Money Management

These Three Common Beliefs About Money Don’t Make Sense

By  Karen Banes

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Many of us hold beliefs about money that are so ingrained we rarely question them, and they can cost us a lot. Sometimes thousands, or even millions of dollars over a lifetime. Think before you buy into these common money beliefs.

The “Sunk Cost” Fallacy

This is the belief, present in almost all of us to a certain extent, that once we’ve invested a certain amount of money (or time, or effort) in something, that money, (or time, or effort) will be wasted if we quit whatever that something is. In short, the more money we spend on something, the more committed we are to it, even if it’s clearly not working.

If we invest money in starting a business or side hustle, we feel we have to make it work, and we’ll keep pouring money into it. If we invest money in education on forex trading, we’ll keep putting money into trading forex long after we’ve accepted we’re never going to be in the small minority of forex traders who make money. If we buy a “money pit” of a house that needs renovations, we’ll continue to spend money on it long after we should cut our losses and resell it.

We tell ourselves that the money we’ve already sunk into this project will be wasted if we don’t see it to fruition. In reality, of course, we’re often just wasting more money. And the project may never come to fruition. We tell ourselves that perseverance in the face of obstacles is good, which often it is. But persisting after we know that what we’re doing is wrong for us isn’t. My grandfather used to call this attitude “throwing good money after bad”. He was right. Investing money in an as yet untested situation is a calculated risk. Throwing money at a situation you know has gone bad is a waste.

Blowing “Windfall” Money

Almost everyone has a theory about how they’d spend the money if they won the lottery. Even people who invest every spare penny they have for their futures feel like they’d be justified in blowing at least some of the money if they won it. The most boring answer, in fact, when asked this question is “I’d invest it”. We feel almost as if we are wasting a windfall if we don’t spend it.

This is totally illogical, of course. Where the money comes from shouldn’t affect how we spend it. If you’re already aggressively saving for a new car or house, it does of course make sense to buy a new car or house with windfall money. But if you’re happy with what you have and saving for the future, (for your kid’s college or your own retirement, for example) it makes little sense to blow windfall money on something else. Especially if that something else is something you’ve never wanted or even thought about previously.

Receiving a windfall, whether it’s a lottery win or an inheritance, can make us feel somewhat divorced from the money. We didn’t earn that money, so it can’t be measured in terms of our own time and effort. This somehow makes it easier to spend, which is probably why the majority of lottery winners go broke and many of them end up declaring bankruptcy.

“Saving” Money in Sales

As someone who is interested in saving money, I subscribe to a few email lists that send out information about deals, discounts and general ways to save money. I open them and skim them. Then I do something unusual. I click on maybe one or two links, if that. Sometimes I delete the email without clicking a single link. If I can get a better deal on something I’m already spending money on, like my energy bill or phone contract, then sure, I’m interested. Same if I can get a deal on something I’m already planning, like a vacation. If I can get a discount on something I’ve never considered buying, why would I do that? I clearly don’t want or need that product or service. If I did, it would already by on my radar.

When my son was small he loved going to yard sales. He would often pick up something and ask “what’s this”? I’d explain what it was, and then follow it up with something like “But if you don’t know what it is, you probably don’t need it”. He would often follow that up with: “But Mom, it’s only 50 cents”. That’s how I often feel watching grown adults shopping the sales. They’ll buy something cheap even if they’re not entirely sure what it does. Yes, (very) occasionally you discover a wonderful product that you didn’t know existed and realise it would make your life easier. But the vast majority of the time, if you’ve never considered buying a product at full price, you don’t need to buy it in the sales.

Everyone will tell you they saved 50% buying something on sale. It’s true, but only if you were absolutely, definitely going to buy that specific product, today, and at full price. Otherwise, you didn’t save anything. You spent something. Something you wouldn’t have spent otherwise. Sales psychology encourages us to see money in relative terms. So a 50% off sticker is tempting, whether we’re saving $5 or $500. In reality, money is absolute, not relative. $5 is $5, and $500 is $500. If you’ve exchanged that money for something that hasn’t added value to your life, you’re worse off now, no matter what the sales psychology is telling you.

Questioning your beliefs about money can save you thousands of dollars. If you’re ever lucky enough to win the lottery, it could even save you millions.

Karen Banes

About the Author

Karen Banes

I’m a freelance writer specializing in online business, personal finance, travel and lifestyle. I also work as a content creator for hire, helping brands and businesses tell their stories, grow their audiences, and reach their ideal customers. I’ve lived, worked and studied in six countries, across three continents. Stop by my blog TheSavvySolopreneur.net to learn how to run your own (very) small business on your own terms. You can also connect with me at my website KarenBanes.com or follow me on Medium.com

Disclaimer: In order to make Wealthtender free for our readers, we earn money from advertisers including financial professionals who pay to be featured on our platform. This creates a natural conflict of interest when we favor promotion of our clients over other professionals not featured on Wealthtender. Learn how we operate with integrity to earn your trust.

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