Saving money is not always easy, especially when you consider the temptations of modern banking. However, there is one thing people who want to become rich cannot do without. Despite all the tips about cutting down coffee, it may be more beneficial to change the mindset rather than struggle with it. Understanding your cognitive pitfalls will definitely help you build a fortune.
Financial psychology studies the connection between various mental factors and money management. Human behaviour is unpredictable in general and quite tricky in terms of saving money. However, knowing the cognitive aspects involved in financial decision-making is a good basis for changing your attitude towards money in order to improve your life in the future.
In fact, a couple of cognitive techniques will make your interactions with bank accounts a lot more productive. Let us find out what psychological tricks you can apply in order to improve your finances.
Be Careful about the Anchoring Effect
According to behavioural economics, the anchoring effect means relying on the initial information to the point of making biased conclusions. It happens when we see a shirt whose price was lowered. Having initially been priced at two hundred dollars, a hundred-dollar shirt appears to be a great deal. Retailers use this method on purpose in order to lure consumers. However, now that you know about this effect, you can avoid falling for it.
To beat this cognitive pitfall, you have to form your internal anchors. In other words, before buying something, try to determine the maximum price you should pay for the product, considering its benefits for you. Forget about original prices and focus only on the end result. This little trick will prevent you from spending money on useless things.
Gamify Your Savings Process
Saving money can be challenging due to the absence of immediate rewards. However, you can easily solve this problem if you learn to gamify your process. Creating a challenge that you need to cope with turns the process of building a bank balance into an interesting activity.
One idea worth trying is transferring twice as much money from your checking account to the savings one if you bought anything you did not plan to. Another approach is setting your goal to having zero-spend days several times per week. Moreover, giving yourself a treat each time you reach a milestone trains your brain to associate saving with joy.
Pre-Commitment – A Surefire Method
We cannot say that people are not prone to temptations. Unfortunately, sometimes, the moment of truth comes when we face a certain dilemma, such as spending a sum on unnecessary things or transferring it to the bank. However, you can avoid dealing with such situations using the strategy called pre-commitment.
It means that you decide on your actions in advance. The best way to do this is to use automated payments. Once your salary is credited to the account, transfer half of it to your savings account. In doing so, your brain automatically learns to live on the rest of the money without additional effort. Use resources from the likes of ING to set goals and work out how much you can save.
Framing Your Financial Decisions Correctly
As has been already said, the way information is presented to a person affects their decision-making process. This aspect plays an essential role in the development of financial literacy. If you regard saving as an unpleasant process, it is quite likely that you will never succeed in reaching your savings goal.
However, if you understand that saving allows you to buy freedom and make other major changes in the future, then the decision is much easier to make. In addition, you may translate any expense in terms of working hours to earn these funds. This will definitely make you think twice before spending your money.
Conclusion
Building a fortune does not necessarily mean getting promoted and increasing your salary or even learning a new language of finances. Instead, you just need to master your psychological pitfalls. Choosing the right strategy and applying some simple tactics will help you control your money without any efforts.
Select one of the methods suggested above and put it into practice starting today. You will surely see some results in the near future!
