Imagine that you are shopping for a used car and see a nice one on the lot. After negotiating back and forth with the salesman, you manage to agree on a price that’s several thousand dollars less than the list price. I bet you would sign the title feeling like you got a great deal. Now imagine if the list price was a few thousand dollars lower to begin with, but the salesman refuses to negotiate.

You end up paying the same price, but the feelings you have about the purchase is probably quite a bit different.

This is one of the mental money traps you can fall into.

There are a few more, and this is a long read. So grab some coffee, and let’s get into five of these today and what you can do to avoid the pitfalls.

Mental Money Trap #1: Outsmarting the Anchor-Price Comparison Trap

The used car lot example is called price anchoring. By having a relatively high list price on used cars, customers will remember that price tag and decide whether they got a good deal or not based on that initial price.

The tendency to use the first piece of information we hear or see as our “anchor” for making subsequent spending decisions is called the anchor price comparison trap (some also refer to it as the relativity trap or focalism). This happens most frequently in categories that are new to us, where we have nothing to compare to the prices we encounter.

Whatever you choose to call this behavior, it’s a verifiable bias built into our mental wiring, and it can cost us a lot. The good news is that you can outsmart your own tendency to create pricing anchors with a few simple strategies.
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Money Isn’t Everything

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Being Frugal and saving money is generally always the preferred choice. Week after week, I write articles to help you figure out how to make every dollar travel a bit further so you can retire just that much earlier.

And it’s not just me either. If you keep up with all the articles circulating the web, you will definitely get the impression that saving money makes sense at all times, every time.

Yet, there were moments in my life when saving money wasn’t the right choice. I remember years ago when I was flying back to attend my grandfather’s funeral. Airline tickets were very expensive, as the event was so sudden and I had to leave on short notice.

That funeral fell on a Saturday too. I could’ve saved money if I left the night before but the chances of flight delays was just not worth the extra savings. Making the event was priceless, so unless the difference in airplane fares were so much that I couldn’t afford the cost, there was no way I would try to save money and risk missing the chance to see my grandfather one last time.
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David, you need to talk about home security systems. Everyone is home these days, so why are we still paying so much money on home alarm monitoring?

I have ADT and I’m paying $30 a month. I’m planning to call them soon to cancel.

What do you think?

Looking for answers,

First, give yourself a pat on the back Justin. The fact that you are looking at your expenses and deciding where to cut out the fat is what will separate you from most of those out there who just worry about money but don’t do anything about their situation.
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I’d like to introduce you to Billy, the investment guru living inside my head. He always convinces me to buy and sell stocks at the perfect time, but he must be a billionaire since his call to action always cost me financially. I can’t blame him though, because he probably doesn’t need any more money and probably doesn’t care.

Whenever there’s a bull run in the markets, he tells me to plow more money into stocks. “Buy and hold, stay the course, the market always comes back so it’s always a good time to buy”, are just some of the catchphrases he’s been yelling at me during these years.

The advice worked well enough for a long time since the market climbed relentlessly, but then COVID-19 happened and stocks took a quick dive. And what does he do? At the depths of the market plunge in March, he had the guts to tell me to sell. It’s not just a casual nudge either. We are talking about not letting you sleep, screaming “sell, sell, sell” the whole time for days on end.
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The idea of being financially independent is something most of us dream of, but some of us are taking action to make this dream a reality. We believe that living below our means, maxing out our retirement accounts, paying off our debts, and saving consistently will allow us to achieve freedom. We will be free from money issues, free from our constant struggle at work, and free to work on what we are passionate about.
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He told me he had a gun, and I thought he was about to hurt me. But it turns out to be a friendly neighbor trying to protect everybody because there was a robber just down the street.

To say that perception is important just doesn’t do the term justice. It’s the sole contributor to our decision to purchase, and the reason why some of us make more money than others. Perception is one of the most crucial factors of personal finance because it affects the two main avenues of accumulating more wealth – our ability to earn and our discipline to save.

Let me explain.
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