When it comes to money, we talk a lot about the female gender pay gap, and the super gap, and the investment gap…but there’s something else that has a huge impact on how you use money. It’s your psychology.
Your beliefs about money have a massive impact on your reality. Let’s look at 3 common psychological traps that most people fall into:
1. Valuing some money more than others (‘mental accounting’)
This trap is when we consider some “types” of money as “more valuable” than other types of money.
If you won $500 in a raffle prize but overnight you lost that money, you would probably feel bad. However, you’d probably feel worse if you lost $500 from the money in your bank account.
Here’s the thing: money is money. $500 prize money, or $500 in your bank…they’re both $500.
Ideally, we’d treat both sets of money the same, no matter where it came from or where it was kept.
Instead, we’re emotional beings, and most of us don’t realise that many of our financial decisions are driven by emotion.
This can cost you thousands of dollars, because it means that you’re not using your money in a way that makes financial sense, you’re using it based on how you feel about it.
If for example, you value your savings too much, you may be unwilling to invest your money and therefore miss out on the opportunity to grow your wealth.
2. Keeping up with the Joneses (‘lifestyle inflation’)
As our income increases, typically so do our expenses. We move into bigger homes, buy better cars and clothes, and go on more vacations.
When we earn more, we feel entitled to spend more. After all, isn’t that what money is for?
The problem is that an increase in income doesn’t mean an increase in wealth. To increase your wealth, you need to focus on buying assets. To have money to buy assets, you need to save some of your income.
The more you save, the quicker you can increase your wealth.
3. Thinking you’re saving on “sales”
Everyone has done this before. You see the big red sign saying “50% off!” and you think “wow that’s huge, I should buy something now so I don’t have to pay full price”.
Here’s the thing: if you see a handbag for $300 marked 50% off, unless you were already planning to buy that handbag, you’ve just spent money $150, not saved it.
You might think of it as “saving in the future” but actually, the shop just convinced you to spend money now on something that you may not have ever bought in the future!
If you can stay aware of these 3 money traps you will be saving yourself a huge amount of
money in the long term!