7 'psycho' money traps and how to beat them |
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4. The dollars-to-donuts decoy
Consider this classic economics puzzle. You go to a store to buy a $100 lamp. You then learn that the same lamp is on sale for $50 at another
store a mile away. Would you drive one mile to save $50?
Now imagine you're considering a dining room set for $5,000. You learn that the identical set is selling for $4,950 at a store
one mile away. Do you make the drive?
"Hopefully you said yes in each situation. However, many people say no, they would not make the effort in the second example,"
says Mike Romzy, an investment analyst at Hapanowicz & Associates Financial Services in Pittsburgh. Why? Because 50 percent of $100 ($50)
instinctively seems more valuable than 1 percent of $5,000 (also $50).
How to outsmart your brain: Don't confuse dollars and donuts. Constantly remind yourself that a
dollar is a dollar -- just because it's a small percentage doesn't mean it's not still real money. If you're willing to clip coupons to save
$10, you should also be willing to find ways to cut $10 off the price of a refrigerator or increase your retirement portfolio's earnings by $10.
Or ask yourself: Would I be willing to go to a different store to buy this item if they were handing out $50 bills (or whatever the savings
would be)? Picturing your savings in cash makes it seem more worthwhile.
5. The separate-buckets blunder
For the sake of simplicity, most of us tend to separate our money into different mental "buckets." Sometimes this works well: This savings account
is for our Italian vacation, but this account is for this month's groceries, for instance.
However, this practice can also get you into trouble if you always separate your money into discrete buckets, says Tom Nowak,
Certified Financial Planner of Quantum Financial Planning in Grayslake, Ill. For example, "Maintaining a credit card balance (Bucket No. 1) over
a period of time even though you have more than enough liquid assets (Bucket No. 2: nonretirement money market funds, savings accounts) to pay
off the balances," says Nowak. "Even auto loans or home equity loans with relatively high interest rates can sometimes be paid off with surplus
cash reserves."
How to outsmart your brain: Remind yourself that "money is money" -- no matter where it comes from
or what category you've placed it in. Don't spend your tax refund on something you wouldn't buy with your monthly salary just because you think
of it as "free" money. If you get a $25 gift card from your grocery store for switching your prescription to their pharmacy, don't automatically
use the card for something frivolous. Buy the same items you would have purchased if the $25 had been cash from your own wallet.
6. The 'sacred-fund' slip-up
This one also falls into the category of "mental accounting." Say you receive $3,000 from your beloved grandmother, who scrimped and saved a few
dollars at a time to accumulate that money. It's your money now, and generally you're a fairly aggressive investor.
Are you willing to invest "Grandma's money" in the
stock market along with your other retirement funds, knowing you
could lose some of it during a down year? Studies show that many
folks would be uncomfortable risking Grandma's hard-earned money,
so they treat inheritances much more conservatively than their other
cash. The same is often true of our workplace retirement money.
We mentally consider it "precious retirement money" that we're afraid
to lose, so we put it in more conservative accounts than we really
should.
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