How to Stop Making Foolish Money Decisions – Three common mistakes to avoid

How to Stop Making Foolish Money Decisions - three common mistakes to avoid

Are you a saver or a spender?

A Spender!

Emotional? Compulsive? Unnecessary spending?

Or:

A saver!

You are out of the hook if you save without spending money. Otherwise, you can benefit from these ideas too.

 

 

How do you curb your spending habits?

 

According to Dan Ariely and Jeff Kreisler, authors of Dollars and Sense: How We Misthink Money and How to Spend Smarter, “We’ve seen how we think about money incorrectly, how we assess value in ways that have little to do with actual value, and how these get us to misthink and misspend our money.”

Once you change your mindset, spot your spending triggers and budget busters, you can stop them and get your finances back on track.

 

 

HOW TO STOP MAKING BAD CHOICES ABOUT MONEY

 

Dan Ariely and Jeff Kreisler explain why we make foolish money decisions through these common mistakes to avoid. In the end, you’ll spend your money wisely, and improve your financial situation.

 

1.- We ignore opportunity costs

 

Opportunity costs are present anytime we buy something, even if we are unaware.

“Opportunity costs are alternatives. They are the things that we give away, now or later, in order to do something.”

Mostly, we think about opportunity costs before we make important purchases, for example, buying a house. However, the problem lays in the choices we make every day.

Stop Making Foolish Money Decisions - three common mistakes to avoid - Dollars and Sense

 

We don’t realize what we give up when we buy something, sometimes we don’t even need. “For instance, we can translate dollars into time—how many hours of wages, or months of salary, we must work to pay for something.”

Moreover, we could add to our savings to buy the house if we give up buying things that we don’t need, just because they are on sale.

2.- We forget that everything is relative

 

We need a context to measure value of goods and services. But, in our attempt to make the right choices, we compare items, and that creates a relative value.

However, if we don’t consider the opportunity costs—only compare the item to one or two alternatives—the relative value works against us.

 

Don’t use sale signs to provide context

 

To consider buying something with a special offer or discount, we shouldn’t take into account the regular price, or how much we’re saving.

We should consider what we spend. For example, if you bought a $100 shirt at 40% off, you didn’t save $40, instead, you spent $60.

Right: Compare $60 to $0, or the alternatives-opportunity costs- items you could buy for $60.

Wrong: Compare $60 to $100, and think you saved $40.

 

Try not to think in percentages

 

“When relativity comes into play, we can find ourselves making quick decisions about large purchases and slow decisions about small ones, all because we think about the percentage of total spending, not the actual amount.”

For example, at a car dealership, a customer bought a car for $25,000, and an add-on (a CD changer) for $200.

The customer accepted because the 0.8 per cent of the total purchase price seemed no big deal.

On the other hand, the same customer who didn’t give a second thought to $200 on an additional purchase on a $25,000 car “might use a discount voucher to save 25 cents on a bag of crisps or debate about a dollar or two tip at a restaurant.”

 

3.- We compartmentalize

 

Mental accounting, a tool used for budgeting, is “another way we think about money that has little to do with actual value. Mental accounting can be an useful tool, but it often leads to poor decision-making, especially when we’re unaware we are even using it at all.”

The problem: We categorize our money the wrong way. We divide our money into different mental accounts, with different rules, depending on:

  • How we get it.
  • How we spend it.
  • How it makes us feel.

For example: if we receive a gift card, probably, it goes to our entertainment mental account. With the gift card, we buy things that otherwise we’ll never buy with our hard-earned money.

In the end, it doesn’t matter where the money comes from “If we find ourselves splurging with certain “kinds” of money—just because in our mind the money belongs to the “bonuses” or “winnings” account—we need to pause, think, and remind ourselves that it’s just money. Our money.”

Dan Ariely and Jeff Kreisler conclude that “relativity and our inclination to make the easy choice leave us susceptible to multiple types of external interventions and manipulations by those who set the prices, including decoys.”

It’s our responsibility to take charge of our finances.  It’s essencial to educate ourselves to avoid mistakes, and make choices now that we won’t regret later.

 

Recommended: The Best Simple Mind Hack to Get Things Done

 

How to Stop Making Foolish Money Decisions - three common mistakes to avoid - Dollars and Sense Book Review

Available on:  Amazon US | Amazon CA | Amazon UK | Apple iBooks | Powell’s Books | IndieBound

Authors Dan Ariely and Jeff Kreisler
Dollars and Sense: How We Misthink Money and How to Spend Smarter
Published by Harper (November 7, 2017)
ISBN: 978-0062651204

ARC by Edelweiss

There are affiliate links. I receive an affiliate commission if you decide to purchase from Amazon, Apple iBooks, Powell’s Books or IndieBound, at no additional cost to you. Thank you in advance.

Free Kindle book preview (You can read a sample of this book with just one click – no need for you to sign in or install an app)

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