Today, we are going to talk about mental money traps. What is a mental money trap? We are going to talk about these today.
Let’s get started.
#1: Outsmarting the Anchor-Price Comparison Trap
Have you ever bought a used car? Did it have a relatively high price? The purpose of this high price is so that you will remember it. At this point, you will decide whether it’s a good deal or not. The habit of using the first price you see as the basis of your spending is called an anchor price trap. It’s a mental wiring issue we create for ourselves. You can beat it though. This is how to do so.
Beware this trap exists.
The first step to overcome this is to be aware that it exists. We create price points for everything mentally. Knowing how our minds work, makes it easier to be prepared for this. The next time you are tempted to compare prices based on these anchors, you will be ready.
Hesitate before snatching up a “Good Deal”.
I am sure you have fallen for this trap once or twice in your life. If you have, you may have felt buyers remorse. Save yourself some time, money, and guilt. Think about these “good deals”. Giving yourself time to reflect on major purchases.
A good example of this would be buying a home. Before you jump on a $400,000 home, make sure the price is worth it. Maybe 5 miles down the road there may be one as nice and large down the road for $200,000. So before you make that purchase, think, and do some research.
Is it still worth it after you filter out the anchor price?
All too often you will see something advertised for a discount. Your mentality is that it’s a bargain. It may seem like a deal, but is it really? Filter out the regular price. Then look at the item and ask yourself if it still is a good deal. This will help you more realistically evaluate the value.
#2: Comparing Dollars to Doughnuts
Dollars to doughnuts was a phrase created to say something is a safe bet. Dollars have value. Doughnuts have none.
Imagine buying a pair of shoes. They normally cost $150 dollars. They are being advertised for 50% off. Would you go out of your way to buy this item? Let’s compare this to going to buy a bedroom suite at $2000. The price of the suite is dropped down to $1925. What would you think the better deal is?
You are saving $75 dollars either way. Yet, the first is 50% and the second is under 4%. 50% is a better deal in most people’s eyes. That’s why saving smaller amounts on larger purchases sometimes doesn’t seem worth it. Saving money is saving money. That extra money could be invested regardless of the purchase.
A dollar is a dollar!
Saving a dollar is saving a dollar. Regardless of if it is at the grocery store or your mortgage. Keep this in mind. This is an effective view in all areas of your finances. A discount is a discount regardless.
Picture your savings as cash in your pocket!
When you make a purchase at a lower price, sometimes you view it as a lower set price. Instead of viewing it that way, view it as you are saving money. Next time you make a purchase, take the difference of the full price and set it aside in a savings account.
#3 The Sunk Cost Mentality
Have you ever purchased something and thought about it being a waste of money? What about a vehicle you have that has constant problems yet you refuse to give up on it? This is referred to as “ The Sunk Cost Mentality”.
Why do we refuse to count our losses and move on? There are a couple of reasons for this. Most of us have a feeling of hate towards loss. The thought of losing money sometimes overpowers all thoughts and reasoning. The other reason is the more we invest in something the harder it is for us to understand it as a loss. Like the car for example. You invest your time and money into it. The problems though keep adding up. Instead of taking the money, you may spend on fixing it, you could use it as a downpayment on a new vehicle. But, since you may have a ton of money and time invested in it you are attached. I mean don’t get me wrong. You want to get any return on any investment. You need to figure out when your investment becomes a sinking boat.
There are a couple of ways to fight the sunk cost fallacy. The first is money spent in the past no longer matters when making financial decisions today. Imagine your car and what you paid for it. Now think about the value of it today? Now think about if someone gave you the car for free? Is it still worth it to put money into keeping it running?
The second one is to use the concept of stop-loss to cut emotion out of your decisions. Most stockbrokers have a set price that they are supposed to sell at if the market takes a dive. This is their stop-loss threshold. This is to prevent losses with minimal management. You can do this with anything. Your car is a good example. You can set a limit on how much you plan to spend on repairs. Sometimes buying a newer car is cheaper in the long run.
#4 Mental Accounting
Have you ever received an unexpected amount of cash? This could be lottery winnings, tax returns, or an inheritance. I don’t know about you, but sometimes it’s easy to view it and treat it differently than your normal income. Instead of viewing it as how it can fit into your budget, you think instead of what you can buy. Financial Psychologists call this behavior mental accounting.
What this means is we attend to assign different values to different money sources. We base these values on how that money is earned. Money that is gifted we view as a different source of income mentally. It doesn’t seem like our money. It’s easier to spend gifted money compared to your paycheck.
There is nothing wrong with spending a little bit of settlement or bonus. Having this extra money can also have you make poor decisions. Don’t spend this money on something such as a new car that you wouldn’t be able to afford otherwise. This will add more expenses to your monthly budget.
The other side of the coin is safeguarding this money too much. You may be afraid to use this money for normal budgeting purposes. You may also not invest it or have it sit in your savings account. Doing this you may miss out on making your money grow. You can’t make your money grow if it just sits.
The way to fix this mentality is to change the way you view your income. You need to view all sources of income (gifted or not) as “your money”. It doesn’t matter about the source, all sources are equal. Use all your money as it all comes from the same source. Don’t let this stop you from investing or saving for your retirement.
#5 Falling for Bundles
Everyone loves a good deal. Bundle deals always seem the best. It can be your cable provider or a combo meal at your favorite restaurant also. Even though you may feel like you are getting a special deal, these can be money pits. You are inadvertently spending extra money on things you do not need or want.
Think about the last time you got cable. You need the internet. Your internet costs $60. They then tie in cable and a telephone to your bill as a bundle. You may get talked into it like it’s a good deal. They use the idea of you saving $50 for the bundle which now costs $100. Some people may actually use everything in a bundle. Some people don’t and this is where the issue lies. You may not need a home phone because you use your cellphone. How much TV do you actually watch? I don’t watch TV period because you can stream the channels you want through the internet or Roku. The cable company is getting an extra $40 dollars from you for something you may not use.
As you can see bundles can save you a little bit of money. The average savings is around 5%. Saving is saving though. This is where companies get you. Most of the time you are paying almost as much for each item that’s bundled. They get you because mentally you think you are saving money and that the value is there. The real value of the bundle system is convenience.
We are more willing to pay for convenience. Like my cable analogy, it is easier to go ahead and pay for the convenience and get it all then. You may not use the actual cable till it’s football season. Yet it may be easier to go ahead and get it than waiting to get it hooked up at a later time. Same thing with the phone line. You may not need it at that time, but you may be opening a business at some point. No one wants to use their personal cell phone for these calls. It also may be cheaper than getting another line added to your plan. It would be easier to have than spending time at a cell store or waiting for them to come and hook up a landline.
Next time you are considering a bundle, review each item separately. Ask yourself a couple of questions. Are you buying the bundle for convenience? Would you still buy each of the items individually? Remember you may be paying for full price for something you don’t need. You will save money in doing so. Because the bundle seems like a good deal, it doesn’t mean it is.
There you go. 5 money mental traps that we fall into and how to fight them. I hope this was helpful. Be prepared and mindful of these and you will save time and money. I hope this was helpful. ‘Till next time.