How would you spend 200
These 9 misconceptions will ensure that your money disappears faster than it comes in
Do you know the problem? No matter how much money you earn, it still never seems to be "more"? Of course, those who earn more also have higher expenses, for example with regard to income tax or social security. But usually it is nasty thinking mistakes that trick your brain and lead you to spend more money the more you have. The result: In spite of every salary increase - or even after winning the lottery - there is more month left than money in the end. So why is that and how can you protect your finances?
1. You will not get “rich” with more money
2. Few people can handle money properly
3. Mistakes in thinking that stand in the way of your wealth
4. Mistake # 1: Failure to Survive
5. Mistake # 2: Contrast Effect
6. Mistake # 3: Time inconsistency
7. Mistake # 4: Sunk Costs
8. Mistake # 5: Restraint Bias
9. Mistake # 6: Scarcity Effect
10. Mistake # 7: Anchor Effect
11. Mistake # 8: Relative discounts
12. Misconception # 9: wastefulness
You will not get “rich” with more money
Hand on heart: Many people dream of becoming wealthy in the course of their lives. Those who were not fortunate enough to be born into a wealthy family would usually like to earn the “small change” in the account themselves. In return, overtime is accepted and savings in lifestyle - all in the hope that one day promotions, salary increases and, at some point, wealth will follow. But why all of this? The reasons for wanting a lot of money usually differ from person to person:
- For some, money means above all personal freedom and avoiding dependence on, for example, the employer or life partner.
- For others, money has to do with appreciation and appreciation, in return for their achievements and “sacrifices” - for example time at work instead of with the family.
- Some people also define themselves by their account balance. Such a fixation on money is often associated with a personality disorder like narcissism.
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The list could go on forever. The meaning of money and wealth is as individual as each person. Likewise, there are the respective motives to strive for wealth and its definition. While you might define an account balance of 100,000 euros as "rich", other people would only be satisfied with 1,000,000 euros - or never. And then there is a rarer “species” in our society, namely those people for whom wealth has nothing to do with money, but with happiness, contentment, love or other intangible goods.
The property should be acquired by means that are free from immorality.
But it should be obtained through accuracy and thrift.
(Marcus Tullius Cicero)
The fact is, however: Regardless of whether you are frugal or strive for big money - there is probably no person in the world who would like to live in poverty and worry every day about how enough food will be on the table in the evening should. Fortunately, most people in Germany are spared from such conditions. So it is true luxury problems that we would like to talk about in the coming. And it's about the topic: frugality. The keyword has already been mentioned. In fact, regardless of your earnings, you can live in either poverty or wealth. In the end, a higher income is not the key to more money.
Few people can handle money properly
At best, a person learns how to handle money correctly in childhood and adolescence. Anyone who had positive role models in their social environment, for example with their parents, and was also brought up early on to take responsibility with money, has the best chance of not getting into financial difficulties later in life. Unfortunately, very few people can handle money and especially those who attach great importance to financial wealth tend to waste - of course, otherwise nobody would see how “rich” they are. A classic example are lottery winners: the numbers of those lottery millionaires who are broke or even partially in debt just a few months or years after winning are alarmingly high.
Especially people who are not used to financial prosperity often overestimate their profit - or a high income - and treat themselves to a fast car, the big house, the long-awaited trip around the world and a little unnecessarily expensive jewelry. All the money is promptly gone and nothing remains, except perhaps an unpaid loan. More money does not mean that at the end of the month, year or life there will be more of it in your account. This is due to widespread errors of thought, which many people fall for.
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So you do not need a higher income or a lottery win if you are striving for financial security, but you have to learn to avoid typical mistakes and unnecessary expenses. You do not get really rich through your income, but through the expenses you avoid, i.e. your frugality.
Mistakes in thinking that stand in the way of your wealth
Regardless of whether you earn 1,000 or 10,000 euros a month, you should avoid the following mistakes in handling your money in order to minimize your expenses, save as much as possible and build a financially "secure" future. Don't worry: you are not alone, because almost everyone falls for these thinking mistakes. If you avoid this, however, you will be richer in the long run than many lottery winners. We'll tell you what you have to do - or shouldn't do:
Mistake # 1: Failure to Survive
It is certainly no secret that people tend to overestimate themselves. This also applies to financial decisions. Anyone who has a high level of self-confidence and has already had quite a few successes in life tends to assume that success will continue in the future. There is no life without defeat, but successes stay in the memory and cause the nasty distortion of reality. So if you are affected by the fallacy of survival, think that nothing and no one can harm you and you are prone to frivolous financial decisions - which can backfire quickly.
What to do instead: Above all, check large, but also smaller investments critically in advance and focus not only on possible successes, but also on possible failures. So don't just calculate how much return your stocks could yield, but also any losses. Ideally, get the objective advice of an expert who can realistically calculate the scenarios for you and weigh up the risks.
Mistake # 2: Contrast Effect
Would you spend 10,000 euros on a new sweater? Or for a meal? Maybe for a new sofa? Probably not! But if you buy a house for 350,000 euros, you suddenly don't care about 10,000 euros in ancillary costs here and 10,000 euros in extra costs there. In view of the high purchase price, 10,000 euros seem like peanuts and you tend to literally toss them out the window. Then the more expensive floor, the nicer door and the fireplace in the living room - “it doesn't matter!”. But it is not, because this contrast effect ensures that you tend to squander large sums of money on large investments such as a house or a car, even if you otherwise live frugally.
What to do instead: Always keep an overview, even with large investments, and use the red pencil wherever you can. Of course - to stay with the example - a house at this price should meet your expectations and be of good quality, but you still need to check separate investments such as the stove to see whether they are really worth their price and bring you a corresponding benefit . In order to prevent the contrast effect, you have no choice but to practice your common sense and discipline - you will thank yourself for it afterwards.
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Mistake # 3: Time inconsistency
Retirement provision is a big problem in Germany. Many people, especially women, are at risk of old-age poverty. The reasons for this are a lack of provision, long breaks from work due to raising children and the tendency to mini-jobs. But the time inconsistency is also partly to blame for the problem.
One should live in the moment and not in the past or future,
it is said and many people seem to take this motto to heart, especially when it comes to their finances. Why save if by the time I retire, inflation may have swallowed everything up, World War III has broken out or the pension funds are bankrupt? Of course, you can never predict what will be in ten, 20, or 50 years. Still, it will be too late if you don't start preparing today. The nasty thing is: The human brain is more important the current happiness than that in the future. Therefore, despite all good intentions, you tend to blow your money on your head today instead of putting it aside for the future. In addition, it can happen in the course of life that you suddenly no longer believe in saving and that you release your reserves for spontaneous investments. After all, you develop as a personality and just as little know who you will be in ten, 20 or 50 years from now.
What to do instead: So protect yourself from your future self and tie your retirement provision as tightly and inviolably as possible. To protect your savings, however, you need to invest some first. Do not suppress the importance of retirement planning because of youthful recklessness or an exaggerated "live-in-the-moment" attitude. If you regret this decision, it will be too late. Even if it's only 50 euros a month: Start today to set aside for the future. The earlier you start, the more you can benefit from compound interest and build up a fortune.
Mistake # 4: Sunk Costs
The sunk costs are a real classic in business administration. It is no coincidence that the name is reminiscent of a sunken ship: The sunk costs are sunk costs, i.e. expenses that are already in the past and which, from today's point of view, you would undo - but cannot.
In business administration, a car repair is usually used as an example: Let's assume that your car needs a repair worth 1,000 euros, but is only worth 3,000 euros. Given the disproportionately high repair costs, most people would sell or scrap the car and get a new one. But what if you invested 1,000 euros in a repair a month ago? From today's perspective, you would like to reverse these sunk costs, but since you have already invested them, you are more likely to opt for the second - actually completely overpriced - repair. Otherwise you would have the feeling that the sunk costs were given out "for free", that is, sunk like a ship.
What to do instead: Make new decisions about every investment, regardless of whether you have already invested money in something or not. Think of it this way: It is better to lose the first 1,000 euros than to sink the second as well. Even if it hurts: Use common sense and invest the "saved" money more sensibly.
Mistake # 5: Restraint Bias
Speaking of overconfidence: Because we humans love to overestimate ourselves, we also think we can resist almost all temptation - if we wanted to. Funnily enough, it is precisely those people who value their resilience the highest who ultimately have the least amount of self-control. This applies not only to eating or getting up early, for example, but also to spending money. Think you could just order a salad at the restaurant or just buy a t-shirt while shopping? Nothing! In most cases, you will be spending a lot more money than you thought.
What to do instead: So if you're looking to save your wallet, do yourself a favor and don't be tempted in the first place. The safest way not to spend any money is just not to shop at all, to go to the restaurant or anywhere else that you could spend a lot of money!
Mistake # 6: Scarcity Effect
You know that: Whenever you visit your favorite shop on the Internet, under numerous goods it says “Only 2 in stock” or something like that. So hurry up, quickly put everything in the shopping cart and buy in a hurry. Did you know that you buy a lot more in the process than without time pressure? And do you know that there is a high probability that you will fall for a lousy trick? As a rule, there are not “only 2 in stock”, but 200 pieces, but they sell faster and better if the illusion of scarcity is created underneath. The same applies to a house, for example: What do you think you would rather buy - the one that has been advertised for months and where no other interested parties are in sight, or the one that four other couples have already indicated their intention to buy when viewing it? You will certainly hurry to get hold of the latter - regardless of whether it is actually the better choice.
What to do instead: Unfortunately, the scarcity effect cannot really be prevented, since it is a prank by the brain. Nevertheless, it can help to be aware of the wrong thinking and to question a purchase decision again. Take your time with investments - even if they are supposed to be scarce. This applies both to online shopping on a small scale and to buying a house on a large scale.
Mistake # 7: anchor effect
Due to the anchor effect, you are more likely to buy at a (too) high price if you have been influenced by a correspondingly high number beforehand. Let's say you buy a t-shirt. If you had read the number 82 on your mobile phone shortly beforehand, you would be more likely to buy the 50 Euro T-shirt than if it had been the number 28 - although these numbers have absolutely nothing to do with the T-shirt itself . The brain can thus be influenced in its purchasing decision by randomly chosen numbers. So you will spend more money in a restaurant called Schwan891 than in Schwan001 - guaranteed. The following video explains why this is so:
What to do instead: Unfortunately, you cannot really protect yourself from the anchor effect. Nevertheless, it can help to be well informed about the market prices and not to make hasty purchase decisions. In this way, you are less likely to be misled by numbers and maybe even find a cheaper bargain - for example on the Internet.
Mistake # 8: Relative discounts
To stay with the example: Would you rather buy the 50 Euro T-shirt if it was the regular price or if it actually cost 75 Euro but is discounted? Correct: discounts give the subjective impression that we have saved money and thereby operate the reward system in the brain. In this case, you are more happy to have saved 25 euros than you are annoyed about the 50 euros you spent. It goes without saying that many companies use discounts accordingly.
What to do instead: Of course, there is no mistake in looking for discounts and bargains. But still make sure to only buy the things that you really want or need - and not let yourself be tempted to make spontaneous purchases due to discounts. For larger investments, research the market price from multiple sources. In this way you can assess whether the offer is actually a discount or just a clever trick by the seller.
Thinking mistake # 9: wastefulness mistake
Let us come to the last mistake in thinking that affects the lottery winners already mentioned, as well as other people who unexpectedly come to riches suddenly. The misunderstanding is a simple assumption that if I have more money, I can spend more money. So the inhibition threshold for spending your money decreases. Perhaps you know it yourself: If you go shopping with 50 euros in your pocket, these are usually enough. On the other hand, as soon as you leave with 200 euros, at the end of the day they are suddenly gone - although you can otherwise get by on 50 euros. They were simply more wasteful and may not even have been aware of it.
Waste is wrong use.
A lottery winner with 10,000,000 euros in his account therefore thinks he has so much money that he could spend it recklessly. After taxes, buying a house and a few gifts, it's suddenly gone. In theory, however, it would actually have been enough for a carefree life. Wealth leads to waste, while poverty leads to modesty.
What to do instead: Ultimately, therefore, it is the thrift that decides whether the rich stay rich or the poor can still build up financial security. Income has little to do with it because of the waste effect. Instead, you need to learn to keep an eye on your finances and look at them realistically. Of course, you can indulge in a little luxury here and there, but practice self-discipline to put an end to waste. This works best if you do not define yourself in terms of your wealth, but see it as a means to an end. If you build up a healthy self-confidence, you don't have to “prove yourself” with a fancy car or expensive jewelry or “buy” friendships with gifts.
Reading tip:Strengthen self-confidence: 20 tips & 3 exercises for more self-confidence
How do you deal with your hard-earned money so that you have as much as possible left at the end of the month and you can lead a (financially) carefree life? What other mistakes do you know? How do you relate wealth to income? We look forward to your food for thought in the comments and thank you in advance!
Photo credit: iStock.com/grinvalds
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