Nobody likes a love interest that plays "mind games."
It's a waste of time, energy, and money. But you may be guilty of something almost as bad: playing mind games with yourself when it comes to saving. There are certain behaviors, inherent to many of us, that increase our chances of spending all of our paycheck. Avoid these top four psychological traps holding you back from saving:
1. Lizard Brain
Sometimes you can just blame it on your genes.
Back in the cavemen era, humans had a really hard time surviving. There was always a violent predator around the corner ready to take a bite out of them. This constant state of imminent danger put one part of our brains in overdrive — the amygdala. Sometimes known as the "lizard brain" (because that's all a lizard has for brain function), the amygdala is in charge of very basic functions, such as as fight, flight, nutrition, and sex.
The lizard brain made our ancestors act very emotionally and live as if every day was the very last of their lives. Eat every last piece of food now, and leave everything behind at the first sign of danger, it said. The constant threat of danger kept cavemen on their toes and made them act impulsively.
Many centuries have passed and humans have evolved for the better, but the amygdala is still part of our brain, and many of us want to enjoy our money now. Fight the urge to splurge or analyze your financial situation constantly by reminding yourself that unlike your ancestors, you will probably have a long future to plan for.
How to Fix It
Keeping on top of financial needs every single minute of your day will let your lizard brain take control you and make you react emotionally. Set specific dates for review (e.g. every quarter, semester, or year) of your finances and take corrective action after careful analysis. Then, move on.
We are creatures of habit. We all have a favorite movie that we could just watch over and over, or a brand of coffee that we can't imagine living without.
The challenge with having favorites is that we tend to assume that the same conditions that once made them them our favorites still apply. This is called extrapolating. When you extrapolate your spending patterns without thinking, you ignore how much money you could be saving.
Take, for example, a daily $5 cup of coffee. Let's assume that you picked up that habit on your first job. You were young, didn't have a coffee maker, and you would enjoy it everyday on the bus to work. Now that you're 10 years older, own a home with your spouse, and drive to work, should you still be buying that $5 cup every day? Well, if you were to stop spending $5 a day and put those funds in an investment with an 8% annual return, you would have a cool $28,553.01 by the end of 10 years.
How to Fix It
Don't just do things for the sake of doing them. Take a look at your daily and weekly rituals and find cheaper alternatives. Then, commit to put those savings in your retirement or savings account. Already doing that? Start or strengthen your emergency fund. (See also: Here's How Rich You'd Be If You Stopped Drinking)
3. Confirmation Bias
"There is no worse blind man than the one who doesn't want to see," goes a popular saying.
When you're unwilling to seek out information that challenges your beliefs, you're a victim of confirmation bias. This psychological phenomenon makes you pay attention only to the studies, news, and facts that reinforce your preconceived notions.
By falling victim of your own reality distortion field, you can waste a lot of money by making suboptimal choices. Let's assume that you really like Mac laptops and you're looking to buy a new computer. Here's how confirmation bias would work against you:
- The only research that you do is to read sites focused only on Mac computers. You ignore sites that cover a wide variety of laptop models, such as Consumer Reports.
- You only visit an Apple retail store because you subconsciously favor information that confirms what you already believe.
- You go out of your way to attack any data or evidence that proves that you could get an exact product that performs just as good (or better) at a cheaper price from another brand.
- When asked about the main reason behind buying Apple, you can only answer "I like it" or repeat an ad or catchphrase from an Apple clerk.
How to Fix It
Don't make purchase decisions based on a hunch or first result from a Google search. Be open to checking unbiased information from multiple sources, and be ready to dismiss an idea if the data proves you wrong.
4. Carpe Diem
A day doesn't go by that I don't see somebody quoting "carpe diem" on my Instagram or Facebook feeds.
While the most common interpretation of carpe diem is "seize the day," the official definition from the Merriam-Webster dictionary is the "enjoyment of the pleasures of the moment without concern for the future." Or in fewer words, immediate gratification. Given the choice of enjoying $300 right now or receiving $5,000 in six years, most of us would take the $300.
However, our parents were right in teaching us self-restraint. Data from over four decades of experiments has shown that a child's ability to delay gratification is critical for a successful life. Best known as the The Marshmallow Test, the experiment from psychologist Walter Mischel explains how self-control makes you better prepared to tackle any challenge, including financial ones. (See also: 10 Investing Lessons You Must Teach Your Kids)
One of the most successful investors of all time, Warren Buffett, is a major advocate of learning self-restraint. "Someone's sitting in the shade today because someone planted a tree a long time ago," he wrote in a past letter to his company shareholders.
How to Fix It
Studies have shown that the most efficient way to learn or teach delaying gratification to achieve later, greater rewards is to provide reliable experiences. For example, if you promise yourself that you won't use your credit cards for three years to pay down debt and that at the end of those three years you will take a small trip to Las Vegas to celebrate, then take the Vegas trip if you're successful.
Not keeping your own word will make you say "I didn't get anything in the end anyways" the next time you're trying to reach a financial milestone, and make you abandon your goals. Deliver on your promise to yourself or others.
What other psychological traps are slowing down or eating away at your savings?
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