How To Rebalance Faulty Mental Accounting

By Kelley Keehn, FPSC Consumer Advocate

 

When it comes to money, many of us are tripped up by faulty wiring.

 

Think about the time you walked around the block to save $25 on a $50 pair of shoes, then pooh-poohed doing the same thing to save $25 on a $1,250 big screen TV. It’s our faulty wiring that tells us saving 50% is better than 2%, even though it’s exactly the same amount of money.

 

Succumbing to the percentage versus dollar dilemma—along with many other mental accounting errors—can get us into big financial trouble. Even when we have all the necessary information right in front of us, and a wealth of good intentions in our pocket, we don’t always act rationally.

 

How can we overcome the faulty mental accounting challenge? Awareness is a good first step. Talking it over with a professional will take you even further.

 

Randolph Taylor, a certified credit counselor with Credit Canada, offers these suggestions to help retrain the way your brain thinks about money:

 

1. VALIDATE YOUR BUDGET

 

When establishing a budget, many people are overly optimistic about costs, particularly when it comes to groceries. When tracking actual costs on a monthly budget tracker it often adds up to twice the amount they budgeted for because they underestimated the cost of food and forgot about those quick trips for a loaf of bread or a bag of milk that all add up. Failing to account for the smallest leaks can eventually sink a big ship!

 

2. LET FINANCE DICTATE LIFESTYLE, NOT THE OTHER WAY AROUND

 

Today’s families have a lot of expenses. With school programs and extracurricular activities, things can quickly spiral out of control. Think twice before choosing an expensive dish from a restaurant menu or buying food from the concession stands at a ball game. Many people don’t realize how quickly things add up for an event that is supposed to be fun. Setting aside the money first will bring the peace of mind to fully enjoy those splurges, free from any nagging guilt.  

 

3. DON’T BUY INTO THE SALES HYPE

 

This can be a bone of contention in many households because some sales can seem too good to pass up. Promotional offers can mentally move an item from the nice-to-have column to the need-to-have column. How many times have you bought something on a “buy-now-and-save” offer and put it on your credit card? Where did the savings go? To interest, that’s where. While you may have felt good about getting the deal at the time, it could ultimately put you in a worse financial situation. Build your hype-resisting muscle and only buy what you have saved for.

Kevin Cork, CFP, with The Absolute Group in Calgary, adds these tips to help reset your money mindset:

 

4. COUNT OUT THE CASH

 

When buying major items, take only the exact amount of cash needed for that item—not your credit card. If you only have the money you need, you won’t be tempted by impulse purchases.

 

5.  USE IT OR LOSE IT

 

Have you signed up for a spin class you only attended once? Or, bought the wrong item and never returned it? Press pause and think twice before you make a purchase to avoid leaving money in someone else’s pocket.

 

6. BEWARE FALSE ECONOMY

 

Don’t obsess about forking over $10 for parking while glossing over the due date or paying only the minimum on your credit card. That missed or minimum payment is costing far more than the parking fee in added interest. Try to treat every $10 the same way.

 

7. GIVE IT TO THE COOKIE JAR

 

Every time you forget to use a coupon to save on gas or groceries, put the missed savings in a cookie jar. You’ll be surprised how much it adds up to over time—and how much you now have to put toward a vacation or to pay down debt.

Looking only at percentage savings, not realistically assessing expenses, and failing to account for spending leakage can cost big bucks over time. With a little training, you can catch yourself in the moment and avoid repeating these mistakes. And that’s a great step toward a sound financial future.