Money Mistakes to Avoid - Not Seeing the Big Picture
July 10, 2007
Do you ever make a money mistake that seemed really dumb in hindsight? Well, you’re not alone. Our minds can trick many of us into misusing our money in ways that seemed perfectly justifiable at the time. The field of behavioral economics studies how our financial behavior is affected by psychology.
Smart Money magazine has a great article in their July issue entitled 7 Money Mistakes to avoid. The piece covers some of the work done by two behavioral economics industry experts, Daniel Kahneman and Amos Tversky, and gives some examples of mistakes that sound all too familiar.
Money Mistake #1
The first mistake listed is “saving with the right hand and spending with the left”. By thinking of each part of your finances in individual terms and not seeing the whole picture you could be taking one step forward and two steps back.
The article gives the case of withholding too much in taxes so that you’ll get a refund come tax time. While getting a tax refund in April sounds nice, you’re actually missing out on potential interest you could be earning during the year while the government has your money.
Another example would be having enough money in your savings to cover credit card debt but not paying it off for fear of not having savings. It is wise to have rainy day savings built up but if you’re also carrying credit card debt at the same time, any financial security you build is being eroded by the high monthly interest payments.
The suggestion the article makes for overcoming this mistake is to use a software package that aggregates all your financial data and gives you an overview of where you are financially. Software such as Microsoft Money or Quicken can help you identify cases where you’re “saving with the left hand and spending with the right”.
My Money Mistakes
My failures and successes with personal finance have come mainly as a result of building habits and changing behaviors, both good and bad. Understanding behavorial economics and how it affects our decisions is an important part of getting ahead financially so I’ll cover the remaining money mistakes in the days to come.
It is funny, as I am usually pretty good at saving on little things such as restaurants, activities and original cheap gift. However, I usually spend a lot of money on other things such as new golf clubs, a laptop and a new cell phone… in the same year
Lousy left hand, spending all my money !
FB.
Financial Blogger, you’d certainly have to save a lot of money on your dinner bill to pay for new golf clubs
At least you’re aware of the duel between your left hand spending & right hand saving, that’s half the battle!
I’m a victim of saving with my right and spending with my left. Or sometimes penny wise and dollar foolish
[...] Money Mistakes to Avoid - Not Seeing the Big Picture [...]
I think it helps with everything to have an overarching goal. Then one can ask, “Does this (purchase, action, decision) help me achieve my dream?” Amazing how well this can work.
If Financial Blogger needed the laptop to start a business that was part of the overarching goal, it’s great. The golf clubs could perhaps fit in, if one were to schmooze clients over golf–or if spending a lot of time golfing were part of the goal!
I’m amazed by the number of people that choose to build an emergency fund while having high-interest debt.
Angie, I agree, you need an end goal in mind; not just to help define your decisions but also to help motivate you.
Lazy, I asked a question about credit card debt vs emergency fund a while back that got a lot of comments.
My grandmother always used to say: “Gag at a gnat, and swallow a camel.”
Maybe it’s because we want the big things “soooo much” and the little things . . . well, we’ll do them tomorrow or the next day or the next so it doesn’t feel so precious to us.
Anyway, I understand the dilemma of the credit card debt vs. emergency fund issue. The way that I handled this issue was to do both, at least until I had enough emergency fund so that I DIDN’T use the credit cards again when something crazy happened.
I don’t know, everyone has a different method that’s best for them, I guess.