned upside down. We should be paying ourselves first and then to the world i.e. we should be taking out the planned saving amount first and then manage all the expenses from the rest.

The best way to actually implement is to put the savings on automatic mode i.e. money flowing automatically into different financial instruments (for example – mutual funds, retirement corpus etc) every month.

Taking the automatic route will make us lose control of our money and hence will compel us to manage in what’s left with us thereby increasing the savings rate.

3. Make a Plan and Vow to Stick with It

Budgeting is the best to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be made.

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Nowadays, several money management apps and wallets can help you do this automatically. It’s easy and who knows, you may just end up doing what people fail to do.

At first, you may not be able to stick to your plans completely but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Rise Again Even If You Fall

Let’s be realistic. It’s not like the world will come to an end if you made one mistake. This isn’t called leniency but discipline.

If you fail to meet your budget for a month, don’t give up the entire effort just like that. Instead, start again.

Remember that flexible plans are the most realistic plans. So go forward and try to follow your financial goals as planned but if for some reason, the plan gets out of hand for you, do not give up on it just yet. This has a lot to do with your psychology rather than any material commitment.

All you have to do is to stay on the road and vow to stay on it, no matter how much you fall down.

5. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make Savings a habit rather than a goal. While it might seem to be counter intuitive to many but there are some deft ways of doing it. For example:

Always eat out (if at all) during weekdays rather than weekends. Usually weekends are expensive. Make it a habit and you would in turn be saving a great deal.

If you are travelling buff, try to travel during off season. Your outlay will be much less.

If you go out for shopping, always look out for coupons and see where can you get the best deal.

So the key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice which will be harder to sustain over a period of time.

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6. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission. And it would be rather easy to lose the grip over your discipline.

Therefore in order to stay the course, it is advisable that you keep yourself surrounded with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

7. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

So if you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

Use this journal to write down all essential points such as your short term, mid term and long term goals, your current sources of income, your regular expenses which you are aware of and any committed expenses which are of recurring nature.

When you have a written commitment on paper, you are going to feel more energised to follow the plan and stick to it. Moreover, it is going to be a lot more easier for you to follow you and track your progress.

At this point, you should be ready with your financial goals and would be doing brilliantly with savings; now it’s time to talk about the big daddy – Investments.

Making Smart Investments

Savings by themselves don’t take anyone too far. However savings when invested wisely can do wonders and we are at that stage where we will talk about making smart investments.

8. Consult a Financial Advisor

Investments doesn’t come naturally to most of us therefore rather than dabbling with it ourselves, it is wise to consult a financial advisor.

Talk to him/her about your financial goals and savings and then seek advice for the best investment instruments to achieve your goals.

9. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about them.

Just like “no one is born a criminal”, no investment instrument is bad or good. It is the application of that instrument that makes all the difference.

Do you remember we talked about bifurcating financial goals in short term and long term?

It is here where that classification will help.

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So as a general rule, for all your short term financial goals, choose an investment instrument that has debt nature for example fixed deposits, debt mutual funds etc. The reason for going for debt instruments is that chances of capital loss is less as compared to equity instruments.

10. Compounding Is the Eighth Wonder

Einstein once remarked about compounding,

Compound Interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.

So make friends with this wonder kid. And sooner you become friends with it, quicker you will reach closer to your financial goals.

Start investing early so that time is on your side to help you bear the fruits of compounding.

11. Measure, Measure, Measure

All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments; taking stock of how our investments are doing.

If there is one single step where everything (so far) can go wrong, it is at this step – Measuring the Progress.

If we don’t measure the progress timely, then we would be shooting in the dark. We wouldn’t know if our saving rate is appropriate or not; whether financial advisor is doing a decent job; whether we are moving closer to our target or not.

Do measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

The Bottom Line

This completes the list of tips for you to set financial goals and actually achieve them with not so great difficulty.

As you can see, all it requires is discipline. But guess that’s the most difficult part!

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Featured photo credit: rawpixel via unsplash.com

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