Confession: Number crunching turns me on. I know that for most normal people doing calculations is the mental equivalent of nails on a chalkboard. So, I’ll make it easy for you:
4 tips for avoiding the worst mental money traps
Tip #1: Mind the mental accounting gap! Do you think in terms of percentages or dollars? Here’s a test: You’re shopping for a table lamp. You found one you love and it costs $100. At the store, you bump into a friend who informs you that this very same lamp is on sale for $50 at the other end of the mall. Do you go? Of course you do! That’s a savings of 50 percent!
A few months later you have to replace your TV. A new one will cost you $2,500. Just as you’re about to swipe your credit card, your bargain-loving friend shows up. She tells you that the same TV is on sale down the street for $2,450. Do you go? Probably not.
In both cases you would have saved more than $50 (adding the tax), by taking your friend’s advice. But in the TV example $50 represents only 2% of the total cost, so you’re likely to take a pass, versus 50% of the total cost of the lamp. Yet, in both cases you would save the exact same amount.
Tip #2: Don’t throw small amounts of money away. Although many no longer use cash as our primary mode of payment, sometimes you just have to spend old-fashioned coin and paper currency. By setting a monthly cash withdrawal limit, you can avoid popping into the nearest ATM and paying small but wasteful ATM fees. Withdrawing funds your bank’s competitors’ ATMs cost at least $1.50 a pop that can easily reach several hundred dollars per year. Use that for paying down debt or loading up on lattes instead.
Tip #3: Avoid “pot” holes. Sometimes our mental accounting goes like this: lottery or inheritance funds are placed in the “found” money pot versus “real” money pot, which is the kind you’ve earned. Guess what? Once it’s in your possession, it’s all your money—one big (hopefully) pot of it– and should be treated with the respect it deserves. Categorizing money as “found” can easily lead to spending it frivolously in a way you never would with your own hard-earned income. Don’t be a “pot-head”. Money is money.
Tip #4: Manana. If you’re over-spending now with the intention that you’ll pay it all back later, think again. When you run a balance on your credit cards, you must pay interest each month. That beautiful pair of shoes that were a steal at 20-percent off, are no longer on sale if it takes months to pay them off. In fact, you may be paying more than the original cost. Also, be very leery of no-money-down schemes. The fine print often reveals hefty penalties and sky-high interest rates if you don’t pay the loan when the term expires.
Break habits, not budgets
Even for the most numerically challenged, few small changes to your habitual thinking and behavior will save you a lot of money—not to mention peace-of-mind.
