Power of the Mind: Five Ways Our Spending Decisions Don’t Always Make ‘Cents’

By Mike Peterson
In April 23, 2014

Too often, even when think we’re making smart money decisions, we can be thrown off course by faulty thinking.  The old saying about the mind playing tricks on us is very true.  In fact, our minds can easily sabotage our efforts to save, minimize debt, and spend wisely.

Here are five ways your mind can point you in the wrong direction when it comes to your finances – and some strategies for turning those less-than-helpful thought patterns around.

1. It engages in faulty “mental accounting.” Research shows our minds tend to treat the same dollar amounts differently, depending on the situation.  So while we might be excited to save $50 when we’re buying a $100 pair of shoes, we shrug off the same $50 savings when we’re facing a $3,000 contractor’s bill.  But in both cases, that $50 holds value.  

The same dynamic can come in to play when we refuse to dip into the vacation fund to pay for a car repair or other pressing expense. We’re placing more value on one financial resource than the others. 

Make it work for you:  Since our brains seemed hard-wired to do this, the best thing to do is channel this thought pattern for good:  Save money specifically for an important financial goal, like college savings or an emergency fund, and you’ll probably find yourself setting more aside.

2. It wants immediate gratification.  During the Stanford marshmallow experiment during the late 1960s and early ‘70s, a researcher put children in a room with one marshmallow and told them they could have two marshmallows if they waited about 15 minutes until the researcher returned to the room.  Only about a third of the children were able to wait long enough to get their second marshmallow. 

We do the same thing when it comes to our spending choices. Given the choice of a night out or a contribution to our retirement savings, the thing we want now is going to win. 

What to do instead:  Any time you feel tempted to give in to instant gratification, stop and ask yourself if you really need that short-term expense you want.  Or consider tying long-term savings goals with short-term ones. For example, make a deal with yourself:  For every dollar you set aside for retirement, add 50 cents for the fun things you want.

3. It assumes “more expensive” means “better.”  To be fair, there is some logic to this thinking, depending on the situation.  In some cases, it may actually make sense to spend a little extra.  A more expensive piece of furniture, for example, might last longer and be a better value than a similar item that costs a lot less.  But that isn’t always the case.  Sometimes the cheaper option can be equal, or even better than the more expensive option.  In many situations, price simply isn’t an accurate indication of quality – and if you’re making decisions based on price alone, you might not be getting the best value.

How to shop smarter:  The safest way to sidestep false assumptions about pricing is to research purchases carefully and read reviews from actual users.  This is probably the best way to make sure you’re getting the best quality for your money.

4. It doesn’t see credit and cash the same way.  Research has found that when we pay for something with credit, we consider the benefits of the purchase, and when we pay with cash, we focus on its cost.  This mindset not only affects how much we spend, but what we choose to buy – and it makes us prone to overspending when we pull out the plastic.  One obvious consequence of credit card overspending is, of course, piles of high-interest credit card debt.  But even folks who pay their balances at the end of each month can end up spending more than they intended, simply because they choose to use credit.

How avoid overspending:  The best way to combat the “credit card premium” is to refuse to let your brain talk you into overspending.  Leave your credit cards at home when you shop.  Use cash instead.  Or, if you do use a credit card, decide what you’re buying ahead of time, and don’t allow yourself to splurge on any extras.  If you’re shopping online, use a debit card instead of a credit card.  This will force you to consider the amount of money available for purchases in your bank account.

5. It over-estimates your willpower.  We all want to think that we can stand up to temptation, but in many cases, we just aren’t as strong as we think we are.  We look at the salads on the fast-food menu, but we still choose the big, juicy burger.  We decide that we’re going to stick to an exercise routine, but we make excuses for staying on the couch.  And, of course, we make a budget – but then we can’t seem to resist splurging on a great find when we’re out shopping with friends. 

How to resist temptation: Try to avoid situations where you know you’ll be tempted to overspend.  Don’t go to the mall when you’re bored or stressed out.  When you go out, try to leave the credit cards at home so if fatigue or emotions start ebbing away your restraint, you’ll be saved from yourself.

Our brains can be tricky, especially when it comes to money-related matters.  But the first step to changing our behavior is awareness.  This list isn’t meant to make you feel bad about yourself.  Mental tricks make all of us vulnerable when it comes to money decisions, but at least if we’re aware of what our minds can do, we can protect ourselves and our finances.

Happy saving!

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

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