At times, it feels like managing your finances is a contest. Who will “win” in your battle to keep your money?
Unfortunately, you might be at a disadvantage when it comes to making the most of your money. There are psychological money tricks that can cost you big time. I know I’ve fallen prey to tricks in my time.
Next time you head out there, cash (or card) in hand, make sure you are on the alert for these three psychological money tricks:
1. Price Anchoring
One of the biggest psychological money tricks is price anchoring. It’s the idea that something is “worth” a set amount of money. Then they can discount it later, and you feel like you’re “saving.”
A friend of mine in the furniture business told me they often mark furniture up about a month before a planned sale. They might take a living room set and price it at $4,500. When the sale comes along, they “cut” the price to $2,995. Now you feel like you’re getting a great deal because you’ve got that higher number anchored in your mind.
It’s similar to how you might see “suggested retail” on some item at a store. You are being anchored to the higher price so feel good about spending the lower price.
Instead, comparison shop, negotiate with the lower number as the starting point, and do your best to get to the heart of YOU are willing to pay, rather than relying on someone else’s idea of “value.”
This is a psychological money trick you see when you are shopping for something with the help of a salesperson, especially if you are buying a car or a house.
First, you’ll be shown something you don’t really care for. It doesn’t meet your specifications, and it’s in terrible shape. You decline. But then you are shown something better. It might not meet everything, but it seems like an upgrade.
This happened to me once when shopping for a used car. I told the salesperson what I was looking for. He brought me to something awful, but cheap. The next car he showed me seemed so much better, even though it wasn’t exactly what I wanted. I was tempted to buy it. I didn’t, though. In the end, thanks to the internet, I was able to find a better fit.
In many cases, the salesperson has a need to move something. So they show you something worse so you’ll bite at what comes next. Be firm in your requirements, and shop around until you find what you want. This works best if you have time on your side.
This brings us to another psychological money trick: scarcity.
If you feel like you are running out of time, or that what you’re buying won’t be available for very long, you are far more likely to pay extra or get something you’re not totally on board with.
When my ex and I were buying a house several years ago, and balking at the counter-offer, the real estate agent came back and said that we only had another 12 hours to consider. There were two other buyers interested, and if we didn’t just accept the counter-offer and go forward, we could find ourselves in a bidding war — or lose the house.
We succumbed and paid about $5,000 more than we wanted to. All because we were worried about scarcity.
Whether it’s scarcity of time or a perceived scarcity of the resource, don’t fall for it. Instead, take a deep breath. What’s the worst-case scenario if you “miss out” on whatever this “opportunity” is? In the case of our house, we probably would have been able to find something else if we had held out. But we got caught up in the moment.
Sometimes You Just Have to Pay More
There are times, though, that no matter what you do, you are stuck paying more. If you really are short on time, you might not be able to review all the options and hold out. When your car is totaled, and you need a new one to get to work, you don’t have months to be picky as you shop for your next car.
In those cases, do your best to comparison shop and ensure that your most important criteria are met.