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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 29, 2021

Life Insurance: A Secure Way To Protect Your Future.

Life Insurance: A Secure Way To Protect Your Future.

Life is a journey full of ups and downs. No one can actually predict what might happen the next moment; there are times where the happiest moments do not even take a second to turn into the gravest. Planning for your future can help you face such unwelcomed but irrepressible situations with much ease. We all want to make every memorable event of our life more special and to cherish all those moments happily and worry less, you must financially plan your future. But no one has control over life and death. Who would wish to see his family suffer in his absence? Insurance hands over the financial jeopardy of life’s happenings to an insurance company.

Importance of getting a life insurance

No one has control over life and death. Nobody would like to see their family suffering in an absence, and that’s why many people recommend life insurance. A life insurance plan is one of the best ways to secure the future of your family, even against those financial troubles after an untimely demise. These plans are safe and credible, and you could trust them for your family’s better future.

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On the other hand, a life insurance policy is a contract between a company (insurance provider) and policyholder in which the insurance provider ensures to pay a certain amount of money to the nominated beneficiary in case of the policyholder’s death during the term of the agreement. There are different types of insurance plans, and it is important for you to know the benefits of those plans such as a funeral, medical or some life expenses provided they are mentioned in the agreement.

Choosing the right insurance plan

If you’re about to select an insurance plan, you should consider some important factors:

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  • The time at which you start investing in a program and the number of family members you want to get insured. Obviously, a married man with two children has different needs compared to a single one. The number of persons who are dependent on an individual also varies from person to person.
  • The next thing you need to consider is you and your family needs. What are your child’s dream, your retirement plans, for how long would your dependents need financial support, any personal injury, etc. And do not forget those events or situations that will surely demand a huge sum of money.
  • The next thing one must consider is your current income. You should preferably choose a plan which you can afford.

Now you must be having a pretty clear idea of how to choose the best plan for you. Further, you should also compare various plans offered by different companies and numerous sites available online that help will you to compare them.

Differences between life insurance plans

Here’s a short brief of some plan categories you can choose according to your needs:

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  • Term Insurance Plan – You have to pay once, and your nominee gets the paid money under your misfortune demise. It ensures a person for a fixed time. If you survive the policy period, you do not get your premiums back.
  • Whole Life Policy – This plan continues for your lifetime. Under this, the policyholder has to pay regular premiums, until their death.
  • Endowment Policy –  In case the individual dies during the tenure, the beneficiary gets the amount assured. If the person survives the policy tenure, they gets back the premiums paid with other investment returns along with several other benefits.
  • Money Back Policy – In this a portion of the money invested is returned to the investor at regular intervals. If you survive the insurance term you get the entire amount back; else the beneficiary receives the entire sum assured.
  • ULIPs – These are the life insurance plans that offer you future security plus wealth creation options.

Many people do not opt for whole life policy and endowment policy because of the high amount of money you need to pay, while others may prefer to opt for these if they have a high life expectancy. Surely you will find the best one for you.

So what are you waiting for? Plan for your future and live a happier and carefree life today.

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Featured photo credit: aryehsampson.com via aryehsampson.com

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