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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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Published on September 17, 2018

How Being Smart With Your Money Leads to Financial Success

How Being Smart With Your Money Leads to Financial Success

Achieving financial success is not something that just happens. Maybe if you win the lottery or something, but for the average person like you or me, it comes from a series of small steps you take over a long period of time.

With each step, you form a new smart money habit. And with each smart money habit, you build towards financial independence.

So what sort of habits can you form to get on that path? Let’s take a look at smart money habits you can start today to get you closer to a financially independent future.

1. Avoid being “penny wise but pound foolish”

It’s tempting to try saving a couple cents here and there when buying small items. However, that’s not where the real money is saved. You’re putting in extra effort for something that doesn’t move the needle.

You get the most bang when you’re able to cut down on your bigger bills. For example, finding a lower interest rate for your mortgage could save you $50+ per month. And cutting your transportation bill by purchasing a cheaper car or taking public transportation can provide large gains as well.

So, look at your recurring expenses such as housing, transportation, and insurance, and see where there’s wiggle room. It’s a much better use of your time than trying to pinch pennies here and there on smaller purchases.

2. When you want something big, wait

Impulsivity can get you in trouble in most aspects of life. Finances are no different.

It’s human nature to see something and want it right then and there. It starts as a kid in the checkout line at the grocery store, and it continues on through adulthood.

We get an idea in our head of something we want, and it’s hard not to go out and get it right then.

A good example is wanting a new car. Perhaps you’ve had your car for several years. It’s crossed the 100k mile mark. Maybe maintenance is due, and you’re annoyed that you need to replace the timing belt or purchase new tires.

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So, you get the itch.

You start digging around online, and you realize you could trade in your current car for something newer and more exciting… all for a few hundred bucks a month. Then you get obsessed.

Here’s where you have to take a step back.

Your newfound obsession is clouding your judgement. Rather than giving into the impulse, wait it out.

Set a timeframe for yourself. Maybe you come back to the decision three months down the road. See if the obsession lasts.

It might, but often, a funny thing happens. Often, you forget about it. And often, you find that the new car wasn’t a need at all.

The impulse faded. And you just saved yourself a ton of money.

3. Live smaller than you can afford

You finally get that big raise. And you want to celebrate – and why not?

You’ve been looking forward to this forever. And after all, it was all due to your hard work.

That’s fine, splurge a little. However, make it a one-time deal and be done.

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Don’t get caught in the trap that just because you’re now making more money, you should spend more.

Too often, people get more money and feel like they that gives them the means to buy a bigger house, a bigger car… you know the drill. Resist.

The fact is that living smaller than what you can afford is one of the fastest ways to build savings.

But if you constantly upgrade as you begin to make more, then you’ll never get ahead. You’ll just build up more debt along the way and have just as little wiggle room as before.

4. Practice smart grocery shopping

Food… it’s one of the biggest portions of any budget. And if you’re not careful, it can be one of the biggest drains on your wallet.

But luckily, there are a few things you can do to ensure that you stay smart with your money when buying groceries.

Create a grocery budget

Set a strict weekly grocery budget. When you know how much you can spend on groceries, you can then plan your weekly menu around it.

Once you know what all you need, you can go shopping and keep a running tally as you shop to ensure you’re on track.

I tend to do this in my head, rounding for each item. However, writing it down as you go would probably work best for most people.

Make a list… and never deviate

Never go to the grocery store without a list. If you go to the store with a ballpark idea in mind, you don’t have a true ide of what you need.

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You’re not well-researched. You don’t know what the sales are. As a result, you’re going to make decisions on the fly.

These impulse decisions will lead to overspending, which will derail your grocery budget.

Eat before going grocery shopping

It’s also important to eat prior to going to the grocery store. Hunger is a powerful force.

If you’re shopping on an empty stomach, everything is going to look good. In particular, you may find a lot of ready-made, processed snacks will look enticing.

After all, you’re hungry now and that food is easily available. So subconsciously, you may lean towards those items.

Unfortunately, not only are those items typically less healthy, but they’re likely more expensive. You pay for convenience.

However, when you eat prior to shopping, then you’ll shop with a clear mind. Your hunger won’t cloud your judgement, influencing you to make poor decisions like a cartoon devil resting on your shoulder whispering in your ear.

This makes it much easier to stick to your grocery plan.

5. Cancel your gym membership

Now that you’re all set on your food, it’s time to get smart about managing your budget in terms of physical fitness. And let’s begin by avoiding the gym. The gym bill, that is.

The average gym membership costs around $60 per month. That’s $720 a year.

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Yet, two out of three gym memberships go unused. That means two-thirds of people who have a gym membership are literally giving away almost a thousand bucks a year. It’s crazy!

I recommend seeking an alternative. One good alternative is to look into fitness streaming services.

Streaming services allow you to stream hundreds of workouts like Insanity and p90x, right in your own home for around $10-20 a month. That’s $40-50 less a month than the average gym membership.

Of course, then there’s the free option. The internet is full of free workouts that you can do on your own with minimal or no equipment.

For example, there’s the Couch to 5K program, that I personally used a decade ago to ease myself from couch potato to running my first 5K race. If I could do it, anyone could.

Then there are free resources like reddit that have limitless information on workouts. The Fitness subreddit has done all the research for you, populating workout tips and detailed workout routines for anyone to use in their wiki.

There are several routines that require no equipment. And you can join in on the subreddit to become part of the community, making it easier for those seeking comraderie and encouragement in their fitness goals. All for free.

It’s baby steps… And baby steps can start now!

I’ve never met anyone that can’t stand to be a bit smarter with their money. And on the flip side, anyone can get smarter with their money. But remember, it doesn’t happen all at once.

Begin by fighting your impulses. Prepare for the week and be smart at the store. And cut monthly expenses like gym memberships that are overpriced and you probably aren’t getting your money’s worth out of anyway.

The devil is in the details. And the details can change your lifestyle and prep you for a financially independent future.

Featured photo credit: Unsplash via unsplash.com

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