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The Psychology of Saving Money

Sometimes spending is like an old school phone bill.  Tiny spending after tiny spending, but the total…wow!  How did that happen?  Part of the answer is that there are lots of little psychological games we play on ourselves to bias us toward spending beyond our budgets.  We want to do it so we rationalize and deny.  Professional marketers are also always there to help us with this rationalization should we lack imagination for even a moment.

Some simple changes to how we think about money can help us spend smarter.

budgets, retirement plan and financial plan blog
How we perceive spending matters.

Here are a few ways of heading off those psychological traps and spending more in line with your long term financial plan:

Be conscious of subscriptions.  They are easy to forget about, but if you look at all of the things that you are paying a monthly fee for, you’ll often find at least one or two things you would not miss.  Be especially leery of free or deeply discounted initial subscriptions that then auto-renew at the full rate at some later time.  Most “too good to be true” discounts work exactly like this, as the companies that offer these terms are aware that much of the time you will allow the auto-renewal to occur and reoccur without serious consideration.

Think of monthly payments as annual expenses.  Some things you want are only going to be offered in the form of monthly or other periodic payments.  Always normalize this spending in your mind or use budget software that does it for you.  Think of all monthly payments in yearly terms or if you are agreeing to a 2 years $100/month contract realize that you are making a $2,400 purchase.

Normalize ALL of your spending.  Have budgets that detail all of your weekly, monthly and annual spending, but make sure to calculate all of the different line items as annual for the purpose of comparison.  Once you do this, you can start to see where your money is really going and decide if that’s where you want it to go.

Always think of prices in terms of dollars, not percentages.  Sellers love percentages, but 10% of $100 is not remotely the same thing as 10% of $3000…so add-ons, upgrades and discounts all need to be translated to cash values in your mind when making decisions.

Avoid any non-essential warranties, service plans or insurance.  We’re all risk averse, but insurance of all kinds is always a net negative expected return investment.  You are buying peace of mind and it does not come cheap.  Do you really need peace of mind for a toaster oven?

Buy quality if you can.  If you pay half as much for something that will only last a year or two vs. full price for an item of the same function that will last a lifetime you come out way behind.  Additionally quality products usually provide a better experience.  Beware how you define quality though.  Quality means superior construction and durability, not price or prestigious brand name.

Know how your spending ties into and impacts your ability to achieve your long term financial goals.  Understand for example how giving up some cable channels or daily lunches is going to help you pay for a home some day.  Money is money and every purchase is a trade off.  When you know what you have to gain for making a sacrifice and then it’s hardly a sacrifice at all.  Our personal financial planning software that lets you link budgets to plans that reflect all of your goals including retirement is very focused on helping with this.

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