smart spending

7 psychological money traps and how to avoid them

What about that longer-term goal? "It carries no emotional kick whatsoever. What's rewarding about setting money aside today for a goal two or three decades away?" he says.

How to outsmart your brain: Infuse your future goal with emotion. Visualize that next vacation in Europe or that retirement cottage in Mexico in as much detail as you can.

"If your financial life is not yet computerized, take a manila folder and paste color illustrations to it: Pictures of palm trees and surf on the Hawaiian coast, Tuscan hillsides covered in grapes and sunflowers, or sand and sun in the Gulf of Mexico," suggests Zweig. "If you are online, set up a file on your desktop and download a bunch of images to it."

Zweig also encourages you to add dates and colorful names to financial goals, such as "The Jan. 23, 2034, Tuscany Villa Fund." Now could you forgo that caramel latte and put a little money in that savings account? This practice is also used effectively in weight-loss programs: Dieters learn that it's easier to give up a piece of chocolate cake today if you clearly visualize the trade-off, such as yourself in that elegant dress three months from now at your daughter's graduation.

4. The dollars-to-donuts decoy 

Consider this classic economics puzzle. You go to a store to buy a $100 lamp. You then learn that the same lamp is on sale for $50 at another store a mile away. Would you drive one mile to save $50?

Now imagine you're considering a dining room set for $5,000. You learn that the identical set is selling for $4,950 at a store one mile away. Do you make the drive?

"Hopefully you said yes in each situation. However, many people say no, they would not make the effort in the second example," says Mike Romzy, an investment analyst at Hapanowicz & Associates Financial Services in Pittsburgh. Why? Because 50 percent of $100 ($50) instinctively seems more valuable than 1 percent of $5,000 (also $50).

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How to outsmart your brain: Don't confuse dollars and donuts. Constantly remind yourself that a dollar is a dollar -- just because it's a small percentage doesn't mean it's not still real money. If you're willing to clip coupons to save $10, you should also be willing to find ways to cut $10 off the price of a refrigerator or increase your retirement portfolio's earnings by $10. Or ask yourself: Would I be willing to go to a different store to buy this item if they were handing out $50 bills (or whatever the savings would be)? Picturing your savings in cash makes it seem more worthwhile.

5. The separate-buckets blunder 

For the sake of simplicity, most of us tend to separate our money into different mental "buckets." Sometimes this works well: This savings account is for our Italian vacation, but this account is for this month's groceries, for instance.

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