According to traditional economics, we humans are supposed to be quite thoughtful creatures when it comes to money. Theories claim that we weigh all decisions carefully, examining the pros and cons of our options. But the growing field of behavioural economics says, “Not so fast.” We may actually be wired for instant gratification and if we do crunch the numbers — which we generally don’t — we’re prone to ignore them anyway.
So, what are the top trip-ups Canadians face when it comes to their finances? Here are 5 for you to be aware of and avoid.
Could your newsfeed be tripping you up?
We now live in the age of the Insta-effect, YOLO (“you only live once”), FOMO (“fear of missing out”) and keeping up with the Joneses. There’s nothing wrong with occasionally scrolling through your daily news feed, but might it be causing you to focus on what you don’t have instead of making your financial life just a little better today? Unfortunately, you rarely see tips on social media about maxing out on your RRSP, or how putting just a few dollars a day extra on your mortgage could have you burning through that debt sooner — and saving you hundreds or even thousands of dollars. Why not hop on your bank’s website for a few minutes each morning this week? Try out their calculator to see how you can save more and be debt free sooner.
Feeling tired? Maybe hold off on making big decisions
Going car shopping or making a major decision on a Friday evening at the end of a long week? Think again. Your cognitive capacity is likely depleted at the end of a long day or a week of endless decision-making. And when your mental tank is drained, you’re likely to default to the easy option and that may not be in the best interest of your bank account or your future. Or, the process could just have you feeling overwhelmed.
Think of a judge for a moment. The epitome of rationality, right? Would you believe that they, too, suffer from being hangry and susceptible to decision fatigue? A study of judges considering parole requests revealed that if you faced the judge first thing in the morning, your chances of a favourable ruling were pretty good, around 65%Opens a new window in your browser.. But just before noon? That number sometimes dropped to 0! Then back up to around 65% after lunch. The judge’s tummies weren’t just empty; the study suggested that their decision-making capacity was full and needed replenishing. Not only with food, but also with a break.
The lesson for you and me? Take a break before making major decisions. Spread out the process over 2 or 3 appointments and aim for weekends or days when you’re not mentally drained.
Let’s play a quick game. What if you were in the market for a new lamp? You find the perfect one at a little neighbourhood store. It is $50, a fair price, and just as you were getting ready to pay, a friend taps you on the shoulder. She tells you that if you went across the street to another store, the exact same lamp is on sale for $25. Would you go?
Two weeks later, you and your family are shopping for a big screen TV. You review all the options and find the perfect one. It’s expensive, but a reasonable deal at $1,250. Just as you’re getting ready to pay, the same friend taps you on the shoulder. She tells you that the exact same TV is on sale at a store across the street for $1,225. Do you go?
I don’t know your answer, but most people would go for the lamp, but not the TV. Why? It’s the same $25 savings in both examples. But with the lamp, most of us would do a quick percentage calculation and find a 50% savings irresistible. With the TV, while most of us wouldn’t get our calculator, we’d know the $25 saved as a percentage of the total cost is very low.
When it comes to your financial life, you’ll want to pay attention to every dollar and percentage point. When you’re negotiating your mortgage or a GIC rate, a quarter of a percentage point might not seem like much but it can add up to big dollars over time. What about your investment return or the fees you pay for advice? Always review the percentage and the total dollar amount to be aware of this mental accounting glitch.
Skipping the math
$10 a day isn’t much, right? But if you saved that amount over the long-run and had the magic of compound interest working for you, what could that amount do for you?
If you saved $10 a day, earning 5% over 10 years, that would add up to $49,174. Over 15 years, you’d have $83,646, and in 20 years, that pot of money would be $127,643Opens a new window in your browser..
I’m a bit of a geek, but those are some fun numbers to play with!
Travelling without your financial GPS
If I were planning a road trip, I’d never hit the highway without my trusted GPS. Even if I were familiar with the terrain, it calculates the best route, expected time to my destination and alerts me to blind spots like traffic jams and more. If I take a wrong turn, it recalculates for me (and never makes me feel bad about it either). Think of a pro like a financial advisor as your financial GPS. They help you set your money goals, work with you to develop a plan to get you there, map out the best course and offer advice when life throws you curve balls.
With a little awareness and help from the right pros on your side, you can fight these roadblocks and come out more financially strong on the other side. Here’s to your prosperity!