Yahoo Finance 7 mind hacks to stop you blowing your budget
All our money decisions are entirely caught up by how we think and feel.
We may be given to moments of impulse purchasing, or just be in the habit of buying the same thing from the same place simply out of habit.
But did you know you’re operating out of present bias and status quo bias when you do that? Much more money would be saved if we were more aware of how they shape our financial decisions and commitments.
According to the Financial Planning Association’s Money & Life team, these are seven cognitive biases that are steering us away from sticking to our budget – and how to get over them:
1. Anchoring bias
What’s a good deal, and what’s a bad one? It turns out your brain has a knack for grabbing onto the first price it sees and using that as the yardstick for what you should be paying, meaning over time you can get too comfortable paying more than you should.
How do you combat this? Do your research. “Having a range of prices in front of you can help you get the best value for money,” the Money & Life team advised.
“If you’re buying a second-hand car, for example, don’t snap up the first one you see without comparing lots of others available with the same year, make and model.”
2. Bandwagon effect
You’re probably familiar with this one – we often take our cues from people around us when we see them make certain financial decisions that may not necessarily be right for us.
The solution to this one is, again, to do your research before you make a copycat decision – know and weigh up all your options before you make a commitment you might regret down the track.
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3. Choice-supportive bias
Also referred to as post-purchase rationalisation, this is what we do when we make a decision that wasn’t the smartest choice – but we defend it to ourselves anyway, and retrospectively ascribe more positive attributes to the decision or purchase than it warrants.
But if we keep doing this, we miss out on learning opportunities and risk making similar mistakes again in the future when we’re enticed by the sleek design and fancy features.
“By treating every purchase you make as a new opportunity to choose wisely, you can consciously avoid any rose-tinted view of your previous retail blunders.”
4. Framing bias
Related to anchoring bias, framing bias happens when our decision is influenced by how information is presented, not just what the information itself is. That is, the same thing presented in different ways could lead to different decisions.
It’s also an up-selling tactic that salespeople use: when presented with mid- and higher-priced options, shoppers might be persuaded to opt for the mid-priced product that could still be relatively expensive and more than they were originally looking for.
5. Ownership bias
This one is a tougher bias to break, particularly with the popularity of online shopping. Ownership bias is when we see a product or item and we can picture it fitting in with our lifestyle – and so, in your mind’s eye, the item is already yours. Not only that, but the internet makes it so easy to make a purchase with just a few clicks.
But rather than trying to curb window shopping altogether, a better way to deal with this is to allow for a little buffer in your budget for occasional impulse purchases.
6. Present bias
Present bias is when we give greater weight to a pay-off that’s in the here and now that come at the expense of our long-term goals. This bias is best capitulated in the ‘When in Rome’ philosophy of splurging because of a special occasion or holiday, when we know we have savings or budget goals we’re trying to meet.
But you don’t need to be on holidays to make impulse purchases. To circumvent this, be clear about what you’re saving for: calculate how much you want to save, and arrange a direct debit to take a designated sum out of your salary every week, fortnight or month.
7. Status quo bias
We’re creatures of habit: this is why it’s so difficult to get people to budge from their bank, super fund, or energy provider, even if they’re getting a raw deal. With status quo bias, there’s a desire to keep everything the same – and anything different is perceived as a loss.
But staying in our comfort zone often means we’re paying more for things or services than we need to. To push yourself out of it, just take baby steps: start with reassessing your mobile plan, then move onto your utilities, and then your insurance, and so on.
“On the other hand, it can be very motivating to take care of these tasks in all one go and have the satisfaction of making significant savings across the board,” said Money & Life.
“If you’re someone that gets a kick from bagging a bargain, this second technique might be ideal for you.”
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