5 Tips to Spend Less Money

cash or credit photoThese five tips can help you spend less money. They fix the faulty thinking that many of us have when it comes to money.

The tips help you identify the money trap and then offer a way to avoid falling into it.

These insights are from research in psychology, behavioral science, and neuroscience. More can be found in Thinking Fast and Slow by Daniel Kahneman and Mind Over Money by Claudia Hammond.

Use Cash and not Credit or Debit Cards

Studies of human behavior show that people tend to buy more impulsively when they use a credit or debit card.

When you use a card you not only are more likely to decide to go ahead with a purchase, but your thinking changes too. You are less likely to remember the amount paid and more likely to add a bigger tip. Research also has shown that you may even be ready to spend more on the same goods depending upon how you pay for it.

Paying with cash always feels that much more real somehow and parting with it much more painful. Paying with a card delays the pain and makes the transaction easier.

A strategy to use if you are tempted to buy something on a credit or debit card is to imagine getting the same amount out of a cash machine and spending that amount instead. Or better yet, actually stop using your debit and credit cards and use cash only.

If you want to stay within your budget, use cash instead of debit or credit card.

Beware the Mental Buckets

People often divide their money up into different buckets and apply different rules to those buckets.

You are more likely to be whimsical in spending a gift of $50 then if you had earned the $50. It was free money. But how you spend it has the same effect. You spent $50.

Every $50 is the same as every other $50 whether its earned, saved, or given to you. Our sense of the value of money shouldn’t be altered by how we earned it, how we account for it, or how we spend it. But alas it does and people don’t always recognize this fact.

If you are trying to stay within a budget or spend less money, then check if you apply different rules to your money. And if so, think about how you can avoid doing so.

Dangerous Small Proportions

Don’t be distracted by the size of your purchase so that you buy more than you need. For example, you are buying a car and you set a budget. Then there are the upgrades that are a very small part of the total price. And you say, “what’s another $750 when I’m already spending $22,000.”

This same proportional thinking also happens when you buy a home. There are real settlement costs (title fees, inspections, warranties, etc.) that may be a small proportion of the mortgage loan, but are very large and can run into the thousands of dollars, especially if you don’t shop for them.

You wouldn’t pay an extra $500 at the grocery store when you can avoid it. You shouldn’t do so when you buy a house, a car, or a major appliance just because the added cost is a “small” proportion of the total price.

The key is recognize that you have different attitudes toward how you spend money. If you want to spend less money then treat all money the same and don’t apply different rules to it given the context.

Do the Discount Math

Do you ever wonder why stores advertise large percentage discounts? Sellers know that it lures shoppers. And most folks don’t do the math to calculate the net price they pay. Rather they are taken by getting a “deal.”

The biggest example of this phenomenon is college tuition. I have heard from many parents that their child got $XXX in financial aid and scholarships. Although that is wonderful, it doesn’t really matter. What matters is the final price paid after the financial aid and scholarships. Colleges know that they can give a “deal” to students and they will take it, especially from a “brand” college.

This same thing happens in every day shopping for appliances, new clothes, food items, etc. There is a “Fifty percent off” sale!

The strategy is to do the math to see if the deal is worth it. Don’t be lured by the “deal” you supposedly are getting even if it is from a “brand” name.

I also urge you to make a list of items that you consistently buy at the grocery / convenience store and to list the price you’ll pay before going to the store.

I know it’s a pain, but it is a helpful way to increase your awareness of the prices you pay for items you buy consistently. And if an item isn’t on the list when you are at the store, or the price is too high, then don’t buy it.

Don’t Fall for the Display Trick

The display trick is often seen in appliance and grocery sales. The retailer displays three similar products – a low-, medium-, and high-priced one.

Their aim is not for you to buy the high-priced one. Rather it is to make sure you buy the medium-cost one and not the low-cost one. You think you are saving money by not buying the high-priced item.

We comprise by taking the medium-priced item.

But had only two items been displayed, you may have chosen the lower priced one without any less enjoyment from the purchase.

I see this all the time in grocery stores, on restaurant menus, and in “big box” stores. Remember these retailers have one mission – to separate you from your money!

The strategy to avoid display trick is to know what you want ahead of time and to purchase it when the price is right.

In sum, bring cash to restaurants and groceries stores. Don’t be fooled by large discounts or how the goods are presented. And remember a dollar saved is a dollar earned. Doing so will help you spend less money.

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