Five Psychological Money Tricks That Work
For being such a dollars and cents type of issue, personal finance sure has a lot of psychology involved, doesn’t it? If it weren’t for psychology, ideas like Dave Ramsey’s debt snowball method would be dead on arrival. The debt snowball works because it taps into human psychology, not mathematics. Paying off your smallest debt first isn’t mathematically optimal. It works because after you pay off the smallest debt, you get a sense of accomplishment, a boost of morale, and you are more likely to continue the project. You apply your smallest payment to the next smallest debt and continue until you’re debt free. You pay a little more in interest but you are rewarded with actually finishing because the snowball motivates you to keep at it.
That led me to wonder what other bits of personal finance advice tap into human psychology for success?
Using Cash Only
There’s a reason why casinos use chips to represent money, it’s because chips don’t look like real money. When you swipe your credit card, it doesn’t feel like you’re spending money. When you pull a ten dollar bill out of your pocket, it feels very real. This psychological difference is the reason why so many people experience success spending less when they spend only in cash.
Cash forces you to plan ahead because you can’t spend more than the money in your pocket. Cash forces you to pay for 100% of your purchase right this moment, not 0% now and 5% each month for the next ten years because of interest. Cash forces you to make that tradeoff immediately – do I want the money for later or do I really want to buy this?
Create Barriers to Spending
The best example of how to create a barrier to spending is freezing your credit card in a block ice. People who have gone to cash only usually apply this technique to their credit card because they want to force a delay in spending. If you want to buy something with a credit card, you’ll have to wait until the ice thaws and you can get to your card. It’s a clever idea because it adds two important barriers to the spending process:
- Time
- Headache
If you make it harder to spend money, you’re less likely to do it. There’s a reason why so many online stores want to store your credit card information for later use. They tell you it’s a good idea because then you won’t have to fish for your credit card next time, which is very true. However, it removes one of the biggest barriers to the buying process – paying! If you had to wait a few hours (for the ice to melt) before ...
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Categories: Uncategorized Tags: Accomplishment, Casinos, Chips, Dave Ramsey, Dollar Bill, Dollars And Cents, Money In Your Pocket, Personal Finance Advice, Real Money, Snowball, Spending Money, Swipe, Tradeoff